samchain/econo-pairs-v1 huggingface dataset:
It also illustrates the importance of continuing to focus on bank culture and proper incentives in order to support financial stability over the longer term. At its core, the problem we face today is that the financial system has built a tremendously large edifice on a structurally impaired foundation. While many in the industry cannot recall a time when LIBOR did not exist, in fact, it was only developed in the 1980s. Since then, the use of LIBOR as a reference rate has exploded—with the size of financial contracts referencing U.S.dollar LIBOR today estimated at close to $ trillion.2 The vast majority of these exposures are derivative obligations, such as interest rate swaps. But, that tally also includes trillions of dollars of cash products, such as residential and commercial mortgages, corporate bonds and loans, and securitized products. And, with new contracts referencing LIBOR still being written, this balance continues to grow significantly. Broadly speaking, reference rates are vital to efficient market functioning. They facilitate trading in standardized contracts, which lowers transaction costs and increases market liquidity. Robust reference rates can also reduce information asymmetries and the risk of misconduct by providing transparent, independent pricing. But, in the case of LIBOR, the foundation had serious flaws. Most notably, LIBOR was (and is) based on submissions from individual banks—which, in turn, were based on hypothetical borrowing rates or expert judgments, and not actual transactions. Moreover, deficiencies existed in regulatory oversight and governance of the rate-setting mechanism.

It is clear, however, that the ambitions of most countries still fall short of the requirements in the Stability and Growth Pact. This is certainly attributable in part to the economic slowdown, with Italy as the clearest example. But it is also notable that the ambitions for budget consolidation are now lower than before the move to Stage Three. The relatively good growth during 1998 ought to have left room for budget consolidation in many countries but it was not used and in certain countries the structural deficit has actually increased. The Ecofin Council has in fact criticised a number of countries, including Germany, France, Austria and the Netherlands, for the low level of ambitions in their stability programmes. In Sweden, the budget position looks comparatively healthy. Our fiscal policy is likewise less restrictive than before but the structural deficit has been turned into a surplus that is now growing and the ambition is still to achieve a budget surplus of 2 per cent of GDP on average over the business cycle. At the same time it should be underscored that some variation in the objective across countries seems reasonable. The degree of fiscal readiness — and thus the requisite size of the surplus — depends on a number of factors. One is the cyclical sensitivity of government finances and another is the level of government debt. It is then reasonable that a country like Sweden has a larger public sector financial surplus than a country where the automatic stabilisers and government debt are smaller.
This boost, which allowed the Chinese economy to deal quite successfully with the global financial crisis, brought about significant indebtedness of local governments, high exposure of the financial system to projects of dubious quality, and substantial over-investment. The need to put a stop to this impulse in order to safeguard macroeconomic stability has defined China’s economic policy decisions since 2010. Accordingly, the contractions in investment projects and credit availability have been the main stabilization tools used in China. However, this process coincided with the aggravation of problems in Europe, which resulted in a very sharp reduction of external demand for the Chinese economy, among other things. The fall in exports, together with the need to withdraw the stimulus that had been given to investment over the past few years, has put significant pressure on China’s growth. Its capacity to offset the drop in demand with increased domestic consumption is limited in the short run, especially since the necessary conditions to promote lower savings rates, such as changes to social security and health-care plans, a deepening of the household credit market, and changes in relative prices – such as a real exchange rate appreciation –, are often slow to implement. Until now the Chinese economy has continued to decelerate, and somewhat more rapidly than was foreseen a few quarters ago. In my view, China has the necessary tools to deal with this deceleration, and to deal with a possible worsening of problems in Europe.

Sebastián Claro: Chinese challenges facing Chile and Latin America Speech by Mr Sebastián Claro, Board Member of the Central Bank of Chile, at the 2012 Latin American Cities Conferences “Chile on the path to development”, organized by the Americas Society/Council of the Americas, Santiago, 30 August 2012. *  *  *  I would like to thank Consuelo Edwards and Yan Carrière-Swallow for their help in translating this speech from the original Spanish. Thank you for inviting me to this event that for several years now has been gradually positioning itself – both in Chile and in the rest of Latin America – as a seminar dealing with key issues for the region’s economic development. On this occasion, and at the organizers’ suggestion, I would like to share with you some thoughts on the economic development of China and its implications for Latin America. Rather than focusing on aspects of the Chinese economy – which I will come back to at the end of the presentation –, I would like to focus on those dimensions in which China’s spectacular growth affects the region directly. Let me begin by recalling a widespread debate in the region in the early 2000s. While Europe was boastfully launching its new single currency, Latin America was struggling to leave behind the havoc of successive crises that had hit the region, starting with Mexico in 1994.
For Swedish banks and financial institutions, the difference as regards participation in central bank monetary policy operations will probably not be all that great. The Riksbank will no doubt continue to be the financial sector’s counterparty. The main differences from today for Swedish banks are that the overnight market will be considerably larger and that minimum reserves are likely to be required. How monetary policy is to be constructed and implemented in detail has still to be decided. These matters will not be finalised until the ECB has been established next year. Thus it is the countries which participate from the start that will be in a position to influence the conduct of policy as well as the organisation of the work in the new European bank. There are already tendencies for countries belonging to the “presumed” core to exercise a greater influence over the process. 2. Payment system A single monetary policy calls in turn for a common payment system in order to handle the payments connected with the policy’s implementation. The arrangements whereby all the national systems are interlinked is called the Target system. In the new system, a cross-border payment will normally be made in a matter of seconds, whereas at present in the best case it takes a whole day. The main objective of Target is to enable the ECB to implement monetary policy but the new system will also provide a new “highway” for commercial transactions.

Wage costs in Sweden rose considerably faster than in other countries in the 1970s and 1980s; competitiveness was restored by resorting to devaluations. It is not self-evident that shocks generated externally would hit Sweden more seriously than countries which are currently taken as given for EMU. So the risk of what economists call asymmetric shocks in Sweden should not be exaggerated. Moreover, when it comes to influencing production and employment in the event of major shocks, monetary policy has a limited capability. It may even be the case that independence in monetary policy increases the risk of self-inflicted shocks. In the longer run, monetary policy is not a substitute for the changes that need to be made, for instance to improve wage formation and the workings of the labour market. The Governing Board of the Riksbank will shortly be submitting an opinion on the Calmfors report. The arguments for and against EMU participation will be considered there at greater length. A general theme in the report is that every kind of decision - to joint now, to join later or to stay outside - entails risks and has a price. Although the report conclude that Sweden should wait joining EMU for the time being, not much is needed to tip the scales the other way, for example if EMU begins with more participants than the core countries or if the alternative of remaining outside does not confer any substantial freedom in monetary policy. But as I said, there will be occasion to return to this.
Moreover, several challenges such as the advent of ASEAN Economic Community (AEC) in 2015, the implementation of the Basel III accord and the rocky recovery of the western hemisphere, remained ahead of us. In this regard, I view that priority should continue to be on strengthening the role of domestic and regional institutional investors. This group of market participants are important players on both the issuer and investor side. Collective investment or asset management companies can be an important vehicle to channel cross border savings for cross border investment. We know all too well that very few non financial single name issuer can succeed in a foreign market if they are not well known household names. But institutional investors such as insurance, pension funds and asset management firms are likely to be able to better intermediate cross border savings and investment. These institutional investors would be able to provide a two way flow and with a better knowledge of regional conditions and a natural home bias, would also be a stabilizing factor during severe market stress. A stronger and broader regional institutional investor will also provide opportunities for diversification as well as alternative saving vehicle that would serve the changing demographic trends. Throughout Asia, we are seeing increasing demand for more sophisticated wealth management services. As regulators we also need to continue to collectively enhance our infrastructure and further harmonize regulatory regimes to support greater cross border activities. Standardized market conventions help promote cross border issuance in our respective markets.

Today, many of the ASEAN-5 countries have fairly deep and liquid local bond markets. Central banks, whose operation is contingent on a deep and liquid bond and foreign exchange markets, have been part of the development process for the government bond market. Over the years, our financial markets have become more efficient, more sophisticated and more balanced. ASEAN-5 have moved from a predominantly bank-based or credit market to a growing capital market, both equity and bond. We have also strived to better manage the impact from volatile capital flows as we seek to balance between foreign inflows and capital outflow. Here bond markets have been instrumental to help absorb the impact from the volatilities and sudden reversal of these flows. These developments have facilitated central banks in their conduct of monetary policy, manage market expectations, and guide the path of monetary policy. Today, the ABMI is taking this development further from a domestic orientation to a regional level. This is timely in view of the increasing need for Asians to find new sources for growth and new markets for their exports, and in recognition of the need for “Asian savings to finance Asian investment”. Initiatives such as the Credit Guarantee and Investment Facility (CGIF) is a case in point that aims to foster cross border fund mobilization using the tools of a regional credit guarantee vehicle.
Conceptually, one can always think of this as raising extra government debt to finance whatever is bought, combined with conventional quantitative easing that offsets the extra debt issued. In addition to highlighting the potential interest of the Treasury in the first leg of the intervention, splitting it up in this way can also help to clarify analytical issues. For instance, one idea that has been floated involves sending households a voucher, which could then be spent in the shops and redeemed for cash by the retailer. This may sound like a good idea, as it seems to get the money quickly into action in stimulating demand. Now, such a policy in effect combines an increase in borrowing to finance a temporary increase in income tax allowances with some conventional quantitative easing in which gilts are exchanged for claims on the Bank of England3. But economic theory, as well as considerable empirical evidence, suggests that such a temporary increase in disposable income would be likely to be very largely saved4. Only households that wish to borrow, but presently cannot, would be likely to increase their spending materially. And making the voucher time-limited would do little to help, as households could always use the voucher instead of the cash they would have spent. In sum, this hardly seems the most effective way to add additional stimulus. Let me conclude by offering you a comment on what all this might mean for the housing market and the demand for mortgages.

2  BIS central bankers’ speeches  experience after previous recessions following banking crises suggests that it is likely to be highly persistent (see Chart 5, which shows the UK experience since the start of the recession, together with the range of analogous historical experiences). Initially, households and businesses were protected from the full impact of this downward shift in prospective incomes by the previous Government’s decision to let the budget deficit temporarily take the strain. But the necessary subsequent fiscal consolidation has led inevitably to a higher tax burden and lower public spending growth. As already noted, inflation reached 5.2 per cent in September. But much of that reflects the combined impact of higher VAT and prices for energy and other imports. A range of estimates of the impact of these factors is provided by the blue swathe in Chart 6. The remainder is attributable to domestically-generated inflation, estimates of which are provided by the green swathe in the same Chart. This appears to have been running well below the 2 per cent target, reflecting in large part the unusually low rate of pay growth, which is in turn symptomatic of the slack in the economy. As we go into next year, so last January’s increase in VAT will drop out of the calculation, knocking around one percentage point off inflation. And commodity prices have started to fall back as the pace of global expansion has eased (Chart 7).
The first implication, that the central bank has a strong stake in preventing financial instability, has several elements. The central bank needs to be willing to respond to limit financial market bubbles from developing in the first place. This includes not just paying attention to asset price bubbles, but also to related excesses in leverage and in short-term funding markets. As I noted in a speech a few years ago, this is difficult to do in practice.3 After all, bubbles are difficult to identify in real time and the central bank’s policy toolkit to deal with bubbles may be limited. However, this difficulty cannot be an excuse for inaction. Using the bully pulpit, implementing macroprudential measures, or adjusting monetary policy can generate superior results compared to inaction. The central bank also has to ensure that the financial system is sufficiently robust and resilient so that if there are financial market shocks, the banking system can absorb any shocks and continue to perform its credit intermediation function. This has many elements including tough capital and liquidity requirements for banks and strong financial market infrastructures. It also includes taking action to eliminate sources of vulnerabilities whenever they may arise – for example, strengthening the triparty repo system, reducing the vulnerability of money market mutual funds to runs, or forcing derivatives contracts to be standardized and centrally cleared. These actions should be undertaken during “peacetime” rather than when a crisis is already underway.

The result can be disruption to the financial intermediation function with resulting constraints on the availability of credit for households and businesses. This, in turn, can lead to further reductions in aggregate demand that put additional stress on the weakened financial system. Obviously, this is not a favorable dynamic. Financial instability can impact the conduct of monetary policy via three major channels. First, financial instability can generate a sufficiently large shock to aggregate demand that the central bank may encounter the zero lower bound constraint – the constraint that the monetary policy instrument, for example, the federal funds rate – cannot easily be pushed below zero. In such circumstances, it may not be easy to fully offset the shock through the pursuit of a more stimulative monetary policy. At the zero bound, the central bank is not powerless, and may turn to other monetary policy tools such as forward guidance and large scale asset purchases. But these tools may not be as effective as lowering the short-term rate instrument. In particular, the central bank may not be willing to use these nonconventional tools to the full extent necessary to provide the same degree of stimulus as it would provide if it could set interest rates at negative levels. That might be because of uncertainty about how nonconventional tools will work or because of the potential costs associated with the use of such tools in terms of market functioning and the risks of future financial instability.
In addition, the Riksbank entered into swap agreements with the central banks of the United States and the euro area to increase our access to dollars and euros. I will return to this later. In parallel with our liquidity assistance measures, we quickly reorganised our monetary policy. The repo rate was lowered from 4.75 per cent in September 2008 to 0.25 per cent by July 2009. Furthermore, our assessment in July 2009 was that the repo rate would need to be kept at this low level for slightly more than one year. To emphasise this and also to hold down the longer interest rates charged to households and companies, on three occasions the Riksbank offered one-year loans of up to SEK 100 billion at interest rates of 0.25 per cent. All in all, the Riksbank earned SEK 2.3 billion on the measures adopted during the crisis due to the interest rate differential between deposits and loans. Our primary intention was not to earn money through our measures, but, at the same time, it was important not to subsidise the banking system with public funds. (Figure 4)  BIS central bankers’ speeches  5  Figure 4 The repo rate Percentage points  Source: The Riksbank. Other authorities also acted to safeguard stability The Riksbank was not alone in adopting measures to safeguard the stability of the Swedish financial markets. Other Swedish authorities also intervened to counter the effects of the financial crisis.

For Treasury securities, when the caps are fully phased in, they will generally only be binding during the middle month of each quarter, when there is typically a spike in maturing Treasuries in the Fed’s portfolio. For agency MBS, as long as long-term interest rates are steady or rising, we expect that the fully-phased-in caps will not be binding. However, if long-term interest rates were to fall sharply—provoking a surge in refinancing and mortgage repayments—the caps would likely bind, limiting the amount of agency MBS that would have to be absorbed by the private market. As currently anticipated, once we start the balance sheet normalization program, we expect it to continue in the background until the FOMC judges that the Fed’s securities holdings are no larger than necessary to implement monetary policy efficiently and effectively. Adjustments to the target range of the federal funds rate will remain the primary tool of monetary policy. However, if economic circumstances were to change during the normalization process in a way that would warrant a sizable reduction in the target range for the federal funds rate, the FOMC would be prepared to resume reinvestment. The program has been designed to be implemented gradually and predictably so that market participants and the U.S. Treasury can anticipate when and at what pace the portfolio is likely to run off over the course of normalization. This should keep expectations more stable and reduce the risk that a sharp shift in expectations could generate undesirably large movements in interest rates and asset prices.
Certainly, the more flexible is your economy (in terms of public finances, the labour market, and so on), the easier it is to cope with shocks and the less monetary policy is needed. However, the case of the Eurozone shows how tricky it is when the absorber in the form of monetary policy is switched off and nothing replaces it. The shocks are bigger and hurt more. Listeners themselves can answer the question of whether the labour market and labour law are likely be made more or less flexible (and dismissals made easier) in the future. In doing so, they will answer the question of whether there will be a need in the future for more or less domestic monetary policy in the Czech Republic, a country whose conservative population is so averse to upswings and downswings. 1/3  BIS central bankers' speeches  The “convergence trilemma” The standard “monetary trilemma”, which you know very well (a country cannot simultaneously have a fixed exchange rate, an open capital account and autonomous monetary policy), is accompanied in a converging economy of our kind with something I call the “convergence trilemma”. No country can simultaneously have high convergence growth, a fixed exchange rate, and low macroeconomic imbalances, be they internal or external. In our case, catching up with our wealthier, low-inflation Western peers means a long-term tendency for our currency to appreciate. This is hardly consistent with a permanently fixed exchange rate.

Funds raised in the US from money market funds were round-tripped back into the US through the purchase of asset-backed securities by European banks. When US money funds withdrew their dollar funding, this chain went into reverse gear causing a dollar funding problem. Understanding those links in the cross-border financing chain is impossible without detailed sectoral data. That is now in train. Yet there remain significant data constraints on our ability to map the macro-financial system of systems in the detail necessary to capture accurately interactions within and across subsystems. Even among the world’s largest banks, data on their bilateral exposures to one another remains partial and patchy, especially for off balance sheet positions and securities holdings. That means large parts of the core of the international banking map remain, essentially, uncharted territory. 10  BIS central bankers’ speeches  These data gaps are even more acute when moving beyond the banking system. Large parts of the non-bank sector remain in the shadows from a data perspective. For example, reliable measures of the aggregate and/or individual leverage, maturity and foreign currency mismatch positions of non-bank intermediaries – some of the key vulnerability metrics – are thin on the ground. The FSB has an agenda to fill these data gaps. More broadly, flows of funds data, both within the financial sector and between it and the wider economy, domestically and internationally, is at present partial.