durmus yilmaz : in search of an appropriate policy mix for emerging economies – monetary policy in turkey in the aftermath of the global financial crisis speech by mr durmus yilmaz, governor of the central bank of the republic of turkey, at the euromoney central and eastern european forum, vienna, 18 january 2010. * * * dear guests, during the global financial crisis, almost all countries focused on containing potential adverse effects of the crisis on domestic economy ; turkey was not an exception. following the intensification of the crisis, the central bank of turkey ( cbt ) delivered sizeable and frontloaded cuts in policy rates, reaching 1025 basis points from november 2008 to november 2009. during this period the cbt not only cut policy rates rapidly, but also pursued a counter - cyclical liquidity policy to support the functioning of money and credit markets, thereby strengthen the impact of the rate reductions on economic activity. these efforts were successful in bringing back turkey on a strong recovery track. the healthy household balance sheets and solid banking system allowed a rapid rebound in domestic demand. starting from mid - 2009, the turkish economy has been facing a domestic demand driven rapid recovery. meanwhile, strengthening capital inflows has further exacerbated the divergence between the domestic and external demand, creating new policy challenges. rapidly widening current account deficit coupled with short term capital inflows and exchange rate appreciation called for a different approach to monetary policy. in order to cope with this new situation, we have slightly modified our existing framework of inflation targeting by explicitly highlighting the increasing role of financial stability in our objective function. accordingly, first we have announced the details of our exit strategy from crisis measures in april 2010. as a first step, we have normalized the liquidity support facilities and brought back the try reserve requirement ratios to pre - crisis levels of 6 percent. second, we started to highlight the macro financial risks and contingent policy responses. for example, we have stated through our policy documents that, if divergence in growth rates between domestic and external demand continues in the forthcoming period, and if this pattern of growth coexists with rapid credit expansion and deterioration in the current account balance, it would be necessary to utilize other policy instruments such as reserve requirement ratios and liquidity management facilities more effectively. the primary objective of the cbt is to achieve and maintain price stability. however, the recent crisis has taught us that this single objective may not be enough for attaining macroeconomic and financial

ongoing surge of commodity prices, especially of oil, stands out as another risk factor that may slow down the global economic recovery. distinguished guests, 16. in this part of my speech, i would like to evaluate key macroeconomic developments in turkey in line with the global economic developments in 2010. developments in the turkish economy 17. adoption of additional easing measures in emerging economies led to growing expectations that low interest rate and ample liquidity conditions in advanced economies would be maintained for an extended period, which in turn increased the global risk appetite in 2010. consequently, capital inflows to emerging economies accelerated and risk premiums of these countries declined. meanwhile, risks regarding the debt sustainability of peripheral euro area countries remained vigorous and continued to dominate the financial markets. in fact, renewed concerns over sovereign debt since november increased risk aversion and raised risk premiums across emerging economies. 18. however, what should be highlighted is that despite the volatile course of risk sentiment across emerging economies, turkey ’ s risk premium indicators performed better than many other countries and remained below pre - crisis levels. this positive development is attributable to country - specific favorable conditions such as upgrades by credit rating agencies, reduced political uncertainty in the aftermath of the referendum period and the revised medium term program ( mtp ) signaling further fiscal discipline. bis central bankers ’ speeches 19. on the other hand, risk premiums have recently increased due to current unrest in the middle east. fear of spillover to peripheral countries and the expectations of persistence in oil price hikes deteriorated the risk sentiment. accordingly, turkey ’ s risk premium has also increased. esteemed guests, 20. in 2010, fiscal and monetary policies had growingly expansionary effects on domestic demand. although the weak recovery in advanced economies continued to curb domestic economic activity, gross domestic product ( gdp ) registered an 8. 9 percent increase amid the rapid recovery in domestic demand. indeed, the main drivers of the gdp growth in this period were private demand for investment and consumption. bis central bankers ’ speeches 21. the impact of the global financial crisis on the labor market has subsided and nonfarm employment has started to recover rapidly starting from the first quarter of 2009. in 2010, the rise in non - farm employment compensated the crisis driven job losses, and employment in all sectors surpassed the pre - crisis levels. 22. as i have previously mentioned on several occasions, sustainability of the favorable labor market outlook in 2010 is contingent on implementation of the required reforms for enhancing productivity and flexibility in