samchain/econo-pairs-v1 huggingface dataset:
[7] Whose Problem Is It? In setting monetary policies, should advanced economies take into account the spillover eﬀects on EMEs through capital flows? It is neither feasible nor desirable for advanced economies’ monetary policies to be constrained by considerations of the cross-border spillovers they generate. Advanced economy central banks have their own domestic macro stability goals they need to meet and cannot be expected to sub-optimise their policy outcomes. Moreover, accommodative monetary policies in the advanced economies have generated positive spillovers to EMEs, through strengthening export demand and enabling conducive financing conditions. At the same time, it must be recognised that monetary policy latitude in EMEs is to some extent compromised by large capital flows. Empirical studies have found that EMEs’ monetary policy responds to movements in US interest rates and exchange rates, besides their own domestic macroeconomic conditions. [8]  EMEs should therefore have the flexibility to use the policy tools at their disposal to protect their domestic economies from risks arising from large capital flows. Some Questions for an Integrated Policy Framework What are some of the questions that an integrated policy framework should seek to address? The existence of diﬀerent policy objectives and multiple sources of disequilibria necessitates the use of a range of policy instruments. These can be grouped under three broad buckets: foreign exchange interventions (FXIs), macroprudential measures (MPMs) and capital flow management measures (CFMs).

What the New York Fed does By way of introduction, I will briefly review what my colleagues and I do at the New York Fed. The New York Fed is one of 12 regional Federal Reserve Banks that, together with the Board of Governors in Washington D.C., make up the Federal Reserve System, our nation’s central bank. The Federal Reserve is independent within our government. By law, we are charged with managing the nation’s monetary policy – taking actions that raise or lower interest rates to promote full employment and price stability. The Federal Reserve is also charged with promoting financial stability, without which we cannot achieve our economic objectives. We play an important role in the nation’s payments and settlements system, which some people call the financial system’s “plumbing”. For example, we help ensure that banks’ ATMs have cash and that the checks you write move the money to the recipient. In addition, we have a specific mandate to promote economic development in each of our regions. BIS central bankers’ speeches  1  As president of the New York Fed, I serve as the vice chair of the FOMC, the Federal Reserve committee that meets eight times a year in Washington to set interest rates and make decisions about monetary policy. The members of this committee all strive to achieve our statutory mandate of full employment and price stability. Sometimes we have different views on the specific policy choices at hand, and our policy decisions reflect a full discussion of these differences.
In this respect, “original sin” is a specific term, which was first coined by Eichengreen and Hausmann 2 in 1999; and which means that countries without fully developed financial markets are obliged to borrow in foreign currencies since borrowing in their national currencies at longer maturities is almost impossible. The other main factor behind the dollarization is related to the market imperfections. Market distortions, fixed exchange rate regime accompanied with high inflation, low institutional quality, poorly developed domestic financial markets, currency-blind financial regulations and safety nets in foreign currency such as deposit insurance can all be evaluated under this framework. Due to those imperfections, moral hazard problems arise and this in turn results in a larger demand for foreign currency. As the studies 3 have showed, the low quality of legal and political institutions and the lack of legal protection for domestic creditor provide incentives for dollarization. Dear Guests, Now, the question is why we should care about dollarization. Before anything else, it increases a country’s vulnerability to shocks. Let me also mention the vulnerabilities of two major sectors in an economy: one arising from dollarization in private sector and the other one having to do with dollarized public debt dynamics. Beginning with the private sector, the dollarized financial systems and the companies’ balance sheets are obviously exposed to solvency risks, due to currency mismatch problem.

Michael Gondwe: Encouraging local content and business linkages – role of the financial sector Opening remarks by Dr Michael Gondwe, Governor of the Bank of Zambia, at the 2013 SME Local Content and Business Linkage Forum, Lusaka, 28 November 2013. *  *  *  •  The Guest of Honour, Minister of Finance, Honourable Alexander B. Chikwanda, MP;  •  The World Bank Country Director, Ms Kundhavi Kadiresan;  •  Senior Government Officials and Development Partners present;  •  Heads and Representatives of Financial Institutions;  •  Business Industry and Associations represented;  •  Distinguished Invited Guests;  •  Members of the Press;  •  Ladies and Gentlemen. On behalf of the Bank of Zambia and indeed on my own behalf, I wish to extend a very warm welcome to you all to this very important Forum. Some of you may recall that in June last year, together with the World Bank, we organised a strategic forum for small and medium enterprises (SME) on the “role of finance for unleashing the potential of local Zambian businesses”. The objective of that Forum was to facilitate strategic policy dialogue between the Government, Bank of Zambia, the financial sector and the private sector on issues central to facilitating access to finance by Zambian businesses including SMEs. As Bank of Zambia, we believe that it is important to sustain this dialogue to facilitate an inclusive strategy in the financial sector development.
In Spain’s case, the stress tests covered virtually its entire financial system and were conducted in great detail and with a high degree of transparency, providing extensive information on exposure to the principal asset classes. The results showed the system as a whole to be sound, whereby their publication undoubtedly contributed to dispelling the doubts over our financial system. The final piece in the far-reaching reform of the financial system has been the savings bank legislation approved by this House. In opening up savings banks to private capital, the legislation will not only allow savings banks to move ahead without having to request  2  BIS Review 129/2010  assistance from taxpayers, but it will also enable them to meet the demanding capital requirements set under the new international financial regulation known as Basel III. In the budgetary domain, the government reinforced and accelerated the implementation of the fiscal consolidation programme which, in compliance with Community commitments, it had announced in January. To this end, it approved a new raft of measures on 20 May entailing spending cuts of somewhat over € billion to be made between 2010 and 2011 (around 1.5% of GDP), on top of the previously approved spending cuts and tax rises. The new deficit target path was thus set at 9.3% of GDP in 2010, 6% in 2011, 4.4% in 2012 and 3% of GDP in 2013, which would steady the public debt ratio at a level slightly below 75% of GDP as from 2012.

Indeed, the tensions were amplified by the weaknesses of European institutional arrangements and by the prevailing doubts over the willingness and ability of national governments to tackle the structural and budget deficit problems of their economies. Evidently, the Greek crisis has highlighted the incapacity of the Stability and Growth Pact and, more generally, of the European economic governance framework to prevent the excessive build-up of imbalances and to pursue timely corrective action. As you know, the European authorities have reacted to this need by initiating a deep-seated review of European governance mechanisms, some of the results of which are already coming to light. It can thus be said that as a result of this crisis, economic policies and, in particular, the fiscal policy of the EU Member States, will be subject henceforth to closer and more detailed  BIS Review 129/2010  1  control by the European institutions so as to anticipate and forestall inconsistencies and imbalances. Any build-up of the latter will ultimately entail major costs not only for the countries concerned, but also for the European single currency project. Further, attributing events exclusively to market excesses would mean ignoring the importance of the effects of the decline in activity and employment, of the deterioration in public finances and of financial systems on the possibilities of recovery, and the major economic policy challenges posed thereby, most particularly in the fiscal realm and in the field of structural financial reform.
But, even in Europe, where the influence of the so-called “new economy” is more modest, the rise in stock prices has also been significant;  ·  second, these changes have probably influenced private spending more than past asset prices movements did because of the more widespread share ownership observed in a number of industrialised countries. As far as France is concerned, market capitalisation as a percentage of GDP increased approximately fourfold between 1990 and 2000 (28% to 110.5%) and we have some evidence that the share of Households’ equity holdings in financial assets has also risen. All of these developments have recently raised the issue of whether monetary policy should react to financial asset prices, and more generally to asset prices. The motivation is two-fold: not only could the large swings, misalignments or even bubbles, on asset prices endanger price stability, which is the main objective of most central banks, but also they could impinge upon financial stability, which is an other important goal of central banks. Let me now develop these two points. 1. Implications for monetary policy  Transmission channels of monetary policy The role asset prices may play in the transmission mechanism of monetary policy is well known theoretically, although quite difficult to characterise empirically. Monetary policy mainly controls the interbank overnight rate, which is not directly relevant for any material economic decision. The way to which monetary policy affects the real economy is when it impacts on relevant financial prices, i.e.

Third, the Bank takes a countercyclical approach. The UK deploys a Counter Cyclical Capital Buffer (CCyB) through which capital is accrued in the good times for release in the bad. Two years ago, amid heightened uncertainty following the Referendum, we cut the CCyB by £ billion, releasing £ billion of additional lending capacity. As the immediate uncertainty receded, we then required banks to rebuild it. Today their capital buffers are twice as high, meaning the FPC could unlock over £ billion of lending capacity, if required. Fourth, the FPC has identified the major cross-border risks to financial services that could arise in a cliffedge Brexit. 13  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  13  The biggest risks relate to contract continuity. 16 million insurance policyholders in the UK and 38 million in the EEA have policies that firms might lose the permission to perform in a no deal scenario. Around £ trillion of cross-border derivative contracts could be disrupted by the loss of the regulatory permissions required to service them and loss of recognitions for CCPs. The Bank has been working with the relevant parties over the past two years to ensure they have contingency plans for the worst case scenario. In some cases, particularly in insurance, UK financial companies are restructuring so they can continue to serve their EU customers. If all current plans are delivered successfully, the number of EU policyholders at risk will fall to 9 million.
Let me say a few words about these issues. -  The exchange rate stability is one of the five (nominal) Maastricht convergence criteria. Consumer price stability, long-term interest rate convergence and fiscal consolidation are the other conditions a country has to fulfill in order to gain EMU membership. Clearly, the burden of ensuring compliance with these conditions does not fall solely and exclusively on the monetary policy authorities. The fiscal and labor policies must be aligned with the monetary policy objectives and the achievement of political commitment to ERM II is of paramount importance. I find the practice of monetary and fiscal policies dialogue, as stipulated in Accession Strategies of some of these countries, a commendable achievement. BIS Review 1/2007  1  -  Financial instability has been identified as a potential negative outcome of the bilateral fixing of the exchange rate for accession countries. Limited exchange rate flexibility under ERM-II and disinflation conditions expose the EU acceding countries to large ‘convergence play’ capital inflows. 1 If the exchange rate in accession countries is forced to fluctuate within a relatively narrow band, the outcome might be additional and unnecessary inflation. The central bank’s reaction to increasing inflation would restrict economic growth. Such an outcome is even more likely in the presence of the Balassa-Samuelson effects, commonly experienced by the transition economies. 2 In such a scenario, the dual task of preserving the domestic and international value of the currency can be jeopardized.

Several considerations need to be made. By adopting a single currency, the country foregoes independent monetary policy and the central bank can not act as a lender of last resort. The loss of monetary policy independence can be problematic if a country has achieved little in the way of real convergence (both structural and cyclical convergence) and is susceptible to asymmetric shocks. On the other hand, the loss of the lender of last resort function by the national central banks implies high and protracted fiscal costs in the case of financial crises. For this reason, a healthy and resilient financial system would be required for participating in the monetary union. It is partly a reflection of these economic challenges that the new EU members appear to be following different trajectories towards EMU. On one hand, Slovenia, the Baltic countries, Malta, Cyprus and Slovakia have proceeded to join the ERM II with a view to enter EMU in the future. The other countries, notably the larger Central European ones, have opted to stay out of the ERM II in order to have more time to do the necessary economic adjustments. (II)  Challenges of the ERM II  Once the economic argument and the political consensus are strong enough to support EMU membership, the acceding country can decide to enter the ERM II mechanism. What could go wrong for accession countries during the ERM II? Some often-cited issues are related to fiscal consolidation, financial stability and the choice of the central parity.
BIS central bankers’ speeches  9  •  Possible improvements to the monetary policy framework, including a longer target horizon for policy formation, which offers greater flexibility to take account of longer-term risks to price stability, including those due to financial stability risk. •  Changes to the financial system should also aim at improving monetary policy transmission. This option has the advantage that Iceland retains monetary independence and a flexible exchange rate and can therefore respond to future idiosyncratic shocks. Another advantage is that a domestic run on the Treasury and/or solvent banks would be manageable. Furthermore, there is reduced risk of financial instability due to excessive capital inflows and a subsequent run on the external funding of the banking system and the Treasury. The disadvantages of this option lie in the fact that the possibilities for external trade without exchange rate risk will remain limited, and the domestic financial system will continue to be more expensive and less integrated with the global financial system than it would otherwise be. In that case, prudential rules restricting domestic financial institutions’ cross-border operations will be needed. The feasibility of this option is also dependent on support for the necessary reforms. But even though that condition is fulfilled, it is not likely that excess exchange rate volatility will disappear, as it is also rooted in the inherent volatility of asset prices and the small size of the domestic foreign exchange market.

The króna is now worth only 0.05% of its value prior to the 1922 devaluation; in other words, it has depreciated by 99.95%. In terms of consumer prices, the króna has eroded in value even more, or about 99.99%. In other words, its purchasing power in terms of goods and services is currently only 0.013% of what it was in June 1944, when the Republic of Iceland was founded. Nevertheless, over this period, Iceland developed from being one of the poorest countries in Europe to one of the richest in per capita terms, despite the economic costs of persistent inflation. Currency depreciation and subsequent inflation episodes have sometimes expedited the necessary adjustment following economic shocks, however, thereby returning the economy more quickly to a path of economic growth. Chapters 3 and 12 focus on certain aspects of Iceland’s experience with an independent currency. In Chapters 9 and 13, two key questions are asked. First, how effective is monetary policy in achieving the goals with which it is tasked? Second, has the flexibility of the exchange rate facilitated economic adjustment and stability, or has it instead been a source of shocks? Summarising these findings reveals that Iceland’s experience of independent monetary policy and a flexible exchange rate has been poorer than that in many other countries, in that monetary policy has not been successful in achieving its goals and the flexible exchange rate has tended to be a source of shocks rather than a shock absorber.
Time will shed more light on the true effects of developments abroad on Chile’s external position and the evolution of domestic balances. For now, it is important that we take the opportunities we have to preserve and enhance the soundness of our economy, but bearing in mind that there are risks and that they are significant. Thank you. 8  BIS central bankers’ speeches  Figure 1 Real exchange rate (*) (index, 1986=100) 120  120  110  110  100  100  90  90  80  80  70  70 88  90 92 RER  94 96 98 00 02 1997-2011 average  04 06 08 10 12 1992-2011 average  (*) August figure includes information up to 30 August 2012. Source: Central Bank of Chile. Figure 2 Nominal exchange rate (index, December 2010=100) 110  110  105  105  100  100  95  95  90  90  85  85  Dec. 10  Jun.11 Chile  Australia  Dec.11 N. Zealand  Jun.12 Canada  Source: Bloomberg.

Euro area banks’ CET1 capital ratios remain at a solid level of about 14%, whereas profitability has stabilised on the back of the strengthening recovery. Some weak banks have been successfully resolved with the impact on the rest of the euro area banking sector being well contained. Notwithstanding these positive developments, important challenges remain, including the still subdued profitability, structural challenges in some parts of the euro area banking sector, such as the presence of excess capacity and cost inefficiencies, as well as – in a few countries – the persistently high stock of non-performing loans (NPLs). On aggregate, however, further progress has been made with respect to resolving NPLs, and a comprehensive action plan to deal with legacy asset quality issues was adopted by the Council of the European Union and is now being followed up by EU and national authorities. The ECB has published guidance to banks on NPLs and a draft addendum, currently subject to public consultation. With respect to financial stability, we observe that at the current stage the euro area’s position in the financial cycle is consistent with the ongoing economic recovery. There are no indications of widespread asset price misalignments and credit developments remain modest. Nevertheless, relatively buoyant real estate dynamics and high household debt levels in some countries warrant careful monitoring. We expect the national macroprudential authorities in the euro area to remain vigilant and ready to use the macroprudential policy instruments at their disposal to counteract the any emerging risks when necessary.
Chart 3: Wage growth compared to MPC forecasts  Chart 4: Unemployment compared to MPC forecasts  Outturn February 2014 IR forecast February 2015 IR forecast February 2016 IR forecast February 2017 IR forecast  6  10 9  4  8  3 7  2 1  6  2019  2018  2017  2016  2015  2014  2013  2012  2011  2010  2009  2008  -1  2007  0  2006  Wage growth (& forecasts)  5  Outturn February 2014 IR forecast February 2015 IR forecast February 2016 IR forecast February 2017 IR forecast  5  Unemployment (& forecasts)  7  -2  2020  2019  2018  2017  2016  2015  2014  2013  2012  2011  2010  2009  2008  2007  -4 Sources: ONS and Bank calculations Notes: Whole economy AWE, total pay. 4  2006  -3  Sources: ONS and Bank calculations Notes: Unemployment rate for 16+ population.

7  All speeches are available online at www.bankofengland.co.uk/speeches  7  My colleague Ben Broadbent has suggested that one effect of the crisis and perhaps of other changes in the world of work and in workers’ perceived pricing power has been to lower or remove that ‘norm’. 15  I suspect changes in workers’ perceived pricing power and perhaps their appetite for risk have been responsible for some of the behaviour of pay and employment post crisis. If this has happened, and I will come onto why it might have done in a moment, the effect could indeed have been to lower the Phillips curve. With one caveat, the policy implications of a lower Phillips curve are the same whether the driver is a lower natural rate, lower/more anchored inflation expectations, or some change in real pay increase norms net of changes in productivity growth. The evolution of unemployment and pay growth will trace the same shape of curve, but pay growth, and hence domestic inflation pressure, will be lower for any given level of unemployment. All else equal the policy maker can therefore tolerate a lower level of unemployment before worrying about domestic inflation pressure in the pipeline. The caveat, and it is a very important one, is that if the Phillips curve has been lowered by the anchoring effect of central bank credibility on inflation expectations, attempting to exploit that change might damage the central bank’s credibility and increase expected inflation, shifting the curve back up again.