“ how to do it ” tends to vanish. in other words, while the relationship between economic theory and policy recommendations is reasonably well defined during “ normal ” times, in periods of turmoil, this relationship becomes much weaker. we have reached a point in which economic theory is having a hard time keeping up with praxis. my reading is clear : there is no single policy or one optimal approach that could be defined in a vacuum. every policy option has its costs and benefits. the key is to choose whether we want to avoid “ going long ” or “ falling short ”. naturally, beyond any attempt to mitigate this trade - off, the strategy and policy choice will crucially depend on the attitudes of the government and its people towards risk. it will also depend on their intertemporal considerations, because the profit and loss profile of alternative regimes will not always coincide. furthermore, past trends in the relevant economy and the starting conditions will naturally affect our policy choice. also, current turmoil and policy reaction in developed countries is an opportunity to understand how monetary policy is performed in emerging economies where financial markets are shallow, the power of monetary policy to affect aggregate demand is limited. one interesting conclusion from the ongoing crisis is that the way of doing monetary policy in such an extreme framework is not much different in emerging or developed countries. it could be framed as a matter of effectiveness of the available tool - kit. however, this is not a negligible point. monetary authorities in emerging countries, are much more used to employ diverse tools. even the emerging countries with inflation targeting regimes were forced to make their systems more flexible to face the new environment. in the end, we all operate under similar principles, but are surrounded by different realities, circumstances and idiosyncrasies. in the case of small open economies the job becomes even more comprehensive from a monetary policy perspective. emerging economies need to achieve macroeconomic and financial stability, develop capital markets, deal with fewer and less developed policy instruments, with fiscal, external and financial dominance, and build credibility, all at the same time. we often lack developed economies ’ room to implement counter - cyclical fiscal and monetary policies. it is hard to think of an asian country doubling its monetary base in four months or reducing its reference interest rate to almost zero percent, as the u. s. did, without adversely affecting economic agents ’ expectations regarding future inflation or the sustainability of the foreign exchange regime. it is also hard to imagine an emerging economy

announcing a fiscal package of 7 percent of gdp to bail out financial institutions, without creating doubts as to the sustainability of their public accounts. at the same time, emerging countries are more likely to experience joint crises. a drop in deposits may lead to fx pressures with an impact on the external position and may affect fiscal accounts ( due to the impact on sustainability of the potential fiscal cost of a financial system bailout or domestic currency depreciation in the face of a currency mismatch ). these limitations together with second round effects make a strong case for more coordinated efforts with a greater voice from the emerging world. otherwise, countries might be tempted to further address the shocks in an uncoordinated way probably by taking measures to isolate themselves. the backfire could be seen either on financial integration ( by controlling capital outflows ), or on trade policy ( rising barriers on imports ). we have to avoid that the positive aspects of integration are overcome by the flaws of the system. it is also worth noting that self - insurance via international reserve accumulation or fiscal funds seems not to be enough when confronted to the magnitude of the de - leveraging process taking place at a global level. we are seeing many welcome developments, particularly the surge in bilateral currency swaps agreements such as the recent one between the hungary national bank and the swiss national bank as well as the one between the people ’ s bank of china and the monetary authority of hong kong to facilitate a smoother trade. this adds to those seen during last year between central banks in developed economies and with emerging ones : the fed with mexico, brazil, korea, and singapore ; the bank of japan with india and the scandinavian central banks with iceland. all of these bilateral agreements just prove the need for international cooperation in a context of an absence of a multilateral organization in a position to perform as a kind of “ central bank of the central banks ”. this is the next step we need to go for. while challenges for policy makers around the globe are significant, now we seem to understand that policy recipes vary from one country to the other in this complex scenario. this progress is, obviously, welcomed. especially for us, emerging markets ’ policy makers, as we have to catch up with the standards of living of our population and, most importantly, build institutions and credibility at the same time. in fact, it is more a synchronic than a sequential two - fold challenge : advancing towards the development of our economies and building institutions simultaneously. and