This is confirmed by Phillips curve estimates. As you can see from the right-hand side chart on slide 3, ECB in-house estimates using a variety of slack and inflation expectations measures suggest that core inflation today is well below what historical regularities would suggest. Of course, a number of factors – such as changes in the slope, weak productivity growth or second-round effects of past low inflation – might be at work here. But in the current context this is unlikely to be the whole story. For one, there is considerable uncertainty around the slope of the Phillips curve. As we heard this morning, some estimates show that the curve has flattened in recent years. ECB research, by contrast, found evidence that inflation has become more responsive to slack lately, but with notable heterogeneity across euro area Member States.7 Blanchard, Cerutti and Summers have not found much change at all during the crisis.8 Second, our Phillips curve estimates show that even once we control for past low inflation and weak productivity growth, there is still a considerable part that cannot be explained by the model. These analyses therefore do offer one useful conclusion: that slack may be larger and that structural unemployment may perhaps not have risen by as much as some estimates suggest. This also means that policymakers should be careful in attaching too much weight to notoriously unreliable and hard-to-estimate measures such as the NAIRU.
Speaking as chair of the Financial Stability Board’s working group on the resolution of crossborder firms, I can update you on the work already in train. Basically for the top roughly 25 banks and dealers, the authorities will work with them over the next 6-9 months to produce recovery and resolution plans. The effort will build on the existing supervisory colleges, but typically at a more senior level, and involving resolution authorities and central banks as well as line supervisors. After official level exchanges, there will be engagement with those firms, also at a senior level (say group CFO). The desired outputs will cover two things. First, recovery plans for “de-risking” a group where it can and should be maintained as a going concern. Second, a resolution plan when a firm needs to be wound down and put to rest, but with essential economic functions maintained somehow. The FSA has explained their contribution to the exercise. No one should think that this will be easy; or that anyone in the official sector is naïve about that. It will, in fact, be formidably difficult. The process is, for that very reason, designed to flush out the issues, so that they can be properly debated and reviewed.