guy quaden : price and wage rigidities in an open economy opening address by mr guy quaden, governor of the national bank of belgium, at the fourth biennial colloquium of the national bank of belgium, brussels, 12 october 2006. * * * it is a great pleasure for me to open the fourth biennial colloquium of the national bank of belgium and to welcome you all at this conference. the topic of this year's conference is " price and wage rigidities in an open economy ". understanding how prices and wages are determined and how they fluctuate over the business cycle is of course a crucial issue for central banks. nominal and real rigidities in price and wage setting have a strong impact on how the economy, and inflation in particular, reacts to all kinds of shocks. as far as these rigidities result in deviations of prices from their efficient levels, they will lead to an inefficient allocation of resources and unnecessary volatility in output and employment. especially in a global context, with a rapidly changing external environment, flexible prices and wages can protect the economy against costly real adjustments and improve its resilience. that is the very reason why we are interested in measuring these rigidities, in understanding their nature and in assessing their welfare implications. this knowledge may eventually result in formulating deliberate policy recommendations for structural reforms in view of reducing rigidities in price and wage setting, to the extent that this is desirable from a welfare perspective. however, as far as these rigidities are deeply rooted, monetary policymakers are faced with them as part of the environment in which they operate. price and wage rigidities have indeed a strong impact on the monetary transmission mechanism. they also affect the way central banks will combine their pursuit of price stability with a more general concern about real economic developments and the policy trade - offs involved. the importance of these issues induced the national bank of belgium to devote its 4th biennial colloquium to " price and wage rigidities in an open economy ". the aim of this conference is to promote theoretical and empirical research, both at the micro and the macro level, on the measurement, the rationale and the consequences of price and wage rigidities in an open economy. by way of an introduction to the conference, i would like to underline the policy relevance of many of the topics that will be discussed in the presentations today and tomorrow. in order to evaluate the relevance of the different types of rigidities, it

central bank. the 2003 legislation did create the risk of ambiguity with regard to which entities were responsible for what. certainly, communication between the macroeconomic specialists assessing systemic risks and the micro prudential supervisors dealing with individual banks was not fully effective : each side felt they would have acted more vigorously had they been more aware of what the other knew. but that probably reflected a lack of mutual understanding of the methodology and professional language as between economists and supervisors more than the institutional separation, which was by no means rigid. in the end, senior officials in both institutions, as well as many elsewhere at home and abroad, were too optimistic about the strength of the economy and the irish banks. one should recall that several other central banks and financial regulatory authorities suffered similar failures in the run - up to the crisis. but ( with the exception of iceland ) they had not allowed the scale of their banking systems to get so completely out of control as happened in ireland. bis central bankers ’ speeches the report ’ s section on crisis containment includes an assessment of the 29 september 2008 decision to guarantee substantially all of the liabilities of the banks. while several other countries followed suit in subsequent days with more limited guarantees, the guaranteeing of subordinated debt of the banks was clearly a mistake ; the formal guarantee, backed by legislation, of all long - dated debt was also unnecessary and bound to constrain the authorities ’ ability to restructure or wind - down failed banks before the expiry of the initial guarantee. with the benefit of hindsight – had the regulatory authorities had any notion that heavy losses could be involved – an alternative strategy ( mentioned in a footnote on page 132 of the may 2010 report ) of putting anglo ( and inbs ) into liquidation on september 29, while standing behind the rest of the system, should have been more favourably considered. given how resistant external authorities subsequently proved to be to the imposition of losses on unguaranteed senior bank debt of failed banks, external partners might have responded to such an idea with compromise proposals that might have alleviated the subsequent pressures on the irish exchequer. more generally, greater consultation with eu partners would have been highly desirable and could have helped ireland to be less on the back foot in subsequent negotiations. despite the passage of time, i see no reason to alter the assessments i made in may 2010. 1 accordingly, extensive changes have taken place within the central bank to ensure that the identified shortcomings have been removed as far as possible. while