Over the  16  same period, unemployment averaged 7.6%, with a  14  standard deviation of 2.8%. Soon after the adoption of  12  inflation targeting, unemployment fell by one  10  percentage point and its standard deviation was cut in  8 6  half. The volatility in economic growth rate in the  4  1970s and 1980s was also one-and-a-half times  2 -6  -4  -2  6 8 Output gap (%) Source: Bank calculations. Inflation is the annual growth rate of the retail price index (RPI) until 1975, and the annual growth rate of the retail price index excluding mortgage interest payments (RPIX) after 1975. The output gap is the percentage deviation of quarterly GDP from its trend, where the trend is measured by a Hodrick-Prescott filter. 0  0  2  4  higher than after the adoption of inflation targeting. In sum, high, volatile inflation likely contributed to a higher natural rate of unemployment and poor supply side performance. Once the UK adopted inflation targeting and granted  operational independence to the Bank, consistent with the theory of constrained discretion, the UK moved towards a better equilibrium characterised by low, stable and predictable inflation, and relatively stable employment. Moreover, by successfully anchoring inflation expectations around the target, inflation targeting helped lower UK borrowing costs for households and businesses, and has allowed monetary policy to promote short-run stabilisation of the economy.
To me, both types of institutional setup may have one important common weakness, that is, there does not seem to be the notion of a lead supervisor in either model. Allow me to elaborate on this point. In the case of separate authorities, it would be normal for each authority to assume that every authority is doing its job according to its mandate. Therefore, one would tend to focus only on its own mandate. This can be a problem if some authorities fail to do a proper job, others may not be able to take note. Worse still, if there are supervisory gaps, the chance of any one authority identifying potential adverse impact from areas outside of one’s own mandate is even smaller. Take the US as an example, the authorities and investors did not  2  BIS Review 32/2009  realize that credit rating agencies were not doing an adequate job in their rating of complex structured products. If there were a lead supervisor, would the whistle have been blown earlier? I believe that there would have been a better chance if there were a lead supervisor with a clear mandate to take the lead responsibility and who is risk focused. There would have been more dialogues through which weaknesses may have been identified and corrected. The idea of a lead supervisor has gained widespread support in the area of cross-border supervision, as it contributes to better coordination, which in turn could help to prevent or identify problems at an early stage.