- hand side ). surveys point to continued employment growth in the coming months. put differently, one of the key channels in policy transmission – if not the most important one – is currently not working as usual. [ 31 ] structural factors, such as the rise in sick leave, the higher share of services in value added and a shortage of workers, are contributing to this. but demand is playing a key role, too. in the services sector, for example, the share of firms reporting demand as a factor limiting business remains close to historical lows. a tight labour market, in turn, increases the bargaining power of workers in an environment in which wages are already expanding at a historically high pace. if wages increased by more than currently projected, paired with potentially lower productivity, firms would be more likely to pass on higher labour costs to consumer prices. this risk is corroborated by evidence that, as inflation increases, prices and wages become less sticky – that is, they are adjusted more frequently, as the cost of keeping them unchanged increases ( slide 15, right - hand side ). in such an environment, whether a wage - price spiral will unfold will ultimately depend on the ability and willingness of firms to absorb higher unit labour costs in their profit margins. this, in turn, depends on the economic environment in which firms operate, and hence on monetary policy. recent work by ben bernanke and olivier blanchard has examined the role of labour market tightness for the united states. [ 33 ] their work suggests that unless the ratio of vacancies to unemployed workers falls back below its pre - covid level, inflation is unlikely to return to target in the next three years. policy implications and conclusions all in all, the risks to the inflation outlook are tilted to the upside, reflecting both supply - and demand - side factors. the question is how monetary policy should take such risks into account. the imf has recently issued a clear recommendation : if inflation persistence is uncertain, risk management considerations speak in favour of a tighter monetary policy stance. there are two reasons for this. first, the costs of protecting the economy from upside risks to inflation are comparatively small, as the policy rate can be brought back to neutral levels faster than if policymakers acted under the assumption of low inflation persistence ( slide 16, left - hand side ). second, it is very costly to react only after upside risks to inflation have materialised, as this could destabilise inflation expectations and thus require a

##urities relatively short. corporate bond issuance has improved, though activity remains below trend, and spreads appear to incorporate unusually high liquidity premia. there are also concerns over possible crowding out of private finance by large - scale public debt issuance. sovereign debt issuance – excluding guarantees – will rise threefold this year. in this context, some central banks have taken direct measures to improve the flow of credit ; and governments will need to be prudent when considering additional borrowing. keeping the system functioning also requires action to mitigate the dramatic reversal in cross - border capital flows. the institute of international finance estimates that net flows from private creditors to emerging markets, which topped us $ 630 billion in 2007, will be negative this year. the scale of these declines means that there is an urgent need for additional imf resources. in addition, a sharp decline in the availability of trade finance has exacerbated the fall in international trade. g - 20 countries could address this by providing additional export credits and trade insurance, as canada has done. the g - 20 summit beginning today could make substantial progress on these issues. second, the timely implementation of ambitious plans in the united states and other major economies to address toxic assets and re - capitalize financial institutions will be critical to stabilizing the global financial sector. two weeks ago in horsham, england, the g - 20 agreed on principles for addressing such assets ; the issue now is implementation. throughout this process of restructuring the financial system, policy - makers have made it clear that systemically important institutions will not be allowed to fail. g - 20 finance ministers and governors reiterated that commitment earlier this month in horsham. moreover, no one should be in any doubt that g - 20 countries can afford their banking sectors. the bank calculates that even in the worst - case scenario, recapitalizing the banking system in an individual g - 20 country would cost less than 20 per cent of gdp – a considerable, but still manageable, sum. third, g - 20 nations need to move decisively to define the priorities for the new international financial architecture. in this regard, measures to improve transparency and integrity, to implement a macroprudential approach to regulation, and to widen the perimeter of regulation are vital. if these national and multilateral measures are not timely, bold, and well executed, canada ’ s economic recovery will be both attenuated and delayed. the reality is that the financial crisis and subsequent recession