the supply side pushes one further to the right of the schematic picture in chart 8. chart 8 : lags in the inflation process mean that, when the policymaker is uncertain about supply, there ’ s a trade - off between a better understanding of the economy and the timeliness of the policy response the lag between movements in spare capacity and inflation is longer and the price one pays for this extra information, in time, is therefore higher. there are clearly risks in moving only when you see “ the whites of inflation ’ s eyes ”. but it may still be a price worth paying. the two graphs below ( chart 9 ), derived from a simple model of inflation in which there ’ s incomplete information about the shocks hitting the economy [ 7 ], help to cement the point. in this representation inflation can be moved around by four underlying drivers – demand, productivity, firms ’ mark - ups and movements in the nairu – but the policymaker has only three observable variables from which to deduce them ( output, unemployment and inflation itself ). importantly, he or she is assumed to understand how variable these underlying disturbances are ( estimates that can be built up over time ). but there is nonetheless what is sometimes called a “ signal extraction ” problem, and one can estimate only imprecisely, in real time, what is driving what. and, in doing so, the policymaker will lean on a greater range of information. chart 9 : more weight put on unemployment when there ’ s uncertainty about underlying productivity growth ; uncertainty about the nairu means wage and price inflation matter too sources : ons and bank calculations. first panel plots the contribution of activity and unemployment data to the estimated variance of the output gap, where along the x - axis we increase the standard deviation of the supply shock relative to the others. second panel charts the contributions of unemployment and inflation to the estimated variance of the output gap, where along the x - axis we increase the standard deviation of the shock to u *. the graphs plot two pairwise comparisons of the relative importance of the observable series for estimates of the output gap, depending on the variance of ( and therefore uncertainty about ) the underlying shocks. as uncertainty about underlying productivity growth rises, the policymaker puts increasing weight on developments in unemployment rather than gdp growth. when the nairu is more uncertain, inflation becomes more significant. as that happens, the variability of inflation itself rises, because policy has a less precise understanding

is based on the superiority of free trade as the organizing principle of international economic interaction. ” 4 lessons from the crisis the joint, massive, and unprecedented policy responses that were put in place as the crisis unfolded surely deserve due credit. as mr. subramanian here at the peterson institute noted in the financial times in late december 2009 : 5 “ what is striking about the influence of economics is that similar policy responses in the fiscal and monetary areas, and non - responses in relation to competitive devaluations and protectionism, were crafted across the globe. they were evident in emerging - market economies and developing countries as much as in the industrial world ; in red - blooded capitalist countries as well as in communist china and still - dirigiste india. if ever there was a great consensus, this was it. ” a key lesson from the crisis is the need for multilateral cooperation and collective action. it relates to the framework for polices on prevention, resolution, reform and implementation. it also relates to the institutional set - up. the international community turns to the imf in times of crisis, in part because it is an effective institution that performs the vital functions that are called for, but also for the very simple reason that the world has no one else to turn to. the imf has played a pivotal role in presenting the initial lessons from the crisis, in providing finance to countries with temporary balance of payments needs, and in preparing the overall framework for the international policy response. when the good times return, we must avoid memory failure and remember these facts of life. the financial crisis has left a legacy. large public and private debt, high unemployment and wide global imbalances continue to challenge the global framework for economic policy. shaping the global governance structure in recent years, increasingly assertive non - statutory bodies have emerged in the area of international economic and financial collaboration, most notably the g20. the global crisis pushed the g20 into closer cooperation and at new levels. as an effective and powerful group, the g20 featured prominently in the broad international efforts to stabilise the global economy in late 2008 and early 2009. without its prompt and comprehensive action, the consequences of the crisis would have been much worse. it is in the interest of all that the large and systemically important countries discuss issues of common interest. their successful collaboration benefits not only themselves, but also the rest of the world. among the g20 measures of 2009 were the efforts to strengthen confidence in international financial institutions,