the fed ’ s estimated non2 / 7 bis central bankers'speeches accelerating inflation rate of unemployment ( nairu ) of 4. 6 %. yet, wage growth has remained at around 2. 5 %, below the pre - crisis average of 3. 5 %. whenever central bankers gather these days, this phenomenon of “ missing inflation ” is often the main topic of discussion. many wonder whether the philips curve has permanently flattened – meaning whether the negative relationship between the unemployment rate and wage growth has fundamentally weakened. some even ask if the philips curve is dead – if the relationship no longer exists. why has “ papa bear ” inflation been missing to - date? the first and simplest explanation is that the headline measure of unemployment may be understating the level of slack in the economy. in the us, the imf estimates that the output gap between actual and potential gdp has only just closed. the output gaps in the eu and japan are still some way off from closing. there may also be quite some slack in the labour market that may not be fully apparent. part - time workers now make up about a third of the us work force, and many of them want to transit to full - time jobs. the labour force participation rate in the us remains near a cyclical low, at 63 %. even after accounting for the retirement of baby boomers, a meaningful segment of the population could re - join the workforce. if the labour market in reality is not as tight as the unemployment number suggests, then it is not surprising that wage growth has been weak. a second reason for low inflation has to do with the effects of globalisation. the integration into global production chains of workers from china, india, and the ex - soviet republics during the 1990s and 2000s is estimated to have nearly doubled the size of global labour supply. this labour supply shock, facilitated by expanding global value chains, has exerted significant downward pressure on tradable goods prices. and the international outsourcing of production appears to have dampened the “ pricing power ” of labour and hence wage growth. a third explanation is technology. industrial automation has exerted downward pressure on manufacturing wages. likewise, advances in software programming and artificial intelligence are automating knowledge work and dampening wage increases in the services sector. more broadly, the spread of e - commerce has been eroding the monopolistic pricing power of traditional retailers and wholesalers of goods and services – the so - called “ amazon effect ”. i think

country. foreign financial institutions become risk averse, and withdraw. this time, large banks in the developed countries have certainly also become risk averse. but there is also the important factor that their own balance sheets have been severely impaired, and so, risk aversion aside, they have little capacity to lend. in other words, a key factor for capital withdrawal this time is banks in the developed source countries pulling back to hunker down for their survival. emerging economies, many with sound fundamentals, are suffering the collateral damage. this comes after years of rapid growth fuelled by yield - hungry foreign capital. for these reasons, the transmission of the shocks in the us and europe to the rest of the world has been swift and sharp. indeed there have been many comparisons to the great depression. yet, compared to the 1930s, an importance difference today is that news spread across the globe far more rapidly. even rural households in china and india can now access this stream of bad news, real - time, through satellite televisions and the internet. the hyperefficiency of information flows has in itself introduced new uncertainties as sentiment shifts rapidly and abrupt loss of confidence becomes self - reinforcing. crisis response : decisive action needed how do we deal with this crisis? despite its scale and unprecedented nature, it may be instructive to study the pattern of responses in previous crises. in past crises, the responses typically go through several overlapping phases. initially, there is a lack of appreciation of the scale and severity of the problem. this then gives way to fear and panic as the problem becomes stark. next, anger sets in, and a hunt for culprits begins. as the financial and economic stresses take root, pessimism sets in. if remedial actions are seen to be tentative and lacking in conviction, recovery is delayed and interrupted by bouts of renewed panic. it may take some time before the hard realities are accepted, and a level - headed search for viable solutions sets the path for recovery. elements of these have been played out in the current crisis. initially, the " subprime " issue was regarded as a manageable problem, confined to a small segment of the us housing market. then it triggered seizure in the wider credit markets. after months of turbulence, the hope was that markets would unclog and financial institutions would be quite unscathed by the credit losses and liquidity strains. when it became clear that this script was wrong, the