among central banks of developed countries was to give priority to problems in financial markets, ignoring the signs of inflationary pressures. certainly, there are structural reasons behind the recent run - up in food and energy prices, as i have just briefly discussed. however, it is also undeniable that there are significant demand - driven pressures over commodities. loose monetary policies adopted at the turn of the century certainly played a key role, together with excess liquidity in the financial system. fast - forwarding to the recent period, the central banks of developed countries still keep real interest rates negative in the face of financial risks may hamper a correction in commodity prices. the commonly accepted practice in inflation targeting regime is that monetary policy should not react to supply - driven shocks that are temporary in nature and should allow temporary increases in inflation in the short - term, unless they create deterioration in inflation expectations. otherwise, undesired fluctuations might arise in economic activity and relative prices. the increase in commodity prices would trigger a self - correcting mechanism. by changing the relative prices, it would provide valuable information on how the resources of the economy should be distributed. while high food and energy prices curb consumption on these products, they would also encourage investment and increase supply in the long - term. in short, the common view is that central banks have nothing to do but wait for the supplydriven shocks to work out their natural course. however, in the current environment where persistent and rapid increases in food and energy prices have been observed for a considerable period, the prevalence of this view has become questionable – especially in the light of current projections that foresee even higher prices in the near future. as a matter of fact, many countries under inflation targeting regime now project that inflation will converge to the target at the end of 2009 or in 2010, at the earliest. going through a long period of high inflation is a serious risk for price stability. first, the general price level may shift upwards at a faster rate, as producers and workers in other sectors ask for higher prices and wages in response to the loss of their real purchasing power. the fall in real interest rates due to deterioration in inflation expectations is another risk, since lower real rates will lead to a faster pace of credit expansion. the common factor of these two risks is that persistent supply shocks may turn into demand shocks after a while. thus, at some point, central banks have to decide to what extent they can tolerate the rise in inflation. advocators of a

durmus yılmaz : role and responsibilities of emerging economies in the global monetary system speech by mr durmus yilmaz, governor of the central bank of the republic of turkey, at the conference on " where is global finance heading? ", istanbul, 2 october 2009. * * * dear guests, i would like to welcome you all to istanbul. it is a great pleasure for us to host this conference and such a distinguished group of central bankers, academics and experts. i hope this meeting, together with the upcoming events, will be helpful in shedding light on the future of the global financial system. it has been almost two years since the surfacing of global financial crisis of epic proportions and we are still dealing with its repercussions. one can easily identify a variety of reasons for its occurrence : global macroeconomic imbalances certainly played a key role. deficiencies in financial regulations and lack of coordination among monetary authorities and regulatory institutions played even a bigger role. policy makers were quite complacent during the build up in asset bubbles. accommodative monetary policies enabled access to cheap money. high leveraged transactions magnified the amount of liquidity created through financial system. search for high yields led to excessive risk taking and use of complex instruments. compensation scheme in the financial sector encouraged short - term bias. above all, believed that with the use of complex financial instruments, one can wipe out the risk from balance sheets. however, risks only changed form and address in the financial system, just like the energy continuously transforms in the physical universe. almost all economists agree that we are heading to a slow, gradual and painful recovery. and as a central banker who has spent almost 30 years in this profession, i can tell you that it is a miracle itself to have so many economists agree on one issue with so much vigor and conviction. the future of the global financial system will be shaped by the lessons we derive from our current experience. the ongoing crisis revealed that preventive measures put in place at the local level by national authorities may not be effective to address global problems. it also underlined the importance of international cooperation and coordination in designing and implementing economic policies. it is clearly understood that the only way to prevent future crises at the global scale is multilateral cooperation. however to establish and sustain multilateral cooperation is not an easy task. as ( john maynard ) keynes once said, “ the biggest problem is not to let people accept new ideas, but