Heightened volatility in global financial markets can be associated with the presence of very low and even negative rates rather than the underlying macroeconomic and external imbalances. In these circumstances, any change in interest rate differential across countries is likely to create greater impacts than otherwise. If this interest rate change takes place in the largest and the most significant economy in the world, then the impact will expectedly be further magnified. The Fed’s start of interest rate normalization has demonstrated that its impact on the global economy and financial markets indeed has been large, giving rise to significant capital outflows from emerging market (EM) economies, large adjustments and volatility in exchange rates as well as widened EM spreads and interest rates. The adverse effects of the Fed’s interest rate normalization has been on average larger than those occurred in previous two financial turmoil episodes, namely the Eurozone sovereign debt crisis and the US tapering tantrum. However, the disparity between the effected countries has been large too. The plummeted commodity prices as well as other factors led to this outcome as commodity exporters suffered from both the lower commodity revenues and the tightening global financial conditions. Financial markets also differentiated EM countries by policy frameworks and prudent policies. Those having rich and better policy frameworks and prudent policies have withstood the recent global financial turmoil better than the others.

Turalay Kenç: Stocktaking of international financial architecture Remarks by Mr Turalay Kenç, Deputy Governor of the Central Bank of the Republic of Turkey, at the “Stocktaking of International Financial Architecture” Conference, organized by the Reinventing Bretton Woods Committee (RBWC), Shanghai Development Research Foundation (SDRF), Research Institute for Banking and Finance, China (PBOC) and Korea Institute for International Economic Policy (KIEP), Shanghai, 26 February 2016. *  *  *  Over the last two decades the world has witnessed substantial increases in the trade volume to global GDP ratio, sharply grown international investment positions and significantly deepened production supply chains in the most part of the globe. As a result, monetary and financial policies across countries have become much more correlated. The conference organizers rightly asked the most crucial question whether the international monetary system (IMS) is still sufficiently stable in this current environment with a growing interconnectedness. In addition to this heightened interconnectedness, the global economy and financial markets face the challenges of the unconventional and unusual monetary policies in the advanced economies as well as diverging monetary policies of these countries, uncertainty in commodity prices, the risk of China’s economic hard-landing and the unintended market liquidity consequences of the recent financial sector reforms across the world. Large asset purchasing programs of the major central banks have depressed global bond markets with decreasing long-term yields as well as short-term yields and their negative nominal policy rates further destabilized bond markets and in general financial markets.