The economy moves from point B to point C, so employment recovers (to above its pre-crisis equilibrium), but wages continue to fall. BIS central bankers’ speeches  15  Weak wage growth With some additional structure, the simple model above can be used to understand unemployment and wage inflation.23 If wages are adjusted infrequently (ie there is nominal wage stickiness), then the following relation between wage inflation, 𝜋 𝑤 , and unemployment can be derived: 𝑤 𝜋 𝑤 − 𝛽𝐸𝜋+1 = −𝜆𝜑(𝑢 − 𝑢�)  (WPC)  𝑤 captures expected inflation, 𝑢� is the ‘natural’ rate of unemployment (which can where 𝛽𝐸𝜋+1 vary over time) and 𝜆 is a parameter capturing the degree of wage stickiness. Equation (WPC) is the Wage Phillips Curve. For a given natural rate of unemployment, WPC traces out the relationship between wage growth and unemployment. Chart 9 contains a reducedform representation of the WPC, taken from Broadbent (2014). As that chart shows, outturns for wages in 2013 and 2014 were considerably below the past relationship, which would otherwise suggest that unemployment would be expected to be around 10% given the observed decline in wages. In light of equation (WPC), one way to interpret this is as there having been a decline in 𝑢�, the natural rate, such that a given rate of unemployment puts greater downward pressure on wages. Broadbent (2014) discusses Chart 9 further. 23  16  See Gali, J (2011), “The return on the wage Phillips curve”, Journal of the European Economic Association, 9(3), June.
External sector of the economy continued to be characterised by a positive, though falling, contribution of foreign demand to economic growth. The correction pace of the trade deficit was slower in this quarter. Trade deficit reduced by 1.2% compared to two-digit correction rates recorded in the first half of 2010. This situation of the trade deficit is determined mainly by the acceleration of imports, which marked a year-on-year increase of 10.8% in the fourth quarter of 2010, recording a growth for the third consecutive quarter. On the other hand, Albanian exports increased by 48.8% year-on-year, maintaining high rising rates. The Bank of Albania holds that the Albanian economy will find it difficult to maintain the same growing rates of exports during 2011; among other things, this projection reflects temporary factors that influenced on 2010 growth and is in line with the global economy situation and basic statistical effects. Nevertheless, external demand is expected to generate positive contribution to the economic growth during 2011, as well. 2  BIS central bankers’ speeches  Monetary indicators, financial markets and inflation Performance of monetary indicators continues to generate controlled monetary inflationary pressures on the domestic economy. Money supply increased by 12.5% in December 2010, reflecting a good performance of deposits in the banking sector during the second half of the same year. Our assessments indicate that monetary expansion is in line with the private sector demand for real money.