To enhance their own self-image, members of the group often then systematically exaggerate differences with other groups, while emphasizing similarities within their own. 11 Perhaps most important of  7  Goldin et al (2011). 8  Further details available on the http://www.etymonline.com/index.php?term=diversity. 9  It uses Google’s Ngram Viewer. 10  For example, Tajfel et al (1971). 11  Karlan and List (2007). BIS central bankers’ speeches  Online  Etymology  Dictionary  at  3  all, people may discriminate or negatively stereotype the “out-group”, as a means of enhancing the image of the “in-group” and hence their own self-image. Behaviour consistent with social identity theory has since been detected in a wide range of social settings: in families, sports teams, schools, gangs, colleges and organisations. It generates important, but often subtle, biases in decision-making which may discriminate against members of the out-group. Despite laws against racial discrimination in most developed countries, there is evidence that racial stereotyping and discrimination in everyday decision-making has persisted, in everything from selling cars to making loans. 12 While deeply undesirable, these behaviours cannot be dismissed as entirely irrational. Indeed, economists and psychologists have developed models to show this behaviour may indeed be rational once the role of social identity and social norms are recognised. 13 And because a multicultural society gives rise to greater numbers of distinct groups and identities, this sociallydiscriminatory behaviour might even have become more, not less, powerful over time.

Nevertheless, the transmission of global monetary conditions to emerging economies is unavoidable given the open nature of the economies and the increasingly open and interconnected financial markets. To fully appreciate the changes in the global landscape since the Global Financial Crisis and the challenges and risks they entail, let me suggest five important developments that emerging market economies have been facing in conducting domestic monetary policy. First, global financial markets are more interconnected than before. Financial openness in 1/5  BIS central bankers' speeches  the Emerging Asia, as measured by the sum of assets and liabilities in the international investment position to GDP, has grown from around 800% of GDP to now more than 1000% of GDP. Emerging Asia cannot escape the vagaries of the financial markets around the globe. Second, global capital flows have increased in size and volatility. Cumulative non-resident capital flows to the region have reached USD2.1 trillion in 2016, compared to only USD400 billion in the period prior to the Global Financial Crisis. More importantly, capital flows have also become more fickle than before. Debt flows now contribute to 66% of capital flows. These flows are short-term in nature and carry higher propensity of reversals. Emerging markets had never experienced such phenomena before. Third, the volume of global foreign exchange trading has grown by more than four times in the last 15 years alone. The global foreign exchange market has become bigger, more complex and increasingly disconnected with economic realities. Today, exchange rate overshooting is the norm rather than the exception.