V. Concluding Observations
- Robert Corker, and Wanda Tseng
- Published Date:
- March 1991
The past decade posed particularly difficult challenges for macroeconomic management in the Asian countries. The marked deterioration in the global economic environment in the early part of the decade required a reorientation of policies to sustain noninflationary growth and balance of payments viability. Reforms in the financial system and in the conduct of monetary policy were part of the overall adjustment process. While pressures on the external sector eased for many countries during the second half of the decade, the growing sophistication of many economies and the desire to sustain high growth rates induced a continuation of reforms.
Financial liberalization brought many new challenges for the monetary authorities of these countries, many of which remain as reforms continue to be implemented. These challenges relate to the way in which monetary policy is formulated and implemented. In particular, financial liberalization has altered the relationship between money, income, and interest rates, complicating the interpretation of developments in the monetary aggregates. At the same time, the use of indirect instruments of monetary control has been hampered by the thinness of money and capital markets and by the large domestic financing needs of governments.
In a few cases, liberalization contributed to sharp increases in real interest rate that complicated the task of macroeconomic stabilization. However, the Asian countries avoided the more extreme problems encountered by some Southern Cone countries. In general, financial markets in the Asian countries enjoyed comparative stability and were able to cope well with the changes in the global and domestic economic environment of the 1980s.
It is difficult to distinguish the effects of financial liberalization and monetary policy from the myriad factors affecting economic performance in the Asian countries during the 1980s. The experience with the implementation of monetary policy and financial reforms in these countries varied widely, but the overall experience was positive. The development and improvement of indirect instruments of monetary policy has enabled the authorities to respond more flexibly and effectively to macroeconomic imbalances. This has proved particularly useful in a number of countries that confronted monetary disturbances from widening fiscal deficits, financial crises, and large inflows of funds from abroad. The liberalization of interest rates and other financial reforms have promoted financial deepening and have contributed to improving resource allocation, the mobilization of financing savings, and the efficiency of investment.
Because of the reforms implemented during the 1980s, financial markets are now considerably deeper, interest rates are performing more flexible allocative roles, and the apparatus for implementing effective indirect monetary policy is evolving. As a result, the financial systems of the Asian countries are now better placed to meet the challenges of the new decade.