Such long lags in the dynamics of the labour market mean that there is unlikely to be a simple relationship between deviations of unemployment from its natural rate and changes in the inflation rate. Chart 1 shows that it did indeed take almost 20 years to bring inflation and inflation expectations (implied by financial market returns on indexed and conventional gilts) down from double-digit levels to the current target of 22%, accompanied by a large rise and subsequent fall in unemployment. The idea of the NAIRU can be thought of as a conceptual response to inertia in the system which means that the response of the economy to shocks will be protracted. In 1975 Franco Modigliani and Lucas Papademos introduced the concept of the non-inflation rate of unemployment – the NIRU – defined as “a rate such that, as long as unemployment is above it, inflation can be expected to decline”. Note in passing that more appropriate terminology would be the nonincreasing inflation rate of unemployment (NIIRU). Modigliani and Papademos recognised that the NIRU would be affected by macroeconomic shocks. They argued that there was evidence to suggest that “over the last two decades the NIRU [in the US] was held down by a favourable trend in the terms of trade between the private nonfarm sectors on the one hand and imported goods and farm products on the other.
In Australia, for example, the 1998 Payment Systems (Regulation) Act gives the RBA powers to regulate the payments system and purchased payment facilities (such as travellers’ cheques and stored value cards). It also allows the RBA to obtain information from payment system participants and to set access regimes and determine risk control and efficiency standards for designated payment systems. The RBA’s responsibilities in this regard are discharged by a Payments System Board. The adoption of Real Time Gross Settlement (RTGS) has been another key risk reduction initiative on the part of many central banks in the past decade and a half. These systems eliminate the build up of settlement exposure and Herstatt risk between financial institutions as a result of the exchange of high-value payments and debt securities settlements. Instead, individual transactions are settled in real time across accounts at the central bank. The availability of RTGS is also an important step in dealing effectively with foreign exchange settlement risk. Finally, no discussion of payments system oversight would be complete without some mention of AntiMoney Laundering initiatives. AML is important for the integrity of payments systems, and thus also has important macroprudential implications. The publication of a Financial Stability Report is the second way in which central banks have given more prominence to their macro prudential responsibilities. The Bank of England was among the first movers and its Financial Stability Report is now a decade old. The report recently underwent a revamp reflecting how rapidly this type of analysis has evolved in that time.