This picture of how the economy functioned was modified in the 1970s. The economies in many western countries at that time evinced both high inflation and high unemployment. In fairness it should also be mentioned however that the oil price shocks also contributed to the high inflation that decade; not all problems were a consequence of the failures of stabilisation policy. Now most economists and political decision-makers accept that only in the short term is there a trade-off between inflation and employment. Real wages can be reduced owing to unexpected inflation and employment will thereby be stimulated. But when this pattern is recognised – as will very likely happen after a while – inflation expectations adjust to the new, higher inflation rate. Then the positive effect on growth disappears and employment reverts to its previous level. All that remains is a higher rate of inflation. In other words, in the long term there is normally no positive relationship between employment and inflation. Instead employment in the long term is decided by such conditions in the real economy as technological and population developments or labour market efficiency. However the temptation to use monetary policy to stimulate employment still exists. Even for a government that knows that the long-term effects of increasing demand a little too much are undesirable, it can be tempting in the short run. The very fact that this possibility exists has made it more difficult to instil confidence in a policy of low inflation.
Ranee Jayamaha: The significance of payment reforms in financial system stability Opening address by Dr Ranee Jayamaha, Deputy Governor of the Central Bank of Sri Lanka, at the seminar on “Payment systems and cheque imaging” organised by the Royalist Bankers’ Club, Colombo, 25 May 2006. *  *  *  Let me thank the President and members of the Royal Bankers’ Club for inviting me to deliver the opening remarks at the seminar on ‘Payment Systems and Cheque Imaging’. I am honoured to be speaking to this distinguished group and it is encouraging to note that the subject is of interest to a good cross section of the financial community. In my opening remarks, I will give an overview of the significance and rationale of payment reforms in financial stability and then set out the impact of payment reforms on the financial system, institutional arrangements that are in place, and the need to change payment practices of banks and the public. It may also be important to note that the term “Payment Systems” covers payments, clearing and settlement systems. As you are aware, the Central Bank’s role in the payment system stems from its primary function of providing payment, clearing and settlement service. Economic policy reforms, the ever increasing complexities in the financial system and the changing role of central banks have resulted in central banks to be at the center of payment reforms which, from the Central banks’ point of view, is helpful in achieving the objective of financial system stability.