durmus yılmaz : reform strategies and expectations in the new normal – a public perspective speech by mr durmus yılmaz, governor of the central bank of the republic of turkey, at the active academy 8th international finance summit, istanbul, 8 december 2010. * * * distinguished participants and esteemed guests, before starting my speech, i would like to thank the directors and staff of the active academy for their efforts in organizing the 8th international finance summit. the turkish economy, which has achieved stronger macroeconomic fundamentals and a sound financial system thanks to steadfast implementation of structural reforms since 2001, has been one of the economies that exited the crisis very rapidly. in the upcoming period, the new economic conjuncture needs to be managed wisely in order to sustain macroeconomic stability. therefore, today i would like to devote my speech entirely to macroeconomic stability. distinguished participants, the recovery observed in the aftermath of the crisis continues albeit being slow and gradual. however, the downside risks pertaining to the future global growth outlook persist. vulnerabilities continue especially in developed countries that experience serious deterioration in budget balances and an excessive rise in public debts. perceptions are growing that the accommodative fiscal policies and expansionary monetary policies adopted by these countries fall short of achieving the desired results in unemployment and growth. meanwhile, developing countries, which have stronger financial structures, are enjoying a faster recovery process. the decoupling observed between these two groups of countries is expected to continue in the upcoming period as well. global liquidity has increased significantly as central banks of developed countries, which eased policy rates rapidly, adopted quantitative easing policies. recently, capital flows to developing countries such as turkey have been accelerating owing to expectations that short - term interest rates in developed countries would remain low for an extended period, the decoupling in growth performances of countries and increased risk appetite. in the face of growing capital flows, some developing countries are introducing measures to prevent capital inflows. however, past experiences of countries show that restricting capital inflows is not really effective in terms of the volume of capital inflows while it is only partially effective in terms of the type of incoming capital. in other words, due to reasons such as financial innovation and the integration of markets, it is not possible to effectively prevent capital flows, unless they are fully controlled. the current conjuncture is conducive to benefiting wisely from capital flows and implementing policies that

sector to the real sector whereas in emerging economies, the direction was the reverse – the fault lines spread from the real sector to the financial sector. finally, much of our pressures came from the supply side, not the demand side. for all these reasons and more, the challenges we faced were different and the responses called for from us had to be different. it is important for us as well as the rest of the world to appreciate these differences between advanced and emerging economies. what better person than prof. taylor to look at monetary policy responses from the special perspective of emerging economies? 15. prof. taylor ’ s career has been marked by a seamless back - and - forth between the academia and policymaking, most recently as the u. s. treasury ’ s top official for international affairs. when in academia, he jumps into teaching and research with an abandon that seems uncharacteristic of a washington policymaker. to grab students ’ attention in a class on agricultural supply and demand, he once pranced around the classroom in a california raisin costume to the tune of marvin gaye ’ s “ i heard it through the grapevine. ” 16. having a concept named after oneself is as much a mark of honor in economics as it is in other sciences. by this standard, prof. taylor is among the most honoured macroeconomists of his generation. indeed, concepts bearing his name have become so pervasive that the u. s. federal reserve board chairman ben bernanke once remarked that “ with our appetites whetted by the taylor rule, the [ taylor ] principle, and the [ taylor ] curve, we now look forward to the taylor dictum, the taylor hyperbola, and maybe even the taylor conundrum. ” 17. here in mumbai, and in a more immediate sense, we look forward to the taylor lecture. 18. ladies and gentlemen, i have great pleasure in inviting prof. taylor to deliver the 11th l. k. jha memorial lecture.