However, over time as the financial system get more complicated and expanded exponentially, its supervision and regulation has been partially transferred to other institutions, which is also the case in Turkey. The challenge faced by central banks is to establish a framework that combines both price stability and financial stability as primary mandates even at times they conflict with each other and identify the policy instruments to target both. As you know central banks have typically used short-term interest rates as their primary policy instrument. However, the “Tinbergen Rule” suggests that this one instrument could be deployed to achieve only one target, which is conventionally recognized as price stability. Addressing both price stability and financial stability simultaneously necessitates a second set of policy tools. This second instrument may be in the form of the supervision and regulation of financial activities. The question is that whether these responsibilities should be assumed solely by central banks. The downside of this option is that central banks may turn out to be too big, inflexible and in conflict with themselves, which eventually led to failure in both objectives. Dear Participants, Prior to the global financial crisis, central banks were conducting monetary policy through conventional banks and use government bonds in open market operations. However the  BIS Review 73/2010  3  financial crisis led central banks employ a wider range of securities, ranging from corporate bonds to asset backed securities and mortgages. The reason behind this transformation was obvious.

There are also calls for establishing new global mechanisms to address the concerns of emerging market economies regarding FX liquidity, which has led to accumulation of high amount of FX reserves through capital controls and intervention on exchange rates to keep local currency undervalued. Of course, relaxing capital controls and gradual adoption of more flexible exchange rate systems should also be part of this package to achieve successful reorientation of global demand from advanced economies to emerging market economies. Last but not least, all countries should undertake necessary actions to repair, restructure and reform their financial system. Necessary structural reforms in product and labor market should also be a top priority to increase potential growth rates and reduce permanent unemployment. Dear Guests, Now let me turn to responsibilities of central banks and elaborate on their evolution over time. Until recently when you asked the primary mandate of central banks, the typical response would be price stability. However, the history tells us that central banks were founded for quite different reasons in many countries. For instance the Bank of England was founded in the 17th century to cover the financing need of the British Government during its war against France. Likewise, Bank de France was created in the 19th century during the Napoleon Wars against the Great Britain. These institutions had the privilege of issuing banknotes in  2  BIS Review 73/2010  exchange for providing funds for treasuries. In other countries providing stability in financial markets was the paramount concern.