impossible to implement fiscal stimulus measures. on the contrary, in order to secure long term sustainability, a significant fiscal adjustment took place, which was necessarily pro - cyclical in the short run. the fiscal adjustment also contributed to the dramatic adjustment that took place within the private sector. households increased their net savings, while firms cut down on their investments, which resulted in a strong trade balance surplus, and a net financing capacity towards the rest of the world. the financial gap was closed. in less than 18 month the external finance position improved by more than 8 %. it must be stressed, that when the crisis hit, countries relying heavily on external funding to finance their growth suffered a more severe recession in 2009, in contrast to those where growth was financed by domestic savings to a greater degree. as it appears unlikely that investors ’ risk appetite will return to pre - crisis levels for quite some time, over the medium term, the process of real - convergence cannot proceed at the expense of a significant deterioration in external balance. we need a new growth model. we have to rely mostly on domestic savings. neither monetary policy was in a position to act strongly against the sharp downturn, due to the high expected risk premium and the currency mismatch problem. however, from the outset the central bank introduced liquidity support measures, and after risk appetite seemed to be stabilizing, we begun to lower or policy rates gradually, keeping in mind that we must not let sudden movements in risk appetite to translate into potentially destabilising balance sheet effects. how can we address these vulnerabilities, that are a threat in themselves but also constrain the effectiveness of economic policies so much? there are no quick fixes here. while the pre - crisis level of indebtedness of households was not particularly high by international standards, its currency composition became very risky. the debt burden increased significantly due to the weakening of the forint - euro exchange rate and the strengthening of the swiss franc. the currency mismatch on private sector balance sheets took years to build up and cannot be undone easily. there is no simple way of converting foreign currency debt to domestic currency debt. if government takes over, it would only mean a transfer of risks, but not elimination. if the conversion would take place directly and en masse on the foreign exchange market, this would almost certainly imply large exchange rate depreciation and possibly other unintended consequences. moreover it is hard to imagine indebted households that

financing. however, it is clear that – apart from hungary – most problems among cesee countries were rather caused by excesses in the private sector, than by excessive government spending. though, as is shown in case of “ peripheral europe ”, this picture can change quickly, systemic risk in the private sector can easily turn to government debt. regarding private sector imbalances, the issue is even more complex, as we cannot identify one actor, responsible for the behavior of a whole sector. here we have two policy optimon : monetary and macro - prudential, and one should not forget about their interaction. let me look at them in turn. monetary policy in a post - crisis world : living together with permanent level of high uncertainty as i argued, the crisis brought a reassessment of risk, resulting in the reassessment of sustainable external balances. foreign investors are not the only actors to change their opinion regarding the most likely path of future variables. households, corporates and all economic actors should reassess, what they thought sustainable previously about the future. with forward looking agents, this means that they react now stronger in output, expenditures and prices compared to how they did in the past. all this means an extreme level of uncertainty. we need a robust monetary strategy that helps to live together, with high level of uncertainty. we need a transparent framework, flexible enough to absorb risk premium shocks, but such, that ensures price and financial stability in the long run. flexible inflation targeting might be considered as such a system. inflation target as a final nominal anchor is transparent but flexible enough to ( 1 ) avoid reacting to excessive risk premium volatility with interest rate policy ( 2 ) incorporate other type of policy considerations, like macro - prudential ones. see tang and upper ( 2010 ) “ debt reduction after crisis ” bis quarterly review, september 2010. see mnb ( 2010 ) “ analysis of the convergence process, from the point of view of the financial crisis ” and atoyan, r. ( 2010 ) “ beyond the crisis : revisiting europe ’ s new growth model ” imf wp 10 / 92. it is also obvious however, that one instrument, namely interest rate policy, cannot be enough to achieve both price, and financial stability. one of the most important lessons from the financial crisis is that there can be conflicts. the empirical evidence shows, that increasing price and macroeconomic stability gives extreme incentives to financial risk taking, as