Using the rankings of each correlation in the pooled sample, a normally distributed test statistic is constructed, under the null that the two samples are drawn from the same distribution. 23  Jennrich’s test for the equality of two correlation matrices derives a chi-squared distributed test statistic from transformations of the correlation matrices, including a term correcting for the bounded support ([-1,1]) of the difference between two correlations. The null is equality of the matrices. 18  BIS Review 168/2010  Chart 14 Dispersion of equity returns of major UK banks and top UK 100 PNFCs (by market cap)  Source: CapitalIQ and Bank calculations. Chart 15 Dispersion of ROE of top 10 UK banks and top 10 UK PNFCs (by market cap)  Source: CapitalIQ and Bank calculations. BIS Review 168/2010  19  Chart 16 Cumulative distribution function of cross-country correlations of credit cycles  Source: Bank calculations  Chart 17 Cumulative distribution function of cross-country correlations between medium term GDP cycles  Source: Bank calculations. 20  BIS Review 168/2010  5. Curbing the credit cycle  Taking together the evidence from Sections 2–4, what are the implications for public policy? First, according to the model a credit cycle arises from a collective action failure among banks. The lending decisions banks take, while individually rational, are collectively suboptimal. Specifically, individual banks may fail to internalise the reputational externalities their lending actions impose on others.
These factors combined have resulted in a large increase in the different measures of inflation, bringing CPI and CPIX1 (a measure of core inflation that excludes perishable foods, energy and regulated tariffs) annual change close to 4%. By contrast, labor cost pressures and other inflation trend indicators are nearer to 3%. Similar problems (i.e., increased inflation due to sudden rises in food prices) have been recently suffered in such diverse countries as South Africa, Brazil, Colombia and China. It is interesting to note that a price measure that excludes foods and energy prices, similar to the CPI core inflation calculation applied by the US, shows annual change below 2% in July (Figure 2). 2  BIS Review 97/2007  Figure 2: CPI, CPIX1 and CPI inflation excluding food and energy (annual change, percent)  Note: In brackets participation in total CPI basket. Sources: Central Bank of Chile and National Statistics Bureau. This phenomenon is not new. Given the supply-side or specific price shocks, the 2000s have seen annual inflation drop below 2% and climb above 4% during temporary episodes. In this picture of higher CPI inflation due to various supply shocks, short-term inflation expectations have increased substantially, but remain close to 3% for medium and long term. Because monetary policy affects inflation with lags that are largely unknown, but long – usually more than a year – not much can be done to reverse a short-term inflation jump.