Monetary policies are those laid down to manage the money supply and interest rates. It particularly involves the demand side of economic growth in a country which concerns inflation, consumption, growth, and liquidity. These policies are set forth by the Central Bank of a country. There are two classes of monetary policies. A monetary policy can either be expansionary or contractionary. When a monetary policy is made to reduce interest rates and increase the money supply such is an expansionary policy. On the other hand, a contractionary policy seeks the opposite. An example of a monetary policy that increases the money supply is the incentive of “purchasing bonds through open market operations.”
The said policy is made to improve a country's liquidity and as such, it would introduce money into the market. Although monetary policies are greatly concerned with the flow of money in an economy, such poses a challenge for emerging market economies. It is important to remember that from an economic perspective, the flow of goods and demand of it affects the supply and demand of a market. To control otherwise would be disrupting the so-called “free – hand” of a market or as portrayed by 18th-century economist Adam Smith as the “invisible hand. ” A monetary policy may be tantamount to governmental interference in a market’s invisible hand since it impedes the predictability of an economic system such as supply and demand.
In Asia-Pacific, emerging market economies, imposing monetary policies may affect the opportunities for growth of these economies. Regulatory mechanisms are the concerns of these emerging markets. Instead of evolving at a rapid pace, it would cause a plateau or reach a standstill because of the difficult circumstances affecting the accessibility to goods and supply. As monetary policies can decrease the growth spur of these emerging markets such is a different story when it comes to improving the financial structure of these countries. Monetary policies in emerging markets play a great role in building financial infrastructure. Emerging markets may have underdeveloped financial infrastructure due to fast-paced growth without any solid foundations or back-ups in their market economies for failure. These vulnerable financial infrastructures impact banks, stock exchanges, currency, and information about the current state of investments. It has been a given that in emerging market economies there is rapid change.
In these rapid changes, economies may grow in an instant, however, due to an unstable financial infrastructure, businesses come and go which makes it difficult for investments to create a strong foothold in the country and for it to maintain an accurate record of the state of the nation. Hence, when operating in emerging market economies it is important to note that monetary policies are placed to level out the repercussions of a possible deterioration in the market. This is to avoid any outright devaluation in a country’s economy. Although one may argue that it affects the possible extent of an emerging market’s growth, one cannot fight the fact that emerging markets still have not been placed on a pedestal where depression cannot lead to a fractured market as opposed to developing countries where there is much confidence in the market.