SOAS Research Online

Abstract

This chapter discusses the experience of central bank open market operations in emerging countries that have become integrated into global financial markets and experience high international capital mobility. We argue that the operational procedures of central banks in emerging countries must allow for the weakness and shallowness of financial markets that are subject to large international capital movements. In such a situation open market operations remain central to the implementation of monetary policy, while non-market mechanisms are ineffective. This is explained in terms of the Latin American financial markets and the origins of inflation in these countries. The argument is developed using the example ofMexican monetary policy after the 1994 crisis. It is argued that in that period operational instruments had different results even though the objectives of central banks’ monetary policy remained the same as in more financially advanced economies.