Thus, it is imperative that emerging market devise a proper strategy and process to expedite reforms and develop the financial system. The second long-term reform I want to bring up is on policy institution and framework. On this, two institutions are upmost important for attaining monetary and financial stability. The first is a credible monetary framework that effectively anchors the public’s expectation of inflation. On this, the key issue is the importance of independence and transparency of the monetary policy process. Our view is that lack of independence can come at a great cost in terms of lower central bank credibility and a less favorable trade-off between inflation and output volatility. Likewise, weaknesses in monetary policy transparency can contribute to policy uncertainty and exacerbate the impact of shocks on macroeconomic volatility. The second important policy institution is an effective supervisory policy and domestic financial institution’s capacity for sound risk management. The logic for this is clear. With less effective supervision and limited capacity to manage risk, the ability of the economic system to absorb volatility from global markets is significantly compromised. Reflecting this emerging market has put enormous emphasis on building up the necessary institutions with regards to effective supervision. But the challenges are many. For example, at this time many emerging markets are facing the challenge in implementing Basel II. (i)  Stronger risk management culture  The objective of Basel II is to strengthen the soundness and stability of the banking system through more risk-sensitive capital requirements and rigorous internal risk assessment process.

Timothy F Geithner: Reflections on the changing global economy Remarks by Mr Timothy F Geithner, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the 46th ACI Financial Markets Association World Congress, Montreal, Quebec, 4 May 2007. *  *  *  Good morning. I am pleased to be able to join you today. And it is a privilege to be here today with Canada's accomplished central bank governor, David Dodge. There are few people in central banks or in governments around the world today that have presided over as far reaching and successful a set of macroeconomic policy reforms as has David Dodge. I want to offer some reflections about the challenges managing macroeconomic policy in a more open and integrated world economy. And I want to say something about how the international monetary system, and the current framework of exchange rate regimes, might develop in the coming years. For the past century or more, choices about exchange rate regimes have played an important role in economic outcomes across countries. From the Gold Standard of the late 19th and early 20th centuries through the Bretton Woods system and the episodes of exchange rate cooperation among the G5 and the G7 in the 1980s and after, the desire to achieve exchange rate stability was a major preoccupation of policymakers. The economic damage inflicted by the disastrous competitive devaluations among the major economies in the 1930s had a profound influence on thinking during much of the postwar period.