legitimacy and effectiveness has also progressed, granting a larger weight in their decision bodies to emerging economies, as well as expanding the representativeness of the financial stability forum and of the basel committee on banking supervision. the imf and the expanded financial stability forum are called to increase efforts in crisis prevention and responses. the g20 communique backed the calls for a broader international cooperation in several fronts, but let me remind you that the international community of central bankers and financial regulators have already developed strong cooperation ties. institutions as the bis with its regular meetings or governors and of senior central bank officials and experts or forums like the basel committees and the financial stability forum have been providing for years the necessary dialogue, exchange of ideas and information between us. i understand that other forums of economic authorities can replicate our own model of cooperation. regarding the imf, the discussion currently concentrates around its role and legitimacy. its role should focus on three main topics. the first is surveillance. it is very important that the imf becomes a key and integral part of the financial early warning system. the imf is vital not only in terms of forecasting, which is already regularly performed and published, but also in terms of surveillance of each country ’ s policies and specific warning indicators, aimed at detecting its growing unbalances. one of the points that, in my personal opinion, have complicated efforts to deal with the current financial crisis is that the whole focus of the imf during decades was to prevent crises in emerging markets. there is a different picture now, and is paramount that the surveillance done by the imf focus on every relevant economy and really works as an early warning system. the second topic, evidently, is international cooperation. and international cooperation requires that the imf and the financial stability forum work together to propose a new set of regulations – some of them were already discussed here today, and particularly regulation and supervision of cross - border transactions, which are not directly restricted to one national supervisory authority. the basel committee will most likely continue to be the focal point of conducting the implementation of the process. the third topic is the imf role in supporting emerging and developing countries, which have no financial conditions to address the effects of the financial turmoil on their economies. traditionally, the imf has focused on crisis generated in one specific economy or group of economies and in proposing policies to restore that country ’ s soundness. the problem that we are facing today is that some countries might have a sound policy but were affected by the

the same rationale applies to inflows. if the exchange rate level that is intended to be defended is inconsistent with economic fundamentals, massive inflows can be created that will sooner or later appreciate the domestic currency in real terms. investors take advantage of a relatively cheap currency to enter capitals before the appreciation occurs, and get a significant capital gain. hence, within a framework of capital mobility, foreign exchange flexibility avoids one - sided bets over the exchange rate. furthermore, an inflation targeting regime with a floating exchange rate provides a good buffer to smooth the impact of changes in capital flow cycles. the same monetary policy reaction to a currency appreciation that reduces inflationary pressures, allows limiting the currency appreciation process by narrowing interest rate differentials. a second line of defense is a symmetrical opening of the financial account. many countries have approached financial integration by opening their economies to capital inflows, still holding on to their constraints to local capital outflows, especially from institutional investors. after a while, and as a reaction to massive capital inflows, restrictions on outflows are allowed to become less stringent. however, this is normally done too late and signals fear of capital inflows. in fact it can even reinforce the phenomenon, particularly when the exchange rate has reached unsustainable levels. having a well regulated and developed financial system is a requisite for properly accommodating exchange rate and capital movements. this is because it makes it easier to prevent exchange rate fluctuations from destabilizing financial conditions. currency mismatches have been at the origin of many banking crises in emerging economies. nonetheless, their financial systems ’ resilience to exchange rate fluctuations toward late 2008 and early 2009 showed that lessons were learned, and effects on banks ’ balance - sheets, that would have translated an external recession into a far - reaching financial crisis, were avoided. of course there were exceptions, particularly in emerging europe, where fragilities arose precisely because of the rigidity of their exchange rate systems and currency mismatches of their banks. another reason of the importance of having a well - functioning financial market is the distortions caused by exchange rate volatility on resource allocation. in order to minimize such effects it is prudent to develop an exchange rate hedging market allowing producers in the tradable sector to hedge against exchange rate fluctuations at least at one year ’ s term. in fact, evidence shows that hedging markets are more developed in economies with more flexible