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. 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. 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. cutting interest rates to manage economic slowdown, only to find that it worsens capital reversals, exchange rate depreciation, and potentially reignite financial imbalances that policymakers have tried so hard to tame. these are some amongst the many challenges to any policymaker, which brings me to my next point – the importance of policy pragmatism. the importance of policy pragmatism our own experience suggests that in dealing with multifaceted challenges, a broad array of policy instruments is critical. the idea is that no single policy tool should be overburdened. the region ’ s experience theorises that despite great strides in achieving price stability and sustainable growth since the asian financial crisis, an open economy with sizeable financial market invites volatile capital flows that adds layers of complexity in policy - making. we have expanded our policy toolkit to include micro and macroprudential as well as financial market stability measures. this additional arsenal of policy tools has helped to maintain the effectiveness of monetary policy and safeguard domestic financial and macro stability. but having a broad policy toolkit is not enough. it may be tempting for us to treat these challenges 2 / 5 bis central bankers'speeches as linear strings of events in order to cope with the complexity. but breaking the challenges into digestible fragments of their own and tackling them in isolation using our various policy tools seem a futile attempt. given the closely interdependent and constantly evolving nature of the challenges, solving one part of them may amplify the risks in others. in this environment, it is imperative for policymaking to also be agile and pragmatic.