Asset prices and interest rates worldwide have become more closely correlated in the wake of the unprecedented monetary easing by central banks in advanced economies, according to the Bank for International Settlements (BIS).
This closer correlation across borders following the global financial crises has created major challenges for policymakers in emerging market economies as witnessed by the sharp reversal in capital flows and bouts of market volatility from May last year through February 2014.
Deputy governors from 25 emerging market economies - including Brazil, China, Russia, South Africa, India and Turkey - discussed the impact of monetary policy in major advanced economies on their economies and how to manage the exit from highly accommodative policy at a meeting at the BIS' headquarters in Basel in March.
BIS, which promotes international cooperation among central banks, has now released 24 background and contributed papers from this meeting on the topic of "The transmission of unconventional monetary policy to the emerging markets."
The papers can be accessed on BIS' website: www.bis.org.
The meeting focused on three main questions, including how external monetary conditions become a source of risk to monetary and financial stability in emerging markets, how central banks should respond to such shocks and whether there can be a greater international role for emerging market currencies.
"One major worry was the risk of an abrupt reversal of capital flows to EMEs," BIS said, adding:
"Central banks face difficult policy dilemmas in preserving financial stability while pursuing their monetary policy goals. It is hard for EME monetary authorities to counter a prolonged period of very low long-term interest rates and increased risk-taking in global financial markets."