The answer to the above question lies in the prudential dimension. If the financial intermediaries of the EMEs were able to internalize the macroeconomic risks that arise from the current low interest rate environment, there would be no need for a policy apart from market based return equalization. Since this cannot happen by itself due to agency problems, there is a room for macroprudential policy. Turkey, following the second approach, has been using mainly macroprudential measures along with a relatively low and yet quite flexible interest rate policy in face of volatile short term capital flows.2 The Central Bank and the other government agencies responsible for financial stability, developed new tools and introduced new policies to avoid excessive deviations of the credit growth rates and the exchange rates from economic fundamentals. Examples of macroprudential policies used in Turkey are loan to value restrictions, high risk weights and provisioning requirements on credit with negative externalities, maturity based reserve requirements and leverage based reserve requirements. These policies already helped to start a rebalancing process for domestic and external demand during the rapid post Lehman recovery and the more recent European sovereign debt crisis.3 Distinguished Guests, The financial stability, when lost, has deep and long-term impacts on both employment and growth.4 The cost of preventing a financial crisis is much lower than the cost of living it. The recent developments have reminded us this economic dictum once again. The primary objective of the Central Bank of the Republic of Turkey is to achieve and maintain price stability.

To address this, one approach has been to distinguish between the two facets of financial stability: the systemic importance of a given financial institution on the one hand, and the procyclicality of the overall financial system on the other. Such taxonomy implies that macroprudential policy should aim to improve the resilience of the financial infrastructure in these two aspects. With respect to systemic importance, various measurement tools have been developed, ranging from the network externality approach to the concept of conditional value-at-risk or CoVaR associated with the works of Adrian and Brunnermeier. The latter method has since been applied to the cases of Hong Kong and Thailand, by their respective central bank staffs. 1 On the second facet, there have also been attempts to get a handle on procyclicality quantitatively. Notably, credit-to-GDP ratio has been proposed as an intermediate indicator around which macroprudential policy such as countercyclical capital buffer can be designed. While scientific work on the conceptual and measurement issues are still progressing, central banks implementing macroprudential policies will need to be content with something less holy. At the Bank of Thailand, implementing macroprudential policy involves monitoring a large set of indicators, covering seven important areas in which experience and history have shown are prone to financial vulnerability. Such a wide coverage is designed to make up for any shortfall in terms of scientific measurement and increase the chance of detecting financial imbalances as they begin to develop.