the foreground during the initial stages of central banking, because there was not much concern for inflation in many advanced economies. the value of money was well - protected thanks to the use of gold standard. as friedman once said, “ inflation is always and everywhere a monetary phenomenon. ” therefore, there would be no permanent inflation as long as long term money supply expands in parallel to long term money demand. in this context, inflation concerns were kept in the background in many countries under the gold standard during the 19th and most of the 20th century. with the collapse of gold standard after the great depression and its successor ( the bretton woods system ) in 1973, we have entered the era of fiat money. in the absence of a solid anchor like gold, the only mechanism left behind to support the value of the fiat money was the credibility of central banks. this brought out the issue of price stability in the foreground of central banking. our initial experience with fiat money was not promising. in the late 70s, many countries including advanced economies experienced rapid monetary expansion and as a result very high inflation rates, in many instances in double digits. 1981 was the turning point of central banking. the federal reserve, under the leadership of its chairman paul volcker, engaged in a very tight and painful monetary tightening, despite the harsh criticism from the us administration and the real sector. as inflation rate in the us gradually declined to low single digits, the federal reserve earned the reputation of an uncompromised inflation fighter, which gradually extended to other central banks in advanced economies as well. this was also the period in which many central banks gained operational independence. over time it became a conventional wisdom among policy makers that the most important and long lasting contribution of central banks to long term growth and financial stability is to establish and sustain price stability. as the issue of financial stability has gained critical importance during the recent global crisis, central banks are asked to address directly not only price stability but also financial stability as well. as i explained before, to maintain smooth functioning of the financial system has been a concern of many central banks since their foundation. in fact, that is the reason we are called as “ the bank of banks ” or “ the lender of last resort ” for financial institutions. however, over time as the financial system get more complicated and expanded exponentially, its supervision and regulation has been partially transferred to other institutions, which is also the case in turkey. the challenge faced by central banks is to establish a framework

that combines both price stability and financial stability as primary mandates even at times they conflict with each other and identify the policy instruments to target both. as you know central banks have typically used short - term interest rates as their primary policy instrument. however, the “ tinbergen rule ” suggests that this one instrument could be deployed to achieve only one target, which is conventionally recognized as price stability. addressing both price stability and financial stability simultaneously necessitates a second set of policy tools. this second instrument may be in the form of the supervision and regulation of financial activities. the question is that whether these responsibilities should be assumed solely by central banks. the downside of this option is that central banks may turn out to be too big, inflexible and in conflict with themselves, which eventually led to failure in both objectives. dear participants, prior to the global financial crisis, central banks were conducting monetary policy through conventional banks and use government bonds in open market operations. however the financial crisis led central banks employ a wider range of securities, ranging from corporate bonds to asset backed securities and mortgages. the reason behind this transformation was obvious. thanks to financial engineering and innovative products, only a small portion of financial institutions ’ assets is in government securities. therefore, asking for government securities as collateral in open market operations would no longer provide enough liquidity to the financial system. in the meantime, as banks have lost their dominance in the financial system, corporations and non - bank financial institutions have joined the conventional banks as the counter parties of central banks in market transactions. the question in this context is ( 1 ) whether the innovative policies we have seen in the last year will lead to longer - term changes in central banking doctrine and behavior, ( 2 ) whether in parallel to new developments in financial structure central banks will adopt a more flexible approach in operational practices, and ( 3 ) maybe more importantly whether central banks will maintain their influence in the financial markets, which has grown rapidly due to extraordinary actions during current crisis? these are important questions to discuss and i hope this conference would provide new insights to policy makers as we sail through uncharted waters. while concluding my remarks, i would like to extend my thanks to the members of the forum istanbul, who have contributed to the constitution of constructive criticism environment that i perceive as an important element in building the future of turkey. thank you for your attention.