in what jurisdiction your money ends up. in the case of a branch structure, it may end up in any country in which the bank operates, and ring - fencing a subsidiary may prove equally difficult in practice. furthermore, in some situations it may be socially optimal to spend public money in order to reconstruct a failed bank. if the reconstruction is successful, the money spent may eventually be recovered by the public. but it could take a considerable amount of time before this happens, and a precondition is that you are not betting on the wrong horse. the taxpayers in one country may not be so keen to take on such risks in another country. in addition to fiscal costs, there may of course be substantial indirect social costs in the form of a dipping gdp that may occur when the financial system is suffering efficiency losses or is being temporarily disabled as a result of a financial crisis. these indirect costs are basically a function of the systemic relevance of the financial institution ( s ) in question. according to a study by hoggarth et al, the average drop in gdp following a financial crisis is 15 - 20 percent. the social costs from a banking failure can thus be substantial and involve many countries in various degrees. this, in turn, will most certainly have the effect of giving rise to difficult negotiations on how burdens should be shared between the countries involved. the larger the banking group, the more countries that are involved in its cross - border activities, and the more important the bank is to the functioning of the financial system in a country, the higher the stakes will be for individual countries and the trickier and tougher the negotiations will be. but why is this relevant in a crisis management perspective? couldn ’ t we just go about and deal with the most urgent phase of a crisis first, and take care of burden sharing later, when we all know the facts? in my opinion, we cannot afford to wait that long. uncertainty about the distribution of social costs in the event of a cross - border banking bankruptcy can seriously hamper the ability to act in an emergency situation. in particular, there is a risk that crisis management will be held up by a negotiation game between nations unless there are some previously made arrangements for burden sharing. when the stakes are high, the incentives of the involved nations to keep their cards close to their chests until the last minute will also be strong, and the decisive actions that would be desperately needed in a crisis situation may be taken too late or not be taken all

inflation and unemployment, based on nairu, is called the phillips curve. according to this concept, there is some threshold level of the unemployment rate ( nairu ) at which supply and demand are balanced in the labor market ( and perhaps in the product market as well ). this balance yields a constant inflation rate. you asked what the relationship was between full employment and inflation. in this model, there is no relationship between full employment and inflation. at full employment, defined as the rate of unemployment equal to nairu, inflation is constant, but any constant level of inflation is possible at full employment. the rate of inflation in the long run is therefore not determined by the unemployment rate at all. it is determined by the rate of growth of the money supply. this of course gives monetary policy unique responsibility for inflation in the long run. if the unemployment rate falls below this threshold, inflation rises over time, indefinitely, progressively, and without limit. it is a process that feeds upon itself, because once inflation begins to rise, further price increases feed into wage increases. the basic framework is based on supply and demand. at nairu, supply and demand are balanced, so inflation is stable, matched by expected inflation. the trigger for increases in inflation is excess demand for labor and goods. the unemployment rate is a proxy for the balance between supply and demand in the labor market, for the degree of excess demand. historically the balance between supply and demand in the product market - - that is, for final goods and services - - has closely paralleled the balance in the labor market, so that the unemployment rate has effectively summarized the relationship between supply and demand in both the product market and the labor market. it has always been the case that the application of the nairu concept has been more difficult in practice than in theory. sometimes, the phillips curve has made large errors ; occasionally the equation has over or underpredicted for a considerable period of time. the value of nairu has also varied over time, for example, in response to changes in the composition of the labor force. of course, if nairu moves frequently without explanation, the concept would not be very useful, either for forecasting or for policymaking. but the fact is that, relative to other equations used to forecast macroeconomic performance, the phillips curve was one of the most reliable, if not the most reliable equation, during the 15 years prior to 1994. during this period nairu either appeared to be relatively constant or moved