in favor of long term capital inflows and foreign direct investment. at this point, i would like to reemphasize the support of the fiscal policy as an important factor contributing to this achievement. the involvement of the government in the process first came from the fact that inflation targets have been set jointly by the government and the central bank. the government ’ s pricing, tax and income policies have been carried out in tandem with inflation targets. another crucial factor has been the fiscal discipline : very high levels of primary surplus have been maintained all over the years. thus concerns over the sustainability of the public debt stock have faded away, helping inflation expectations to be consistent with the targets, maintaining confidence in the economy and thus reducing the risk premium. the continuity of fiscal discipline and tight fiscal policies consistent with targets are critical for the credibility of the inflation - targeting regime. thus, the support from the fiscal side is still an indispensable part of the economic program. dear guests, central bank independence generally implies the ability to act free of direct political pressures when taking and implementing decisions concerning monetary policy. parallel to this, central bank independence takes the first place in monetary policy debates especially in developing countries where lack of sustained fiscal discipline and higher inflation rates have been common. both country experiences and economic literature have proven that there is a direct relationship between central bank independence and inflation. that is, the more independent and thus the more insulated from political pressures a central bank is, the better the country performs in terms of reducing the inflation level. the first thing that the independence of a central bank then evokes is de jure independence. within this context, factors such as goal independence, instrument independence, rules for the appointment, term of office and discharge of high level officers, central banks ’ control of their own budgets and provisions on their staff are among the important issues that can be addressed in central banks ’ law. in fact, what i find particularly critical based on my experience is that independence is not a concept that can be simply achieved by legal independence. i believe achieving central bank independence is a process you live through on a daily basis and is closely related to central bankers ’ stand on economic policies and stability. the new law on the central bank, enacted in may 2001 in line with eu norms and central banking practices in the world, has been the most important step strengthening our central bank ’ s operational independence. by this law, as i mentioned before, the main objective of the bank is stated as

in december 2002. eichengreen, b., haussmann, r. ( 1999 ). “ exchange rates and financial fragility ”. nber working paper 7418. as economic literature tells us, and you very well know, the management of expectations is of great importance for every central banker. quoting michael woodford 5, “ for successful monetary policy is not so much a matter of effective control of overnight interest rates as it is of shaping market expectations of the way in which interest rates, inflation, and income are likely to evolve over the coming year and later ”. i believe it is the expectations that form a bridge between short - term interest rates and long - term interest rates. the more the expectations converge to the targets, the greater the likelihood of the success of the policies. also, the less volatile the expectations are, the more stable and predictable the effect of monetary policy on the economy is. however, when it comes to emerging market economies, the functioning of expectations differs from developed countries. to be more precise, expectations affect the economy more heavily than other channels in many emerging market countries with a high inflationary past 6. we at the central bank of turkey are also familiar with this experience. the impact of short - term interest rate decisions is observed within a much shorter period of time through the expectations channel, which has made this channel the most effective one in turkey so far. in this context, what i find particularly critical to my experience is that the high inflationary history of emerging market countries stands as a real challenge to expectations management in several respects. one of the reasons is the lack of credibility resulted from the high and chronic inflation period in emerging economies. since these periods can be characterized by the monetization of public debts by sources of central banks or central banks having objectives other than and sometimes even contradicting price stability, economic agents tend to have doubts about the credibility of central bank policies. not to mention that this constitutes a limit to the effectiveness of monetary policies. the other one is known as “ inflationary psychology ” or “ inflation scare ”. to be more precise, because of high and volatile inflationary periods, economic agents in emerging economies are more inclined to exaggerate adverse effects than in any other economy that has price stability. thus, a seasonal rise in inflation may immediately lead to deterioration in inflation expectations and higher prices with little transitional impact on the level of economic activity. at this point, given the importance of expectations management, a key