Turkey’s Yilmaz keen on second tool for central banks

Durmus Yilmaz, the governor of the Central Bank of Turkey, on Thursday discussed the dual mandate for central banks during the global financial crisis in ensuring both price and financial stability.

In his opening remarks before a conference in Istanbul, Yilmaz said the role of central banks changed as a result of the crisis as they were forced to address directly not only price stability but also financial stability as well.

Yilmaz said the challenge faced by central banks was to establish a framework that combines both price stability and financial stability as primary mandates even if they conflict with one another. "As you know central banks have typically used short-term interest rates as their primary policy instrument," Yilmaz said. However, he noted that the Tinbergen Rule suggests that this one instrument could be deployed to achieve only one target, which is conventionally recognised as price stability.

Yilmaz said that addressing both price stability and financial stability simultaneously necessitated a second set of policy tools. "This second instrument may be in the form of the supervision and regulation of financial activities. The question is that whether these responsibilities should be assumed solely by central banks," Yilmaz said, adding that the downside of this option is that "central banks may turn out to be too big, inflexible and in conflict with themselves", which eventually could lead to failure in both objectives.

Yilmaz said that over time as the financial system gets more complicated and expands, its supervision and regulation can be partially transferred to other institutions.

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