This makes contagion from individual institutions to the rest of the market more difficult to avoid. It also undermines confidence between financial institutions. The lesson to be learned is that if supervisory functions are entrusted to a separate authority, outside the central bank, voluntary cooperation between the two is not sufficient.
While slack has traditionally been measured by an output gap or unemployment gap, recent research suggests that more granular indicators of labor market conditions are needed to better capture Phillips curve relationships in the data.1 The third element is shocks. These shocks can in principle have a positive, negative or ambiguous effect on inflation. If shocks are more permanent, inflation will be more inertial.