Sooner or later, with the recovery of global economy, money supply pumped up to the system involves the risk of inflation if the central banks miss the soft spot in the timing of the exit strategies. The solution I believe is the announcement of credible consolidation plans going forward in stabilizing global economy in order to reduce the risk of wilting the green shoots. Therefore, it is vital for both monetary and fiscal authorities resolve the issues of long term fiscal sustainability and price stability. Esteemed Guests, Following my opinions about the recent developments in global economy, I would like to talk about the Turkish economy and our recent implementation of monetary policy. The global turmoil has adversely affected financing facilities and external demand, and led to a significant slowdown in economic activity in developing countries. We also had our fair share of it. The Turkish economy, which had been growing for 27 quarters in a row, experienced a severe contraction during the last quarter of 2008 and the first quarter of 2009. The higher share of cyclically sensitive exports, firms’ dependence on external financing, and high level of production capacity were all factors that exacerbated the severity of the recession. 2  BIS Review 123/2009  Parallel to the contraction in aggregate demand coupled with the sharp drop in commodity prices, inflation plummeted markedly. Easing of concerns over inflation enabled us to focus on containing potential adverse effects of global financial turmoil on the domestic economy without compromising our price stability objective.

It is therefore imperative that the risks arising from financial openness be better managed. Similar to legitimate concerns on trade openness, emerging economies also have legitimate concerns on the negative effects of financial globalisation. More needs to be done to have, to quote IMF’s Christine Lagarde, “safer capital flows”. Allow me to put forward two areas for deliberation. First is on financial safety nets. In this regard, I welcome efforts to strengthen regional and global financial safety nets. To this end, ASEAN+3 2/4  BIS central bankers' speeches  countries achieved a significant milestone under the Chiang Mai Initiative Multilateralisation when the fund size was doubled to USD240 billion in 2014. Moving forward, an important consideration is to bring the various bilateral swap arrangements and regional financial safety nets together with the IMF’s safety net into a coherent framework that will enhance their complementarities and thus, effectiveness in supporting emerging economies in dealing with short term capital flow volatility. Second is with respect to domestic policy space for emerging economies in dealing with capital flows. Clearly, capital flow volatility poses considerable challenges to emerging economies’ policymakers in safeguarding financial and macroeconomic stability. While the global community continues to debate and explore possible solutions to manage spillovers and spillbacks of policies in advanced economies, for emerging economies, there is a need not just to preserve existing tools available to us, but to constantly refresh our policy toolkit to deal with the multifaceted risks confronting our economies and to be flexible in implementing them. Pragmatism is key.