economies goes further in its implications for the way in which monetary policy has to be operated. four possible effects can be identified. first, because they are undergoing significant structural change, many emerging market economies may be more vulnerable to shocks than fully - developed economies. of course, all economies experience shocks, but the frequency and scale may be greater in emerging market economies. these shocks can have their origin in the domestic economy ( a poor crop ) or arrive unexpectedly from overseas ( higher oil prices ). either way, they are difficult enough to handle if they impact on the demand side, but more often the emerging market central banker has to grapple with sharp movements in cost pressures on the supply side. the orthodox response to shifts in supply conditions is to accept the first - round effect on prices and concentrate monetary action on heading off second - round impacts that can otherwise generate an inflationary cycle. this may be conceptually clear, but in practice it is a hideously difficult distinction to have to translate into monetary decisions. it is a good discipline in these circumstances to remind oneself regularly that higher interest rates will not help to make the maize crop grow higher. south africa's experience in 2001 - 02 is a good case in point. a precipitate and largely inexplicable fall in the exchange rate in the latter part of 2001 combined with higher fuel costs and increases in domestic food prices to deliver a severe inflationary shock. the central bank's response, to raise interest rates in progressive steps in 2002, was exemplary and appears to have worked well, with inflation now falling steadily back towards target range as the shock recedes. but the consequences were to make the central bank's task of embedding low inflation in the fabric of the economy much more challenging, because of the inevitable questions this experience raised as to whether, faced with such shocks, monetary policy really could achieve permanently low inflation. that it can, and is doing so, is now gaining wider acceptance, as reflected in continuing evidence of falling inflationary expectations. but it has required, alongside carefully - timed monetary tightening, a strong effort by the central bank to communicate its determination. the prevalence of supply - side shocks would thus seem to be one area in which emerging market economies may face particular challenges in operating monetary policy. another may arise from the impact of the exchange rate. movements in exchange rates may have a relatively larger impact in emerging market economies, and their currencies may be more exposed to underlying volatility.

relevant skills are often a key constraint on economic development as whole. the same applies, too, more generally to knowledge of the transmission mechanism : understanding of functional relationships across the economy is bound to be less secure when the structure of the economy is undergoing rapid change. the existence of a large informal economy further complicates the task. this leads to a fourth implication for monetary policy in an emerging market economy. this is the critical role played by confidence in, and the credibility of, the policy framework. this has both a domestic and an international dimension. domestically, there is a critical need to win public acceptance of the value of low inflation and public confidence in the determination and ability of the central bank to achieve it. internationally, confidence that the policy framework will be adhered to can have a powerful influence on investment inflows and on the exchange rate. these factors are, of course, crucial to monetary policy in any country. but the task of buttressing them is the more challenging in emerging market economies because the track record of commitment is relatively much shorter. these can be argued to be some of the distinctive challenges faced by monetary policy - makers in emerging market economies. are they, however, sufficiently distinctive as to require any fundamentally different approach in the conduct of monetary policy? the answer, to quote evelyn waugh, has to be, “ up to a point, lord copper. ” they are not different in kind from the factors which central banks in any country have to face. but they do perhaps play a more predominant part in the monetary policy judgement in emerging market economies than elsewhere. this suggests two final observations. first, because of the uncertainties, central banks in emerging market economies may understandably tend to be relatively cautious in adjusting their policy stance, in the sense of spacing adjustments in relatively smaller steps over more extended periods. no central banker need ever apologise for being regarded as being cautious. but it does mean that, even in circumstances in which there may be a case for contemplating more bold action, the balance of risks may argue against such an approach. secondly, given the challenges, can an inflation targeting framework realistically be expected to deliver the desired results in the emerging market context? if the various distinctive features identified above - periodic unexpected shocks, exchange rate volatility, imperfect information sources and public confidence that is not yet fully robust - occurring in whatever combination, result in the central bank missing its target for any extended period, there is of course a danger