Ensuring financial stability requires a multi-dimensional approach. There is no single instrument that has a stable and reliable relationship with financial stability or asset price stability. This is because financial risks emanate from multiple sources and manifest in multiple ways. We need to adopt a range of macro-financial tools to address the spectrum of potential financial vulnerabilities. As mentioned earlier, the macro-financial policy toolkit contains three broad categories. macroprudential measures to moderate credit demand and asset price inflation foreign exchange interventions to dampen exchange rate volatility capital flow management measures to directly curb capital inflows and outflows  Let me briefly describe how each of these components work. Macroprudential policy tools include counter-cyclical capital buffers and sector-specific measures. The latter, often targeted at the property sector, include loan-to-value limits and debt service limits. A few countries have introduced counter-cyclical capital buffers, but it is too early to judge their effectiveness. Targeted macroprudential tools work better than counter-cyclical capital buffers to address financial risks emanating from specific sectors like real estate. Macroprudential policy measures are most effective when used pre-emptively and in a coherent manner. A forward-looking or pre-emptive approach is appropriate given the long lags between policy actions and macroeconomic effects. An added reason is that financial cycles are viewed as being longer than standard business cycles. Both the IMF and BIS support the use of macroprudential measures in a pre-emptive manner, rather than in response to shocks.

It was common that central wage agreements  2  BIS Review 93/2006  signed in the 1980s contained price development guarantees, wage development guarantees, earnings development guarantees, control stations, etc., which led to prices and wages chasing one another in an upwards spiral. The work on changing wage formation can be divided into three important steps. The first step entailed the Government appointing the Rehnberg Commission in March 1990. On the basis of the Commission’s proposals, stabilisation agreements were signed covering the greater part of the labour market, which meant that the rate of wage increase fell from around 10 per cent in 1990 to 3-4 per cent in 1992-1993. The fact that a lower rate of wage increase was not yet fully established in the mid-1990s is, however, shown by the fact that wage increases rose again to around 6 per cent in 1996, after the 1995 wage bargaining rounds. The second step entailed the social partners in the industrial sector signing a new cooperation agreement in March 1997, known as the Industrial Agreement, whereby the parties took joint responsibility for wage formation in their part of the labour market and had agreed on a regulatory framework for negotiating wage agreements. The agreement was followed by similar, but not as farreaching, agreements in other sectors. The third step meant that the new National Mediation Office began its operations in 2000. This established a third, independent party in the labour market, which could actively promote an efficientlyfunctioning wage formation process.