It provides the possibility of  BIS Review 36/2005  3  calibrating systemic risk and developing tools that could potentially be deployed to reduce such risk, and will include scenario analysis and macro-stress testing. In reality, it is unlikely we will converge on a single model which captures systemic risk in its entirety. But by developing and calibrating a suite of models we hope to make some progress towards gauging fragilities and frictions in the financial system better – how likely they are to arise; on what they depend; and, ultimately, what pre-emptive mitigating action might be feasible. This could put financial stability analysis on a more similar analytical footing to monetary policy – albeit with a greater amount of uncertainty regarding eventual outcomes. With time we can review the outputs of this research work. We can then operationalise those that are relevant and robust to help decide our ongoing activities. In other words, the outputs of this R&D activity could become inputs to prioritising our day-to-day risk reduction activities. ii)  Ongoing Activities: Organising Principles  In the meantime we have to address the real risks of today. How are priorities to be set? Financial stability is an area where there are so many things we could do. So we need to have a set of organising principles to help us prioritise and focus. I’d like to describe the process we go through in addressing the difficult decisions – how much to do, and how far to go.
Rising concerns regarding the debt sustainability of several Southern European countries have caused risk appetites to follow a volatile and downward trajectory, which in turn, have triggered capital outflows from emerging markets and increased risk premiums. While risk premium indicators particularly in some European countries have increased, during this period, increases in emerging market risk premiums – especially in Turkey – have been limited (Figure 3). BIS Review 133/2010  1  Sovereign debt-related problems in Europe have once again confirmed that downside risks regarding the global economy activity remain. This development led many central banks to adopt a monetary policy stance with an increased emphasis on downside risks, especially in advanced countries. Accordingly, central banks of advanced economies have underscored that the current monetary policy stance would be kept accommodative for a long period, while emerging economies have also adopted similar changes in their rhetoric through policy statements. These developments have postponed the expectations regarding the timing of policy normalization (Figure 4). 2  BIS Review 133/2010  According to this outlook, year-on-year inflation in consumer prices was flat in both advanced and emerging economies during the second quarter of 2010 (Figure 5). In the meantime, core inflation continued to diverge between both groups of economies (Figure 6). 1. Inflation developments  After summarizing current global conditions, I would now like to make an evaluation of the inflation developments in Turkey that took place in the last quarter.