Our interpretation of the mandate is that the external value of the krone – the exchange rate – cannot be fine-tuned. However, low inflation also makes a contribution to exchange rate stability. The Ministry of Finance has not suggested, and Norges Bank has not requested, that house prices should be given particular weight. Macroprudential supervision and systemic risk Even though inflation targeting has served us well, it was not possible to shield Norway’s small, open economy, in an environment of free capital markets, from the liquidity crisis in global financial markets last autumn. As we have observed abroad, when many banks encounter liquidity problems at the same time, triggered by a deterioration in some banks’ financial strength, solvency problems can easily spread to other banks and to other countries. 11 This can occur when banks facing liquidity problems are forced to sell assets in a weak market. The market value of other banks’ assets may then also be reduced. Even otherwise solid banks can then lose their equity capital. Distrust spread among banks in Norway despite our generous and sound deposit guarantee scheme. Deposits were not withdrawn, but funding in foreign money and bond markets dried up. It was not easy for foreign investors to assess the value of banks’ assets. They also wanted to keep liquidity with themselves. Just as a bank deposit insurance scheme dissuades households and firms from withdrawing their deposits when uncertainty increases, new and improved banking regulation can contribute to bolstering confidence among financial institutions.
Mr Erçel reports on developments in the Turkish economy in the light of the recent disinflation efforts  Speech by Mr Gazi Erçel, Governor of the Central Bank of the Republic of Turkey, at the American-Turkish Council, held in Washington on 28 September 1999. *  *  *  Two years ago, in the summer of 1997, the crisis in Asia began to accelerate. One year ago, on 17 August 1998 a crisis erupted in Russia that threatened serious consequences not only for the Russian economy but also for the entire international financial system. By comparison, this year’s summer has been uneventful, except my country, which was struck by an earthquake on 17 August 1999. The earthquake has been devastating both in terms of human life and physical infrastructure. The death toll has risen to over 15,000 with over 25,000 injured. More than 200,000 houses were damaged or destroyed and over half a million people were left homeless. The spontaneous and prompt support from the international community together with domestic resources will cover reconstruction costs and we will recover. I have to emphasize that this tragic event will not derail our macroeconomic strategy, nor shall we allow it to jeopardize the hand-won disinflation achievements realized so far. Since Turkey has a long history of inflation, which is the main cause of macroeconomic imbalances, we have directed our efforts to reducing the inflation for quite some time. A disinflation program was launched at the beginning of 1998.