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  BIS Review 73/2010  3  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.
Given the long lags in monetary policy, central banks must look forward now and prepare a strategy for a smooth transition back to normalcy. Asian economies: dealing with desynchronised global macroeconomic cycles 31. The second key aspect in securing a return to normalcy is the adjustment of macroeconomic policies in the emerging market economies to spillovers from the advanced world. I will speak with reference to Emerging Asia. Continually shifting gears in monetary and fiscal policies 32. In the early stages of the financial crisis, most Asian countries responded with expansionary macroeconomic policies to dampen the effects of a collapse in exports. Between August 2008 and August 2009, policy rates across Asia were more than halved, on average. Substantial fiscal stimulus was injected, ranging from higher investment spending in China to significant tax cuts in Indonesia. Fiscal deficits across Asia widened from an average of 0.6% of GDP in 2008 to 3.0% in 2009. 33. From 2010 onwards, a two-speed recovery took hold in the global economy, with advanced economies growing sluggishly and Emerging Asia staging a vigorous rebound. Incipient inflationary pressures prompted central banks in the region to raise policy rates from mid–2010 onwards. Although renewed risks stemming from the Eurozone crisis led to a fresh round of easing in some economies in late–2011, policy rates in Emerging Asia are on average 75 basis points higher now vis-à-vis their troughs during the crisis. 4  BIS central bankers’ speeches  34. Fiscal stimulus has also been withdrawn progressively.