At the same time, however, employers are claiming that the inflation target is no longer an obvious startingpoint. According to the Swedish Association of Industrial Employers, it is instead competitiveness and wage outcomes in the euro area that constitute their benchmark. 3 The implications of this are not obvious. Ultimately, the outcome depends on each respective party’s negotiating strength. But since wage increases in Germany, for example, have tended to be quite modest and since the industrial sector’s wage agreements in turn constitute a benchmark for other collective agreements in Sweden, it is conceivable that this could have contributed to the flat Phillips curve since 2011 in Figure 4. In the long term, however, this should not be a major problem as the euro area has an inflation target of “close to 2 per cent”, i.e. very close to our own target. This should imply that wage increases will also be higher in the euro area going forward. But tensions may arise periodically, of course. All in all, therefore, there are numerous feasible explanations for why wage increases have been relatively low despite good economic development. But so far we have no definitive answer to why it is like this nor to how permanent the phenomenon is. Research on the Phillips curve ongoing As I mentioned, the discussion about the Phillips curve is international to a high degree. Quite lively debate has been taking place in various countries recently centred on intensive estimation of Phillips curves, using slightly different specifications and different methods.

In this regard, flexible exchange rate serves as an automatic stabilizer to cushion against external shocks and economic imbalances in the short-term, and as an important price signal for resource allocations and catalyst for structural changes in the long term. In some cases, however, exchange rate flexibility and fluctuations can have costly consequences given some economic contexts, particularly in emerging market economies, including Thailand. First, financial markets in these economies are less developed and relatively illiquid compared to advanced economies. This may potentially cause extremely large asset prices and exchange rate movements in response to capital flow volatility. Additionally, the availability of foreign currency hedging instruments, especially to small enterprises, remains limited, amplifying the negative repercussions from exchange rate volatility. Moreover, many emerging market economies, including Thailand, rely on exports as the main engine of growth. Many of their export items often command little bargaining power and hence need to compete on the basis of price. As a result, extreme and sudden exchange rate movements would affect firms’ competitiveness. For these reasons, many emerging market economies cannot neglect the implications of exchange rate movements. This leads us to the next part of my talk this evening. Managing capital flow and exchange rate stability Ladies and Gentlemen, There is no one-size-fits-all measure to deal with capital flow and currency volatility, as well as its impacts on the real economy. Take Thailand as an example. We have adopted multi-dimensional responses to the financial spillovers.