These spillovers have had tremendous implications on emerging market central banks through macroeconomic and financial instability, financial and foreign exchange market volatility, and more importantly, the ability and autonomy of central banks in the region to conduct monetary policy. So much attention has been focused on the advanced economies – the growth recovery, policy trajectory and political uncertainty. Not enough has been discussed on the countries at the receiving end of these uncertainties, and the difficult circumstances under which emerging market central banks have had to operate in recent years. This will be the focus of my remarks today. I intend to describe a few reasons on why it has been a real challenge for emerging market central banks to conduct monetary policy in recent years than in the period prior to the global financial crisis. I will then discuss the policy thinking and tools from the perspective of an open economy when facing the challenges that emanate from global policy-spillovers. Lastly, I will share my view on the importance of having utmost autonomy in policy-making and suggest what we and the global community can possibly do to improve independence in policy decisions. Global developments since the crisis have added extra layers of complexity in policymaking For most emerging economies, structural changes in the economy over the past two decades such as diversification of sources of growth, wider set of policy tools and deeper domestic financial markets have all contributed to greater independence in the formulation of monetary policy.

Emerging economies’ trade volume relative to the global market is, at best, minuscule. Fourth, non-resident participation has increased tremendously in most emerging markets. Non-resident holdings of Government bonds in Uruguay for example. In a little over a year, non-resident holdings surged from 2% to 45% of the outstanding bonds in May 2013. Closer to home, non-resident holdings of Malaysia and Thailand Government bonds increased from 10.2% and 2.5% in 2009 to 32.2% and 14.1% in 2016 respectively . These non-resident investors tend to be driven more by global rather than domestic factors, motivated by the search for yields. As participation becomes too high, it brought heightened risks to domestic markets through the distortion in asset prices. The disproportionate influence of NR investors further amplified the disconnect between domestic interest rates and economic fundamentals. Fifth, asset prices in emerging economies are increasingly correlated with global factors, exposing emerging markets to shocks in the advanced economies. Stock market indices and long-term bond yields in emerging markets have shown strong co-movement with the indices and bond yields in the advanced economies, particularly the United States. This has led to signs of weaker monetary control. The increasingly correlated yields between advanced economies and emerging market economies have weakened the transmission from policy rate to domestic yields. Given this new landscape, policymakers in highly open economies are often caught in a “catch 22” situation. Raising interest rates to manage rising inflation and the central bank may stoke capital inflows and further currency appreciation.