New Policy Challenges from Financial Integration and Deepening in the Emerging Areas of Asia and Central and Eastern Europe

Since the mid-nineties international financial integration has advanced gradually in the emerging areas of Asia, while it has progressed rapidly in Central and Eastern Europe. This process has helped provide long-term benefits for the economies of the two regions in terms of faster productivity growth and deepening of domestic financial markets. The strong surge of international capital inflows since the early years of the current decade has, however, also potentially increased the financial vulnerability and the external sources of contagion for a number of countries, particularly those in Central and Eastern Europe that have seen a significant increase in their foreign borrowing, and also those with still relatively underdeveloped financial systems. We thus analyze the risks of financial instability and asset bubbles in the emerging economies of the two regions, taking into account the degree of development of their domestic financial systems. We conclude by discussing possible policy responses to these challenges by the monetary authorities of the concerned countries