Within this framework, assuming that financial markets always operate efficiently, we can list the reasons for the crisis as deregulation, financial innovations, problematic accounting standards and global instabilities. The liberty brought by deregulation led to shortsightedness  BIS Review 79/2010  3  driven by over-confidence and short-term profits were preferred at the cost of risking the financial system in the long run. Financial innovations generated complex derivative products, where who owes how much to whom is not clear and, which actually lead to multiplying of risk instead of distribution of it. Meanwhile, the accounting standards based on “Fair Value” principle made cyclical effects and fuelled the destructive power of the crisis. Having mentioned the stages and reasons for the crisis, now I would like to share with you the monetary policy implemented by the Central Bank of Turkey during the crisis and my evaluations on the recent developments in the Turkish economy. Projecting that inflation would decrease sharply as of the last quarter of 2008, the Central Bank of Turkey implemented a monetary policy focusing on restraining the potentially harsh impact of the global financial crisis on financial activity without conflicting with the primary objective of maintaining price stability. During this process, the CBT has delivered sizeable cuts in policy rates and a counter-cyclical monetary policy has been implemented with the aim of supporting the smooth operation of credit markets. Between November 2008 and November 2009, the CBT cut policy rates by 1.025 basis points, playing a pioneer role among central banks of developing countries.

Countries implementing a fixed exchange rate regime have been hit more severely by the crisis compared to those implementing a floating exchange rate regime. In countries with free capital flows, a floating exchange rate regime, – by enabling monetary authorities to adopt a flexible approach in the face of a liquidity crunch in markets – acts as a safety valve preventing over-contraction of the economy, under rapidly deteriorating international liquidity conditions. As a matter of fact, in countries implementing a floating exchange rate regime, economic activity exhibited smaller fluctuations before and during the crisis. Moreover,  BIS Review 79/2010  1  countries under a floating exchange rate regime experience a stronger economic recovery compared to those under a fixed exchange rate regime. The second structural factor that determines the resilience of countries against the crisis is the structure of the banking system. In this period, factors such as asset quality of the banking system, keeping leverage ratios at manageable levels, and proper implementation of regulatory and supervisory activities played an important role in containing the damage and credit crunch in financial markets. The last two factors that determine the level of impact of the crisis on countries are monetary and fiscal policy practices that are considered as cyclical movements in the economy. In those countries, which observed fiscal discipline, implemented countercyclical monetary policies, prevented excessive increases in private sector’s indebtedness ratios in the precrisis period, central banks and governments had the room for maneuver to implement monetary and fiscal policies that could recoup demand shocks.