Second, when growth is relatively rapid, supply-side inflationary pressures do spill over into more generalized inflation, presumably reflecting high pricing power of all producers, including workers. The implications of this for monetary policy are quite clear and direct: if there are signs of spill-over from supply-side to core, then a monetary response is warranted to prevent the process from spiralling out of control.
The latest Global Financial Stability Report (GFSR) by the IMF warns that because of these developments, vulnerabilities in the sovereign, corporate, and non-bank financial sectors are elevated by historical standards in several systemically important countries and regions. Under these circumstances, central banks and other regulators are required to follow the cardinal principle – the regulator never sleeps.