Monetary policy in the new normal

Monetary policy frameworks in members of the Association of Southeast Nations–5 (ASEAN-5) economies have improved significantly since the Asian financial crisis. As elaborated in Chapter 2, the clarification of price stability objectives, including the adoption of explicit inflation targets in some countries, and the strengthening of central bank operations and transparency have been major milestones in the evolution of monetary policy frameworks. The transition to more consistent forward-looking frameworks allowed ASEAN-5 economies to withstand the global financial crisis well, as well as the commodity price cycle and the low-inflation environment of recent years.

A decade after the global financial crisis, the global macroeconomic and financial landscape continues to be influenced by its legacies. ASEAN-5 countries faced a protracted period during which most advanced economies’ expansionary monetary policies were not well aligned with domestic economic conditions in emerging market economies. Moreover, the new normal global landscape is expected to exhibit gradual normalization of monetary policy in advanced economies. However, an inflation surprise could suddenly tighten global financial conditions and prompt capital flow volatility. This global environment will further test ASEAN-5 monetary policy frameworks in the coming years.

This chapter focuses on the challenges posed by the new normal for ASEAN-5 monetary policy frameworks. The chapter first takes stock of the evolution of inflation dynamics in the region during the past two decades. The analysis provides a basic framework for assessing challenges and areas for improvement in the design and implementation of monetary policy. The chapter then presents the current global debate on the role of monetary policy in the new normal and discusses the implications for ASEAN-5 economies.