ideas about working patterns. the mechanisms via which employers and employees find each other – job search – have improved, helped by investment in employment exchanges and perhaps recently by the internet. in combination, these developments provided the conditions for unemployment to fall over the past decade without adding to inflationary pressure. during the transition, the supply capacity of the economy accordingly increased by more than would otherwise have been achieved ; and any given increase in real aggregate demand would have put less pressure than otherwise on supply, and so would have had a weaker effect on firms ’ costs and prices. that does not mean, however, that the feed through of demand pressures into inflation will be permanently weaker. instead, the apparently flat relationship, illustrated in chart 3, between unemployment and wage inflation is, at least in part, most probably a symptom of the sustainable level of unemployment having gradually fallen. that is effectively what the mpc has assumed in making judgments about the outlook for inflation. we can be reasonably confident about the direction of change, but not about its size. that can be illustrated by the current conjuncture. over the past few years, there have been at least two other influences at work. first, for some years we enjoyed an improvement in our ‘ terms of trade ’. that meant, simply put, that the aggregate price of the goods and services we produce and export rose relative to the aggregate prices of our imports. this increased the purchasing power of households ’ incomes ( chart 9 ), and so may have dampened wage pressures as the labour market tightened. to the extent that this explanation should be given any weight, it would tend to be a temporary factor, pointing to an upside risk to earnings growth looking ahead. a second apparent feature of our environment works the other way round. anecdotally, the role of migrant labour has increased in various sectors – partly associated with the enlargement of the eu ’ s single labour market. if that continued, with new residents continuing to help to meet particular skill shortages, the labour supply available to uk businesses would increase, implying that the economy could potentially accommodate stronger aggregate demand than otherwise. however, the available data do not really enable us to get beyond anecdote and speculation. financing another important input for firms is finance – for working capital and investment. here too, there seem to have been changes – in the range and terms of the sources of finance available to both firms and households – that could potentially influence the extent of cyclical fluctuations in output and

bandid nijathaworn : macroprudential policies and capital flows – managing under the new globalization remarks by mr bandid nijathaworn, deputy governor of the bank of thailand, at the conference on macroprudential policies, organised by the people ’ s bank of china ( pbc ) and the international monetary fond ( imf ), shanghai, 18 october 2010. * * * thank you chair, first, let me thank the pbc and the imf for the invitation. it is an honour to be here, and to be given the opportunity to share my view on this panel. given time limitations, and the fact that capital flows are important developments in the region at this time, i want to use this opportunity to discuss three issues. the first is the context of the current capital flows to asia. the second is managing capital inflows and the role of macroprudential policies, where i will draw on thailand ’ s recent experience. and the third is my view on what we need to do to deal more effectively with the capital flows challenge. at this time, capital inflows to asian emerging markets have been large and persistent, posing challenges for policy. the first challenge involves a macroeconomic dilemma that centres around the tension between appreciation pressures, inflation development, and growth prospect. the second stems from financial stability concerns associated with potential build - ups of macroeconomic imbalance, risk of asset price bubbles, and the possibility of an abrupt reversal of inflows. in the past, as we have seen here in asia, serious reversals have triggered debt defaults, banking distress, and currency crises. although capital flows are nothing new for asia, what is new and makes the issue more demanding this time is the global context that the flows are taking place, which has important implications for the effectiveness of the policy response. first, compared to previous episodes, capital inflows this time are not country - specific that relate to the financing of payment deficits. instead, capital inflows this time are a global phenomenon propelled by near zero policy rates and liquidity expansion in the advanced economies, as well as the return of risk appetite, and the recognition that risk - adjusted investment returns in the advanced economies are likely to be very low for an extended period. this means we are living in a world where the forces that shape the resurgence of capital inflows lie outside the control of policy by emerging markets, making it a totally different challenge.