So, as long as monetary policy behaves about as it has in recent years, then there is no reason to expect supply shocks to have lasting effects. So is Fed policy behaving as it has since the mid 1980s? Interestingly, although Fed policy is perceived as exceptionally accommodative, because of hitting the zero lower bound the federal funds rate is actually higher – has come down less – than would be expected if the Fed behaved as it has over the last 25 years. The current level of the funds rate suggest that  4  BIS central bankers’ speeches  we have been less accommodative in recent years given that interest-rate reductions (policy easing) ran into at the zero lower bound.4 Why the different reaction to supply shocks over time? But how confident should we be that the relationship we have experienced over the past 25 years – little response in medium term inflation rates to supply shocks – will continue? The answer is rooted in why we are seeing different reactions to supply shocks – in other words a different interplay of total and core inflation – now versus in the past. There are a variety of reasons why medium-term inflation has not been significantly influenced by short-run supply shocks in recent years.
At the same time, it should be followed by an accelerated convergence process of the supervisory and regulatory practices according to the financial centres of influence. Fourth, the current crisis confirmed our concern related to the exposure of the Balkan region to a relatively small group of banking operators of vast regional extension. Shocks affecting parent banks would affect one or several regional countries. A similar risk still persists even in the case when one of the branches in the region is hit by a shock. Similarly, the contagion risk is still present. Fifth, I believe the region should scrutinize carefully lending in foreign currency. It is essential to set a better balance between lending in the national currency and lending in foreign currency. To this aim, the nature of the exchange rate regime and the impracticability of central banks in the region to act as lender of last resort should be taken into account. In this context, we should support a stronger role of the national currency in bank lending, making lending in foreign currency more costly for banks if it is not supported by savings in foreign currency. The strong reliance of banks on foreign currency financial resources to support the rapid lending should be addressed and managed timely. Sixth, I think the current crisis will make the financial funds, which for a long time have rushed in numerous forms across all former communist countries of East Europe, scarcer.