According to the same survey again, Turkey took the 7th place among European investors and was the 8th destination that international executives are most optimistic about the economic outlook. Lastly, I would like to touch upon the much-debated hot money issue pertaining to the financing of the current account deficit. Hot money has several definitions. The basic definition of hot money is the sum of foreigners’ purchase of securities, portfolio investments, short-term capital inflows and the net errors and omissions item. According to this definition, by April 2006, the annual hot money inflow has reached USD 17.3 billion. The most important component of hot money is portfolio investments composed of securities and government papers. Some outflow was observed, with the last fluctuations. However, the floating exchange rate regime and strong macroeconomic fundamentals reduce the negative impacts of the outflow. The structural transformation process that the Turkish economy is undergoing is very important with respect to the sustainability of higher current account deficits. We are happy to see that within the framework of the transformation process, the finance sector is much stronger. In other words, open positions in the banking sector are fairly limited. Nevertheless, the private sector should be very careful about open positions. Secondly, macroeconomic fundamentals grow stronger every day and a tight fiscal discipline and monetary policy are being implemented. We have a high level of foreign exchange reserves. The floating exchange rate regime has a shock-absorbing ability.
Let me focus on some of the implications of global economic and financial integration for central banks. What does globalization change and what does it not change? What complications does it introduce and what challenges does it ease? This is a vast and complicated topic, but I want to touch on some of the key issues. In passing, let me note Federal Reserve Vice Chairman Don Kohn’s recent assessment of what we know about the impact of globalization on short-run inflation dynamics in the United States and elsewhere. He noted that the evidence so far on these questions is “far from conclusive” but for the most part it suggests that to date the effects have been gradual and limited. There are, however, some important things we know about how economic integration affects the context in which central banks operate. For example, Harvard economist Ken Rogoff and others have pointed out that to the extent that globalization increases the degree of competition, it can reduce the “inflationary bias” or, to put it differently, it can strengthen the anti-inflation credibility of a central bank. By inducing greater price flexibility, competition lowers the short-run gains to output from an unanticipated inflation, and thus permanently reduces the incentives for a central bank to try to exploit those gains. The improved credibility of the central bank’s commitment to keep inflation low and stable should, in turn, allow it to deliver better inflation outcomes with fewer short-run costs to economic growth and employment.