. this increase in transparency should help commentators and financial markets alike to assess the actions of the mpc and to predict its future decisions. as i have said on other occasions, the aim of the mpc is to pursue economic stability, not to spring surprises on an unsuspecting world. surprises may be good for newspapers, but not for most other businesses. so what were the issues facing the mpc two weeks ago? remember that the aim of the mpc is to hit an inflation target of 22. sometimes inflation will be above the target, sometimes below. but over a run of years the outturn should be as close to 22 as possible. it is central to our remit that deviations of inflation from the target are regarded symmetrically. inflation can be too low as well as too high. for over thirty years, central banks have not, until recently, had many opportunities to show that they understand this. i can assure you that the mpc does. when circumstances change, as they have over the past few months, then so will our policy. the recent turbulence in international financial markets brings a new set of problems and risks, over and above those that resulted from the asian crisis which started in the second half of last year. it is important to distinguish between the crisis of the so - called “ tiger ” economies in asia, which, although clearly impacting on world trade, was indeed largely restricted to asia, and the more recent financial contagion which has afflicted almost all emerging markets and affected the financial system of the industrialised world. there are three aspects of the world economy which are relevant to our own position. first, private capital flows to emerging markets have in many cases come to an abrupt halt. that will have consequences for trade balances and activity in both emerging markets and industrialised countries. second, falls in equity prices around the world have reduced household wealth. and third, the sudden increase in risk aversion in financial markets is changing the balance sheets of financial institutions and some fear that this may lead to a credit crunch. the reduction in capital flows to emerging markets started over a year ago when concerns about the foreign currency exposures of a number of countries led to withdrawals of funds and a liquidity crisis in asia. that liquidity problem was compounded by macroeconomic and structural problems which varied from country to country. but the net effect was that capital flows to emerging markets in asia fell from over $ 110 bn in 1996 to only

“ drag ” : slack in the economy, a weaker relationship between slack and wages and lower levels of inflation expectations. these explanations are not mutually exclusive. higher levels of slack, or a weaker relationship between slack and wages, could lower inflation expectations – for example, if demand is weak today, people may expect lower inflation tomorrow. and lower wage and inflation expectations could themselves depress demand – for example, by raising levels of real interest rates. nonetheless, it is worth considering these explanations in turn. ( a ) slack and the phillips curve the short - term relationship between unemployment or the output gap and wage growth or inflation – the phillips curve – is one of the most intensively studied in macro - economics. 4 despite that, empirical estimates of the phillips curve have tended to be poorly - identified. that may reflect the effects of structural and behavioural shifts, which have the potential to alter historically - estimated phillips curve relationships. for example, changes in the credibility of the monetary policy regime can cause inflation and wage expectations to alter, causing the phillips curve to shift around over time for a given level of slack. and changes in the competitive structure of labour and product markets can influence the impact of slack on wage and price pressures, causing the phillips curve to change slope over time. see the governor ’ s open letter to the chancellor ( bank of england, 2015b ). bank of england ( 2015b ). google scholar lists more than 3000 citations for phillips ’ original article ( phillips ( 1958 ) ). bis central bankers ’ speeches chart 10 plots the historical relationship between wage growth and unemployment in the uk over the period since 1856. although noisy, it suggests a negative relationship between the two, with an average slope of just under ½. in others words, a 1 percentage point increase in the unemployment rate has, on average in the past, lowered wage growth by around half a percentage point. a somewhat clearer window on this long - run phillips curve relationship is provided by looking at distinct monetary regimes : exchange rate targeting regimes under the gold and dollar standards ( 1856 – 1970 ) ; discretionary monetary policy regimes without central bank independence ( 1970 – 1997 ) ; and inflation - targeting regimes with independently - set monetary policies ( 1997 onwards ). chart 11 plots the phillips curve relationship over these windows. the introduction of discretionary monetary policy regimes, without independence, caused an outward shift in the phillips curve and a shift up in wage and inflation expectations. that is consistent with a loss of monetary credibility. since 1997, however