monetary and financial stability is pursued in emerging market economies is quite distinct from that in developed economies. for emerging markets, there are two stylized facts that are unique to its policy setting. the first is the greater income and consumption volatility that have been observed in emerging markets, both in terms of the level and in terms of growth relative to developed economies. and the second is the fact that economic agents in the views expressed in this paper are those of the authors and do not necessarily represent those of the bank of thailand or bank of thailand policy. i would like to thank piti disyatat, ashvin ahuja, sarawan angklomkliew, jaturong jantarangs, nawaporn maharagkaga, don nakornthab, kobsak pootrakool, mathinee subhaswadikul and supradit tangprasert of the bank of thailand for their substantial contribution to the drafting the original paper. emerging markets face greater limitations in the ability to smooth consumption in response to shocks. the empirical evidence from two recent studies are summarized in table 1. as documented by aguiar and gopinath in 2007, consumption is around 40 percent more volatile than income at business cycle frequencies for emerging markets, while the ratio is less than one for developed economies. the same is true when comparing relative volatility in growth rates of consumption and income. a study by kose, prasad, and terrones in 2005 also shows greater income and consumption volatility in emerging markets relative to developed economies. such heightened volatility in macroeconomic outcomes undoubtedly has adverse implications for welfare. and the fact that consumption is so volatile – in itself as well as in relation to income – suggests the existence of serious limitations in the ability of economic agents in emerging markets to smooth consumption in response to shocks. a central proposition of our studies is that a large part of the explanation for higher macroeconomic volatility in emerging markets rests with key differences in the nature of shocks hitting emerging market economies, as well as the way in which the economic system of emerging markets propagate the shocks. figure 1 captures our basic arguments, and depicts how observed macroeconomic outcomes are the result of the interaction between the nature of shocks and the structural features of the economic system. firstly, the nature of shocks that emerging market economies experience is quite different from that of developed economies. a particularly pertinent example in this context is capital flow

bandid nijathaworn : the pursuit of monetary and financial stability in emerging market economies 1 speech by dr bandid nijathaworn, deputy governor of the bank of thailand, at a public lecture at the centre for banking studies of the central bank of sri lanka, colombo, 23 july 2008. * * * ladies and gentlemen, i am delighted to be here today in colombo, and am honoured by the invitation that has been extended to me by the centre for banking studies of the central bank of sri lanka to give this evening ’ s public lecture. the bank of thailand and the central bank of sri lanka has a long history of mutual friendship and cooperation. so, i am deeply touched by the invitation, and am privileged to join the long list of eminent speakers and scholars who have previously participated in this prestigious lecture series. the topic of my lecture this evening is the pursuit of monetary and financial stability in emerging market economies. the lecture is drawn from the research done at the bank of thailand on the same topic. the research paper was first presented last year at a seminar at the bank of england, and the lecture today is an updated version of that paper. what the research attempts to do is to examine the challenge faced by emerging market economies in the pursuit of monetary and financial stability. the key hypothesis of the research is that the context in which monetary and financial stability is pursued in emerging market economies is different to that of developed economies, and so the challenge and the implications for policy are different. my lecture this evening is organized into two parts. in the first part, i will talk about the unique context of emerging market economies compared to developed economies in the attainment of monetary and financial stability, and discuss the underlying cause of the difference. in the second part, i will highlight the key implications of these differences for the pursuance of monetary and financial stability in emerging market economies, both in the context of shortterm stabilization challenge and the longer - term structural challenge in implementing structural reforms. the lecture will be brief, so that we will have time for a q and a session afterward. 1. first, the unique context of emerging market economies. as a general statement, one can begin with the notion that the attainment of monetary and financial stability is something that policymakers everywhere place at the forefront of their agendas. and, monetary and financial stability are desirable because they are prerequisites for welfare - enhancing macroeconomic outcomes. along this line, the context in which