Financial integration has also brought with it shocks common to several countries since the “confidence channel” transmits financial crises across countries swiftly. In a world of generalised uncertainty, monetary policy in several countries is faced with a progressive loss of discretion. For developing countries, in particular, considerations relating to maximising output and employment weigh equally upon monetary authorities as maintaining the price stability.
In considering the pace of financial integration, the implications of a concurrent loss of a degree of autonomy in conduct of monetary policy of a country and the country context should not be lost sight of. The analytics presented in the Report of the Committee on Capital Account Convertibility (Tarapore Committee, 1997) are very relevant in this regard.