recurs in response to the fiscal problems within the euro - zone and china ’ s tightening of liquidity management. the world economic recovery stalls out amid a sharp run - up in international commodity prices including that of oil. the recovery in business activity is constrained owing to increased failures of domestic smes. ii. future policy challenges going forward, economic policy needs to secure and enlarge a stable basis for counteracting the possible outbreak of a crisis on the domestic front, complementing the efforts to avoid the recurrence of a global financial crisis at an international level. 1. strengthening of international policy cooperation toward this end, strengthening international policy cooperation constitutes the priority task. the world economy has been recovering more rapidly than expected owing to the fact that international policy cooperation has been swiftly brought to bear against the global financial crisis. a great contribution to this has come from the soothing of market uncertainties by the delivery of a consistent message of recovery from the crisis by every country around the world and, in addition, from the forestalling of the leakage of the effects of independent policy implementation in open economies. in future, every country around the world needs to strengthen the basis for global financial stability still further through international cooperation. under the aegis of the bis, discussions on proposals for policy cooperation are now underway with the aim of reducing gaps in financial regulations among countries and the tendency of financial institutions to indulge in risk - taking behavior. standards for financial soundness including those relating to capital, leveraging and liquidity are being tightened with a major focus on systemically important financial institutions. korea proposed placing the construction of a global financial safety net on the official agenda at the last g20 global summit meeting. in regard to individual countries, the financial safety net now consists of the imf lending system ( fcl ), bilateral currency swaps and the expansion of the foreign exchange holdings. however, in actual fact, it is difficult for these arrangements to function in the envisaged manner because of problematic points such as the stigma effect and the expansion of global financial market imbalances. for the construction of an effective global financial safety net, it is considered appropriate to discuss these at the g20 level in view of the necessity of fine tuning conflicts of interest between the advanced countries and the newly emerging market countries with respect to international capital movements. the presentation of specific proposals is eagerly awaited at the forthcoming seoul summit in november. at the same time, korea is pushing energetically for financial cooperation and

the avoidance of a renewed crisis among asian regional countries through the chiang mai initiative multilateralization ( cmim ). on march 24 this year, the existing bilateral cmi was expanded and enhanced into the multilateral cmim, putting in place a financial stability facility able to supply swift funding support. the arrangements for short - term foreign currency liquidity support by way of “ mutual currency swaps between central banks ” has been converted into a method of “ uniform contract multilateral swaps ”. the total pot available has been expanded from usd 78 billion to usd 120 billion, of which korea has been allocated usd 19. 2 billion with a corresponding withdrawal facility. 2. heightening macro prudential stability heightening macro prudential stability constitutes the second policy challenge. in the aftermath of the global financial crisis the importance of macro - prudential policy has been greatly elevated. it has been a fundamental experience that the macro prudential risk to the future financial system has been overlooked, including that from the expansion of credit and a run up in real estate prices under price stability. owing to the development of financial derivatives products, the mutual linkages between financial institutions had grown closer and this made tackling risk generation and its expansion to the financial system as a whole solely by micro prudential regulation and supervision a difficult proposition. recently the usa, the uk, and other jurisdictions have witnessed lively discussion on the reorganization of the macro prudential policy framework. while there has been an emphasis on multi - lateral cooperation on financial policy including the government, the central bank and the supervisory agency, the importance of the central bank ’ s financial stability role has also been emphasized. the rationale is this : the central bank maintains close linkages with financial market participants and is also well placed to pick up on financial system strains at an early stage. additionally, it traditionally carries out the role of the lender of the last resort role at times of financial crisis. even though the central bank strives for financial stability, this is not seen as conflicting with price stability. considering that financial system unrest generally means that the transmission channels of monetary policy are not working as they should, financial stability is a precondition for a price stability. the central bank ’ s expansion of liquidity supply in order to contain the crisis is also consistent with price stability in that deflation and disinflation may be generated at times of financial crisis. on the other hand, financial crises are mainly provoked by excessive liquidity supply,