. overall, our proposition is that the unique combination of shocks and structural features of the economic system in emerging market give rise to a macroeconomic backdrop that is characterized by significantly higher output and consumption volatility than in developed economies. the asian financial crisis ten years ago is a good example of this interaction, where large and persistent capital flows interacted with financial system underdevelopment and rigid policy regime resulting in a boom - bust cycle. against this backdrop, the pursuit of monetary and financial stability in emerging market, therefore, has two key facets. the first is addressing the immediate short run concerns emanating from various shocks ; and the second is implementing structural reforms to ensure that financial stability becomes embedded in the underlying structure of the economy in the long run. in terms of challenges, the former essentially concerns the challenge of maintaining economic stability through appropriate policy settings and actions to offset the various shocks hitting the economy at any given point in time. the latter, on the other hand, focuses on strengthening the institutional framework for monetary policy and financial supervision as well as fostering financial system development that improves the ability of the system to absorb shocks by itself in a way that minimizes the impact on the real economy without the need for policy intervention. let me now discuss some specific challenges to monetary and financial stability in emerging markets from both the short and the long run perspectives. for short - run stabilization, it is clear that one of the important challenges at present is how to contain financial vulnerabilities that accompany an influx of short - term capital. in coping with capital flows, lowering interest rates to reduce the relative attractiveness of the country to capital inflows may be a first appropriate way to ensure price stability. but, in most cases, fast appreciation may not subside as exchange rates tend to behave more like asset prices than relative goods prices. so, there is a risk that central bank may cut interest rate by too much, hence, sowing the seeds for inflation and an asset price boom down the road as well. on the other hand, sterilized intervention also entails quasi - fiscal costs, as well as adding to inflation risk from the build - up of local currency debt should there be future fiscal stresses. moreover, international reserves accumulation can also risk damaging central bank credibility as they can incur balance sheet loss when reserves are marked to market in local currency. these are all important and delicate points for policy consideration. the second challenge is the ability of emerging market central banks or financial

interests not only slows the reform process but often leads to compromised solutions that fail to address the original underlying goal of the reform. therefore, it is vital to have a well thought - out strategy for the timing and manner with which structural reforms are instigated. to conclude, the central theme running through the paper is to point to the intricacy of achieving monetary and financial stability while at the same time maintaining the delicate balance of short run stabilization efforts and long run structural reforms. this is perhaps the toughest challenge for emerging market. but despite the challenge, the overall direction of change in emerging market economies to date is fundamentally reassuring. much has been achieved in term of strengthening the monetary framework and financial system development. thank you.