Recent Bank research finds that adopting a monetary policy framework consisting of an inflation target and a more flexible exchange rate has led to an increase of about 10 to 20 per cent in measures of financial development.24 This finding is illustrated in Chart 8.
Some observers have expressed concerns about the impact of a flexible exchange rate on financial stability, especially in emerging-market economies. They argue these countries should more actively manage their exchange rates or impose capital controls because of their underdeveloped financial sectors, their lack of credibility in monetary and fiscal policy and their widespread use of the US dollar in debt issuance and trade.