of aggregate demand, but rather of an accumulation of imbalances, specifically with demand outstripping the limits of sustainable level of input utilization and growth of output. the resulting rise in inflation becomes a threat to the continued expansion. preventive medicine is therefore the best course of treatment. in this story, nairu sets a limit to how far the economy can expand before overheating sets in and inflation rises, and the phillips curve traces out an important part of the dynamics of inflation, how fast it responds to excess demand. of course, the phillips curve framework has always been much easier to describe than to implement, given uncertainties about the estimates of nairu, given the fact that empirical regularities between inflation and unemployment always left much of the variation in inflation unexplained, and given the importance of supply shocks with significant, though transitory, effects on the inflation - unemployment nexus. nevertheless, the regularity in the cyclical sensitivity of inflation, as embedded in the phillips curve, has proved to be an important guide to both forecasters and monetary policymakers in the past. transitory influences the consensus estimates of nairu as this expansion began - - about 6 % - - did not prepare us for the recent surprisingly favorable performance. it is possible that the phillips curve and nairu is simply the wrong analytical framework, but i doubt it and am not aware of another model of inflation dynamics that is ready to take its place. so my response is to update my estimate of nairu and add other explanations consistent with this framework, but not to abandon this concept. one possible explanation is that one or more transitory factors, for the moment, are yielding a more favorable than usual outcome. a coincidence of favorable supply shocks is clearly, in my judgment, an important part of the answer to the puzzle. i won ’ t talk at length about these factors, as i have done so in previous talks. i would just note that these favorable supply shocks include an appreciation of the dollar and consequent decline in import prices ; a slowing in the rate of increase in benefit costs, concentrated in a slowdown in costs for health care insurance ; a faster rate of decline in computer prices than earlier, reflecting the quicker pace of innovation ; and more recently, a decline in oil prices and a slower rate of increase in food prices. a cyclical anomaly let me include in my list of explanations for the current favorable economic performance an intriguing cyclical anomaly. one regularity of past expansions

dynamic and iterative process, not a one - off exercise. it is a continuous cycle ; hence there should be genuine awareness, ownership and accountability for risks throughout the organization. lessons for banks from experiences elsewhere there is no doubt that ghanaian banks have many lessons to learn from developments in nigeria and in the west. the first lesson is that poor risk analysis can have a debilitating effect on banking operations. ignoring the dangers of credit, market, operational risks, even in a situation of high capital, can be problematic. banking is not simply deposit mobilization and lending. banking is about risk analysis and strategic deployment of funds to earn commensurate returns at minimal risk. it is not about bigger balance sheets or the fastest growing banks, although size and growth rate are important dynamics in banking. an area ghanaian banks will have to focus their attention is the need to increase their inhouse capacity for risk analysis in the emerging oil and gas sectors. this is because the two sub - sectors that created problems for the five banks taken over by the central bank of nigeria were in the oil and gas sector and the capital market ( specifically margin loans ). incidentally the affected banks were opening their books to these sectors for the first time. obviously, from the benefit of hindsight it is obvious that there was poor risk analysis of exposures to these sectors. i have heard the suggestion that the banks lacked expertise in these areas. my response is that it is not enough to place the blame on the lack of expertise. banks must invest in capacity building in risk management especially for emerging sectors of the ghanaian economy. as i suggested earlier, the culture of risk management is not well rooted in our banking system. boards of banks need to establish risk management functions at senior levels with direct reporting to a committee of the board to ensure that all risk aspects in the operations of banks are monitored and controlled. as banks in ghana grow bigger and go international because of the capital injection, they are likely to take on several risks that they have previously been unfamiliar with. banks ’ ability to manage cross border regulatory risks, currency risks, and other market risks will become critical going forward. for banks to be effective in the new environment, they have to restructure their targets to reduce unnecessary risk taking, and reduce the motivation for fraud. banks need to realize that high targets lead to higher risk taking which can result in higher profits but this may not necessarily result in better performance. undue risk taking, buoyed by unrealistic