Secondly, due to the development of the derivatives markets, the foreign trade level in a floating exchange rate regime will be the same as the level in a fixed exchange rate regime. Hence, exchange rate risk will not affect the level of foreign trade3. Turkish derivatives exchange (Turkdex) In this framework, the effective operation of derivatives markets is for enabling economic agents to hedge their balance sheets from exchange rate risks under the floating exchange rate regime. Macroeconomic stability and the structural transformation process have provided our economy with a  3  Baron D. (1976). Flexible Exchange Rates, Forward Markets and the Level of Trade. The American Economic Review. Vol. 66. No. 3. BIS Review 36/2005  19  sound environment for risk management. And, the establishment of the Turkish Derivatives Exchange has been an important step taken on the way. It would be useful to reiterate the potential favorable effects of derivatives markets on our economy. First of all, derivatives markets offer economic agents the facility of risk management and make their future revenue flows predictable. Moreover, expectations can be measured and reflected on prices through these markets. This, in turn, increases the predictability and efficiency of spot markets. In this way, market prices provide economic agents with accurate information and excessive volatility decreases. Analyzed in terms of their impact on the real economy, the use of derivatives markets increases resistance to shocks in the economy as a whole as it reduces weaknesses resulting from the imbalance on firms’ balance sheets.

A stronger krone also dampens exports and reduces profitability in Norwegian business and industry. The effect on the exchange rate of a change in interest rates will vary as themes and sentiments shift in the foreign exchange market. The expectations channel: We believe that expectations play an important role when prices and wages are set. Expectations concerning future inflation and economic stability have considerable impact, not least in the foreign exchange market. Inflation expectations also influence wage demands and have an effect when companies adjust their prices. It is difficult to be precise about how expectations are formed. Confidence in the inflation target may provide an anchor. Past inflation rates may also influence what we think inflation will be in the future. There is thus an interaction between inflation expectations and inflation. If there is confidence in monetary policy, expected inflation in the medium term will be close to the inflation target. This contributes to stabilising inflation around the target. It is thus important for the central bank to ensure that households, companies, the social partners and financial market participants are confident that inflation will remain low and stable. Let me introduce the concepts of the “neutral rate” and the “long-term equilibrium rate”. Both should be seen as real rates, that is nominal interest rates adjusted for expected inflation. The neutral real interest rate is defined as the rate that does not in itself result in an increase or a reduction in price and cost inflation in the economy in the course of a business cycle.