Moreover, our last system of explicit coordination – the system of fixed exchange rates under Bretton Woods – broke down for a reason. Monetary policy meant to suit everybody is likely in the end to suit nobody. Similar considerations underlie the widespread move in the emerging world away from fixed exchange rate regimes. Policymakers worldwide have learned that a framework capable of responding in a disciplined but flexible manner to changing domestic conditions works best over the long run. While explicit coordination looks neither feasible nor desirable, there is more that central banks in general, and the Fed in particular, could do to be better global stewards. One thing recent events demonstrate is the importance of effective Fed communication. It is clear in retrospect that our attempts last spring to provide guidance about the potential timing and pace of tapering confused market participants. In particular, markets seemed to conflate tapering with monetary policy tightening and raised their expected paths for policy rates. Lately, we seem to have done better: markets now seem to understand that policy rates will likely remain exceptionally low for a considerable period of time even after tapering is completed. As you know, we’ve taken a number of steps in recent years to increase transparency and improve our communications.
But the impact of this weak pay on companies’ costs has been offset by businesses appearing to hold onto more staff than warranted by the lower level of output. The corollary of the resilience in employment has been a sharp drop in labour productivity. As a result, growth in labour costs per unit of output has remained relatively firm, although it has fallen back as productivity has begun to recover. Companies that have spare capacity within their business should be able to use these underutilised resources to increase output relatively cheaply. As such, spare capacity within  4  4  See Benito et al (2010) for a discussion of the impact of the financial crisis on supply. BIS Review 122/2010  companies should, at the margin, push down costs and prices. But reports from our network of Agents suggest that some companies responded to the sharp fall in output by temporarily decommissioning some of their capacity in order to reduce their cost base. 5 Companies mothballed production lines; cut back on capital leases; reduced the number of shifts and so on. Although it is perhaps most natural to think of this mothballing behaviour in the context of manufacturing, it was also apparent within the services sector. It was relatively commonplace for professional services companies to encourage staff to take sabbaticals at much reduced pay. Aircraft were taken out of service. Shops were left empty. This type of adjustment has helped UK industry to withstand the effect of the recession.