Remedial actions need to be evaluated in terms of their short-term efficacy as well as their longer-term implications. •  Unbalanced financial systems create vulnerabilities. Financial systems that are unduly reliant on banks for financial intermediation are likely to be more vulnerable and slower to recover from the onset of weakness. Shallow capital markets limit lending alternatives and delay the recovery of financing to the real sector. The challenges can be daunting, but recent experience both within and beyond Asia confirms that a dedicated commitment to financial reform contributes to sustainable recoveries and greater crisisresilience. Just as strong financial systems act as stabilizers when a domestic economy is battered, weak financial systems amplify the scope and reach of the problems, making bad situations worse. Longer-term financial stability While financial sector rehabilitation will remain a key priority for authorities in Asia, longer-term measures need to be put in place to deal adequately with the increasingly complex and dynamic international financial marketplace of the twenty-first century. The threats to financial stability are many, and no one set of measures can be expected to ensure against the recurrence of future problems. Financial intermediation is a constantly evolving activity, involving new risks, instruments, and control challenges. Financial institutions and policymakers alike should continue to upgrade their processes to remain in command of these risks.
There are several reasons why it is an advantage that inflation is higher than zero: •  The structure of the economy evolves over time. Demand for labour with different qualifications changes. This requires changes in relative wages. There are rigidities in nominal wage growth. Nominal wages do not readily fall. With some inflation, relative wages can change without a fall in some nominal wages. There may also be rigidities in the pricing of goods and services. Some degree of inflation will thus oil the economic machinery. •  In periods, inflation and economic growth will be low. It is then appropriate for real interest rates to be low, or even negative. Nominal interest rates cannot be set below zero. If inflation becomes entrenched at a low level or near zero, the interest rate will be less effective as an instrument. •  There are different ways of measuring inflation. The consumer price index tends to overestimate actual inflation. The most important source of measurement errors is probably the difficulty of distinguishing between changes in the quality and price of goods. In other countries, findings show that the consumer price index overestimates actual inflation to the order of ½ -1 percentage point. The inflation target represents a framework for, not an obstacle to, monetary policy’s contribution to stabilising output and employment. This objective is also expressed in the Regulation on Monetary Policy. If demand for goods and services is high and there is a shortage of labour, there will normally be prospects of higher inflation.