country is that economic units became used to operating in a highly inflationary environment. to put it more clearly, backward indexing behavior became common in pricing activities. thus, wall of inertia evolved in inflation, which was difficult to break. here “ inflation inertia ” simply refers to the situation of, yesterday ’ s inflation designating today ’ s inflation and today ’ s inflation designating future inflation. hence, as inflation increased, inflation expectations increased with it and a self - nurturing inflation cycle began. in a period of high and chronic inflation, consumers were not inclined to control price and quality less and were also less concerned about diversity in selecting products. at the same time, producers were less concerned with cost and efficiency while pricing and were willing to determine profit margins freely, and invest less on increasing product diversity. as a result of this behavior created by the inflation process, goods and services could be sold at any price since consumers did not control prices, while producers did not control cost. thus, this attitude provoked a resistance against anti - inflationary policies that were introduced at intervals and significantly slowed down the decline of inflation. in other words, the main inertia, which needed breaking, was that stemming from the resistance in peoples ’ minds. this resistance still exists and repeatedly stands in the way of stability programs and efforts. however, since it is gradually being understood that inflation is also a moral issue, the fight against inflation is no longer the direct target. my ideas on the fight against inflation are presented in detail the interview given on january 16, 2005, which is available on our website. to sum up, the protracted chronic inflation made our economy highly vulnerable. it hindered the establishment of macroeconomic balances in the long run. consequently, it induced a heavy cost on both our economy and social life. during the last three years, we have repeatedly explained the damage caused by inflation in every possible platform. today we are content to see that a significant part of the society agrees with us. in the rest of my speech, i would like to focus on where we stand on fighting inflation, how we got here and what should to be done to preserve these gains and maintain price stability. with strict and efficient implementation of the economic program devised after the crisis, the thirty - year period of chronic inflation has come to an end in our country, and the focus has shifted to the declining inflation environment and permanence of price stability. besides, there is a persistent and

agents to perceive and understand the importance of risk management and using hedging instruments and derivatives market better. in this context, as we have mentioned in several platforms, the opening of the turkish derivatives exchange market in february 2005 has been an important step. accordingly, promoting the use of this market by a wider range and the development of the hedging instruments further are very important for both the financial stability and dedollarization. distinguished guests, as a result of the steps taken towards macroeconomic stability and the implementation of prudent policies, the level of dollarization in turkey started to decrease after 2001, despite some pauses. as of november 2006, the share of foreign exchange deposits in the total deposits 12 and in the broad money supply were 38 percent and 35. 5 percent respectively. also the ratio of foreign currency loans to total loans in the banking sector decreased to the level of 16 percent in the same period. moreover the share of the foreign currency denominated and the indexed debt of the government to total domestic debt decreased to 15. 8 percent as of october 2006. by any measure, this, i believe, is a remarkable performance. but all these positive developments do not enable us to call it a persistent and permanent dedollarization process, for sure. it is apparent that the level of dollarization in turkey is still high, which is an important challenge for monetary policy - making. obviously, the dollarization is not declining fast naturally. this confirms the evidence that even if the inflation falls and the macroeconomic stability is maintained to great extent, the memories of the past inflationary and unstable economic environment can cause economic agents to carry on their past habit of holding foreign currency assets and create an inertia. therefore, even a small threat to the macroeconomic stability or any kind of internal or external development that increase uncertainty perceptions can easily lead to a deterioration in expectations and give rise to an increase in dollarization. the last turmoil in the global and domestic financial markets has been a concrete proof of this fact. thus, the dedollarization is not a straightforward process. as a clear evidence of this, the findings of reinhart and her friends 13 show that only two countries, israel and poland, out of a total of 85 countries managed to achieve large and lasting declines in domestic dollarization. accordingly, we can say that dedollarization is a difficult and long lasting process that is very much related with the macroeconomic stability and proper incentives. hence, what we should