Some other sources of persistent inflation differentials may, however, not be justifiable – for example differentials attributable to insufficient flexibility. In some economies, the combination of weak labour productivity growth and strong increases in nominal wages and salaries over a sustained period inevitably results in a significant loss of relative competitiveness.
In this environment, the limits of monetary policy are becoming more visible than perhaps they were in earlier years. High levels of debt and increased uncertainty look to have changed or, at least temporarily, altered the transmission mechanism. This is one of the reasons why the G20 and others have focused on the importance of structural reform and improving the climate for investment.