Emerging Markets and the Global Monetary System: The Challenge of Rising Inflation

While spillovers of the present financial turmoil in mature economies to emerging economies have so far largely been contained, the monetary policy implications of the financial turbulence present a challenge to the approach pursued by emerging markets in integrating into the global monetary system following the crises of the mid to late 1990s. Specifically, the period of a smooth coexistence between meeting inflation targets and maintaining a high degree of exchange rate stability is likely to come to an end. * At the time of writing this paper, the second author was an advisor at the Deutsche Bundesbank on secondment from the European Central Bank. The views expressed are solely those of the authors. They wish to thank Karlheinz Bischofberger, Ulrich Grosch and Sabine Herrmann for their valuable comments and suggestions, as well as Livia Chitu for excellent research assistance.