Erdem Başçi: Financial and macroeconomic stability
Speech by Mr Erdem Başçi, Governor of the Central Bank of the Republic of Turkey, at a
conference on "Financial and macroeconomic stability", organised by the Central Bank of the
Republic of Turkey jointly with the Central Bank of Brazil, the Bank of Finland and the Journal
of Financial Stability, Istanbul, 4 June 2012.
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Distinguished Guests,
Welcome to the conference on Financial and Macroeconomic Stability, organized by the
Central Bank of the Republic of Turkey jointly with the Central Bank of Brazil, the Bank of
Finland and Journal of Financial Stability. In November last year, we organized yet another
conference on Financial Stability and Inflation Targeting, with a focus on financial stability.
Country experiences since then have shown once more how costly it would be economically
and socially if and when financial stability is neglected. Therefore, financial stability is of
utmost importance for policymakers in attaining macroeconomic stability. As a matter of fact,
this conviction, which is also supported by international platforms such as G20, IMF and BIS,
has not only raised several new questions regarding the design and implementation of
monetary policy, but also proposed a new research agenda in the academic literature.
Esteemed Participants,
Sustainable growth, low inflation, steady employment growth, low levels of unemployment
and a balanced public finance can be listed as the main indicators of macroeconomic
stability. Although economists were aware of the significance of the above listed for social
welfare, financial stability had been in the back burner before the global financial crisis of
2008-2009. With the onset of the crisis, the importance of financial sector came to the
forefront and it was understood that the costs will be immense if the instability in the financial
sector spreads to the real sector. Therefore, in the period ahead, maintaining
macroeconomic stability and financial stability concurrently remains a major challenge for
policymakers. New policy tools and new policies might be needed to achieve both stability
targets. In this context, I believe that the conference on "Financial and Macroeconomic
Stability" will provide a significant contribution to policymakers.
Distinguished Guests,
Excessive volatility in macroeconomic aggregates, namely production, employment, budget,
foreign trade and inflation, might impair the distribution of income and assets, and reduce the
welfare of that society. It is therefore of utmost importance to achieve macroeconomic
stability and to sustain the welfare of the society.
Financial stability is crucial in providing an effective mechanism for the transfer of the
economy's resources from savers to producers. An effectively-functioning financial system
will ensure balanced distribution of risks and decrease the susceptibility of the economy to
shocks. Otherwise, financial crises will disrupt real sector production and the economy will
suffer sizeable loss of welfare. Thus, instability in the financial sector will jeopardize
macroeconomic stability. As a striking example to this argument, we can mention the
2008-2009 global crisis that was triggered by the financial sector and paved the way to
deteriorating macroeconomic indicators such as production, employment, unemployment and
budget balance in many countries. We need to underline the fact that financial stability is also
crucial for the economies of developing countries as well. During the convergence process,
these countries experience rapid financial deepening and integration with global financial
markets, as a result of which financial transactions become an indispensable part of
economic activity. It is essential for a sound economic outlook in these countries that this
process is managed effectively and risks likely to arise from the financial sector are predicted
so as to contain their potential effects on the economy.
Another potential threat to financial stability is the international capital flows. Free flow of
capital enables it to contribute to the growth prospects by moving where it is the most
efficient. Yet, when capital flows are not stable, economies are likely to face severe damage.
While on the one hand, the surge especially in short-term capital inflows ensure easier
access to credit and boost consumption; on the other hand, they lead to over-appreciation of
local currencies and thereby widen the imbalance between domestic and external demand.
Overall, this leads to deterioration in external balance and increases the domestic economy's
susceptibility to sudden changes in global risk appetite, and in turn, poses risk to
macroeconomic and financial stability. In economic literature, capital outflows following the
developments of this kind are called "sudden stops". Turkey and many other developing
countries have occasionally experienced such sudden stops. Keeping excessive volatility
and international capital flows under control is crucial for financial stability. In this respect,
macroprudential measures stand out as an important tool.
The monetary, fiscal and financial sector policies adopted by advanced economies in the
wake of the global economic crisis exposed even open developing countries with sound
economic fundamentals to financial instability risk. The Central Bank of the Republic of
Turkey, in view of this risk, safeguarded both price stability and financial stability
simultaneously by adopting a flexible monetary policy, and thus contributed to the
sustainable development path. In addition to the flexible monetary policy strategy
implemented by the Central Bank as of the end of 2010, the prudent measures adopted by
the BRSA accompanied by the safeguarded fiscal discipline strengthened the Central Bank's
hand. We firmly believe that we will attain very positive results with respect to price stability
and financial stability by the end of 2012.
Along with national macroprudential measures introduced by countries, some international
criteria have also been developed for the sake of safeguarding financial stability. For
example, the Basel III accords bring about new arrangements reinforcing the capital
structures of financial institutions. These arrangements will ensure a more resilient financial
sector against unforeseen risks and will contribute to financial stability. The recent efforts
clearly point to a consensus among countries on the critical importance of safeguarding
financial stability.
Despite the consensus among policy-makers on the importance of financial stability, the
economic literature lacks adequate theoretical and empirical studies on the details of the
transmission mechanism from financial stability to macroeconomic stability. At this point,
academia is expected to do their share in this respect.
The two-day conference will stage parallel sessions, panel discussions and presentations on
these issues. Banking sector dynamics, macroprudential measures and their impact on
macroeconomic stability, systemic risk issue and sovereign debt dynamics are among the topics
that will be addressed at the conference. Two of our distinguished guests, Mr. Ricardo
Caballero and Mr. Franklin Allen, will be delivering speeches. Mr. Caballero will be presenting a
speech on the first day of the conference and Mr. Allen's presentation is scheduled for the
second day. On the second day of the conference, the panel discussion titled "How did the crisis
challenge the Central Banking as we knew it? What should (not) change?" will be held, at which
senior central bankers will be sharing their country experiences. I think this panel discussion will
be very interesting and beneficial for all the participants.
The studies that will be presented throughout the conference will contribute to better
understanding of the factors threatening financial and macroeconomic stability and
developing policies to achieve these two objectives simultaneously. I believe that the
conference will also serve as a forum for the participants for exchanging views. In this
respect, I would like to thank the organization committee for their efforts in bringing these
very interesting and enlightening studies under this conference. I wish the conference a
complete success and I would like to thank all our guests for their participation.