At the same time, a weak financial supervision framework increases the risk of financial imbalances building up, especially in situations where substantial capital flows drive up asset prices and generate favorable conditions for credit expansion, which may ultimately lead to severe economic dislocations. In contrast, a credible policy framework and enshrined central bank independence provide the necessary preconditions for alleviating the impact of shocks on the economy. For example, by anchoring the public’s long run inflation expectations to the target level, a credible inflationtargeting framework helps to mitigate the impact of temporary supply shocks on inflation and  2  Cecchetti, Flores-Lagunes, and S. Krause (2006) provide empirical evidence for OECD countries that increased access to credit enables households to smooth their consumption, which in turn reduces the volatility of consumption and output growth. See also Larrain (2004) and Raddatz (2003). Similarly, the evidence regarding international financial integration suggests that moving towards the latter ultimately will bring benefits of enhanced risk-sharing that leads to reduced consumption volatility (Kose, Prasad, Rogoff, and Wei (2006)). 4  BIS Review 98/2008  allows the central bank more leeway to adjust its policy instrument to cushion any negative impact on output. Overall, our observation is that the unique combination of shocks and structural features of the economic system in emerging market economies give rise to a macroeconomic backdrop that is characterized by significantly higher output and consumption volatility than in developed economies.

This is supporting the monetary policy formulation process in a more proactive and forward-looking manner. The Central Bank will  10  continue to improve model-based projections through building sound technical infrastructure for inflation forecasting and macroeconomic analyses. Moreover, the monetary policy formulation process is also being upgraded by introducing a forecast calendar, which outlines schedules for projections and revisions of forecasts linked to the availability of important economic data and events. Accordingly, during each monetary policy round, two technical staff level meetings are conducted to obtain inputs and feedback for forecasting followed by a pre-Monetary Policy Committee (MPC) meeting attended by the members of the MPC and technical staff to discuss projections and sectoral developments. The formal MPC meeting takes place subsequently to make recommendations to the Monetary Board. The number of MPC meetings during a year were also reduced to 8, allowing sufficient time for technical staff to undertake more sophisticated macroeconomic analysis. In the new forward-looking framework, it is of utmost importance to monitor developments in both current and future economic conditions. In this regard, we will strengthen the existing surveys of expectations and economic conditions to gain forward-looking insights to improve accuracy of forecasts. With regard to monetary operations, the domestic money market is being actively managed through OMO to steer the Average Weighted Call Money Rate (AWCMR) in line with the monetary policy stance of the Central Bank.