But I will also caution that we will forfeit these gains if we once again fall under the spell of the three lies of finance that helped cause the global financial crisis. To resist their siren calls, we must maintain the new institutional frameworks created in its wake. Globally, the most important of these is the Financial Stability Board (FSB). Having agreed all the major international reforms to address the causes of the crisis, the FSB is now pivoting to focus on their timely, effective and consistent implementation. Mindful of history, the FSB is also scanning the horizon to identify and address new vulnerabilities that emerge as the structure of our economies and financial systems change. We know we cannot rest on our laurels. Financial history rhymes all too frequently, with enormous costs to our citizens. We must remain vigilant, resist the three lies of finance, and reinforce some core financial truths. II. THE THREE LIES OF FINANCE “This Time Is Different” The first lie of finance is the four most expensive words in the English language: “This Time Is Different.”1 This misconception is usually the product of an initial success, with early progress gradually building into a blind faith in a new era of effortless prosperity. It took a revolution in macroeconomic policy to help win the battles against the high and unstable inflation, rising unemployment and volatile growth of the 1970s and 1980s.
It is necessary for the communication policy of the Central Bank that the open letters and Inflation Report would be perceived as complementary factors. Role of public sector in inflation targeting strategy It should be reemphasized that the monetary policy should be supported by fiscal policy in order to be able to turn the downward trend in inflation into a long-term and lasting achievement. The fiscal policy can affect inflation through various channels. A particular channel, through which fiscal policy has direct effects on inflation, is the price and tax adjustments in the goods and services produced by the public sector. Making these adjustments in line with a pre-announced schedule or a pre-described rule would diminish  BIS Review 4/2008  3  uncertainties regarding inflation forecasts and thereby contribute to the reputation of inflation targeting regime. The Central Bank sets inflation targets on the basis of the budget projections of public sector. Therefore, while updating the monetary policy stance, the trend of public sector expenditures, which is a very important component of total demand, is closely monitored. Moreover, keeping public sector wage adjustments consistent with the inflation target is very important as the private sector take these adjustments as a benchmark for their own wage adjustments. Due to all these reasons mentioned above, the Central Bank closely monitors the income and fiscal policy implementations, and frequently emphasizes the importance of structural reforms that would enhance the quality of fiscal discipline and predictability of fiscal policies.