Such effect is usually known as a sudden-stop in capital inflows and the mechanics of the process is not too different from the disrupting effect of the financial accelerator on the credit channel of monetary policy in developed countries. 8 Finally, even an analysis of trade and financial integration, while improving our understanding of complex open economic systems, may fall short of explaining the synchronisation of real and financial cycles. Since cyclical patterns are largely attributable to different cost structures and profitability profiles that affect investment decisions and output volatilities, another  5  Meller, B., Metiu, N. (2015): The synchronisation of European credit cycles, Discussion Paper No. 20/2015, Deutsche Bundesbank. 6  Drehmann, M., Borio, C., Tsatsaronis, K. (2012): Characterising the financial cycle: don’t lose sight of the medium term!, BIS Working Papers No 380, Monetary and Economic Department. 7  Duval, R., Cheng, K., Hwa Oh, K., Saraf, R., Seneviratne, D. (2014): Trade Integration and Business Cycle Synchronization: A Reappraisal with Focus on Asia, IMF Working Paper 14/52; Davis, S. (2011): Financial Integration and International Business Cycle Co-Movement: The Role of Balance Sheets, Federal Reserve Bank of Dallas, Globalization and Monetary Policy Institute, Working Paper No. 89. 8  Bernanke B.S., speech at the Credit Channel of Monetary Policy in the Twenty-first Century Conference, Federal Reserve Bank of Atlanta, Atlanta, Georgia, June 15, 2007. BIS central bankers’ speeches  3  potential explanation should be sought on the production side, which operates in conjunction with trade and finance.

It may be that firms have been responding more than expected to the rise in unit labour costs, in which case as growth resumes inflation pressure might diminish. But there are other possible explanations for higher inflation. One suggestion might be that the MPC could consider using a range of different plausible estimates of the output gap and its effect on inflation as a part of the methodology of constructing the growth and inflation fan charts. It might also be useful to reconsider the merits of looking to inflation prospects beyond the normal forecast horizon, to ensure any future risks to economic stability are taken fully into account. With the benefit of hindsight, this approach might have been helpful in the period before the financial crisis. 13  8  Trichet (2009). BIS Review 27/2010  Since the summer of 2007, life on the MPC has certainly felt very challenging. It may well be some time before all the lessons for the conduct of monetary policy can be fully appreciated. However, the MPC’s framework has overall proved to be resilient during the crisis and capable of making substantial responses to events. I am sure that this will remain true. References Bank of England (2000), Economic Models at the Bank of England, September 2000 update. Barker, K (2003), “Adjusting to low inflation – issues for policy”, Speech at the Manchester Statistical Society. Bean, C (2003), “Asset prices, financial imbalances and monetary policy: are inflation targets enough?”, Speech at the Bank for International Settlements, Basel.