For a more detailed and focused analysis of the proposed Swiss law, see the speech given by my colleague Thomas Jordan earlier this week. BIS central bankers’ speeches  1  Part I: Risk and risk-taking Progress in risk measurement: role in the crisis There is no doubt that significant progress in both the definition and measurement of risk has been made in the recent past. As an example, the function of a risk manager was almost non-existent some 20 years ago. However, it is equally hard to dispute the fact that this progress has been over-estimated. For instance it was regularly claimed in the early 2000s that the financial system had never been as resilient and robust as it was at the time. Clearly, developments since the beginning of the financial crisis in mid-2007 have proved the contrary, and we need to draw suitable lessons from that experience. Progress in the definition and measurement of risk may well have played a role in the recent financial crisis. A reason for this is that – as so often in modern finance – conceptual progress, in tandem with progress in the methodology of risk management, has led to a rather blind trust in models. In general, a trained economist learns to interpret models as abstract approaches to reality, with these models serving as a support for economic and business reasoning. Models are not meant to be substitutes for complete, partially qualitative reasoning including, in particular, a discussion of the model’s assumptions and their degree of robustness.
That is hardly the case today, as the Trade Union Confederation, for example, has acknowledged. Their wage negotiations in 1997 started, in fact, from the 2 per cent inflation target. In the assessment of future inflationary pressure, monetary policy in turn must take the labour market situation into account. Wages are of major economic importance: in that the wage bill accounts for almost 70 per cent of value added, the development of wages has a large impact on costs and thus on price formation. Moreover, wage settlements are liable to influence inflation expectations. Wage tendencies are therefore one of the principal variables in any assessment of inflation. However, the difficulties in forecasting wage trends are considerable. The Riksbank does, of course, follow data on wages and unit labour costs; other important indicators include labour shortages in particular industries, wage drift, registered and total unemployment in relation to job vacancies. A central concept in this context is equilibrium unemployment, often referred to by the English acronym NAIRU—the level of unemployment that can be combined with stable inflation. Attempts to push unemployment down below the NAIRU with monetary stimuli are liable to have the sole effect  BIS Review 77/1999  4  of boosting inflation. In other words, the NAIRU is not responsive to an expansionary stabilisation policy. It depends instead on the workings of the labour market, together with demographic changes and technology. Thus, lastingly higher employment cannot be generated by continuously implementing an expansionary monetary policy.