samchain/econo-pairs-v1 huggingface dataset:
As the onset of balance sheet normalization comes closer over time, the effect of the Federal Reserve’s balance sheet actions on the term premium will gradually diminish. This means that the size of the federal funds rate adjustment should also diminish over time. 6  BIS central bankers’ speeches  rate has fallen, as I believe it has, then the entire trajectory of short-term rates implied by Taylor 1999 shifts down and this pushes back the liftoff date implied by Taylor 1999 significantly. So how strong is the evidence that the neutral real rate has fallen significantly at least in the short term? First, and most importantly, if the neutral real rate were really 2 percent, then the U.S. economy should be growing faster11 as monetary policy would be extraordinarily stimulative right now. But, if that is the case, then why do we see such a lackluster economic performance? Thomas Laubach and John Williams have devised a means of estimating how the equilibrium real interest rate varies over time based on how the economy has actually performed. The estimate generated by their model for the first quarter of 2012 is 0.3 percent.12 Second, we can identify good reasons why the neutral real rate is depressed currently. The channels through which monetary policy stimulates the economy are weaker than normal right now.13 Monetary policy works through its effect on financial conditions that influence economic activity.

These problems can be mitigated if there is a certain underlying inflation rate in the economy. Underestimating the significance of monetary policy and exchange rate developments One problem when criticizing monetary policy with reference to the current economic situation is that one does not take into account the fact that the current strong Swedish economy is of course to a large degree due to the monetary policy that has been conducted. It is a little like taking medicine in connection with an illness and when cured drawing the conclusion that it was unnecessary to take the medicine. On this point I feel that the events of spring 2015 are a good illustration. The ECB had announced in January that it intended to buy securities over slightly more than a year to come for the equivalent of SEK 10,000 billion (around 2.5 times the size of Swedish GDP). This is indeed a very substantial monetary policy intervention. Within the course of just a few weeks the krona exchange rate appreciated significantly against the euro, from almost 9.65 krona per euro to just over 9.10. This was in itself a large appreciation of almost 6 per cent, but the real danger lay in the fact that it could have been much worse. During 2014 and up to spring 2015 the US dollar and the British pound sterling had appreciated by between 15 and 25 per cent against the euro.
And we expect firms to continue to do this and maintain high levels of prudence in the face of continuing high uncertainty.6 Stress testing: 2021 and beyond In the near future we have two more stress tests coming up using a common scenario: (1) The Bank of England will be using the 2021 biennial exploratory scenario (BES) to explore the financial risks posed by climate change. The exercise aims to test the resilience of the current business models of the  5 6  See Insurance Stress Test 2019: Feedback for general and life insurers (June 2020). See Letter from Sam Woods to insurers on distribution of profits (March 2020). 4  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  4  largest banks, insurers, and the financial system to climate related risks – as well as the scale of adjustment that will need to be undertaken in coming decades for the system to remain resilient. Conducting a climate stress test poses distinct challenges compared to conventional macro-financial or insurance stress tests. The Bank is using feedback from last year’s discussion paper to ensure it is effective and that the design is appropriate.7 We are having further engagement with financial firms, climate scientists, economists, other industry experts, and informed stakeholder groups to support this work. We will publish scenarios in June 2021, with initial submissions due by the end of September. Given this time frame we would encourage firms to start developing their capabilities sooner rather than later.

Ratios of household debt and post-tax interest expenditure to disposable income (per cent)  debt ratio (lhs)  mar-06  mar-05  mar-04  mar-03  mar-02  mar-01  mar-00  mar-99  mar-98  mar-97  mar-96  mar-95  mar-94  mar-93  mar-92  mar-91  mar-90  mar-89  mar-88  mar-87  0 mar-86  0 mar-85  2  mar-84  20  mar-83  4  mar-82  40  mar-81  6  mar-80  60  mar-79  8  mar-78  80  mar-77  10  mar-76  100  mar-75  12  mar-74  120  mar-73  14  mar-72  140  mar-71  16  mar-70  160  interest ratio (rhs)  Sources: Statistics Sweden and the Riksbank  8  BIS Review 105/2006
If we compare the period 1970-1993 with the past twelve years, we can observe that  BIS Review 21/2006  5  growth was much higher during the latter period of low inflation (almost 3 per cent a year) than during the earlier period of high inflation (almost 2 per cent a year). Real wages have also developed better over the past ten years than during the interim period with higher inflation, despite the fact that nominal wage increases have been lower. During the 1960s and up to the mid-1970s, real wages rose every year, i.e. wage were rising more rapidly than prices. Then followed a period of 20 years when real wages did not rise at all on average. Since the mid-1990s, we have once again enjoyed a period of rising real wages. Higher productivity growth has contributed to this. The current account is showing a very large surplus. Public finances are also showing a surplus, although this does not reach the target of 2 per cent over an economic cycle. On the other hand, unemployment is now higher than before. During a very long period up to the beginning of the 1990s, unemployment was very low in Sweden. Open unemployment varied between 1 and 4 per cent. In recent years, it has varied between 4 and 6 per cent, following a peak of 9 per cent in 1997. When I studied economics at university, we were taught that lower inflation was linked to higher unemployment. This relationship was illustrated by the Phillips curve.

However, later research has shown that in the longer term there is no connection between inflation and unemployment. At the same time, I believe that the problems in the 1970s and 1980s could partly be explained by the Swedish economy being unable to manage the low unemployment we had then without excessive price and wage increases ensuing. For me, one of the most important tasks of economic policy over the coming years is to bring down unemployment. However, the Riksbank is unable to do very much about this. The Riksbank’s contribution is to safeguard the inflation target and in this way create favourable conditions for growth and employment. All in all, my picture is still that the Swedish economy has functioned much better over the past ten years than in the 1970s and 1980s. Things are better now. Current monetary policy The other part of my presentation is concerned with economic developments and current monetary policy and the reasons why the Executive Board of the Riksbank decided at its most recent monetary policy meeting on 22 February 2006 to raise the repo rate by 0.25 percentage points to 2 per cent. The Riksbank’s view of economic developments over the coming years is presented in the Inflation Report, which was published at the same time as the interest rate decision. This part of my presentation does not contain any new information or new assessments in relation to the February Inflation Report and the separate minutes of the Executive Board meeting.
This was more evident for securities firms and may reflect the opening of the Primary Dealer Credit Facility (PDCF) that allowed primary dealers to obtain liquidity from the Federal Reserve on a collateralized basis. Following the bankruptcy of Lehman Brothers in September 2008, these CDS prices increased dramatically. In response to the deterioration in the economy as well as to mounting loan losses, banks tightened their lending standards and credit spreads increased. This can be seen using data from the Federal Reserve’s Senior Loan Officer Opinion Survey (Chart 10). Values above zero represent tightening of standards, widening of spreads and weaker loan demand. All three were taking place as the economy entered the recession. A consequence was a sharp contraction of lending activity (Chart 11). To the extent that the decline in lending was not completely due to lower loan demand, then this credit contraction exacerbated the decline in real activity – creating what is called an adverse feedback loop between the financial and real sectors of the economy. The Federal Open Market Committee (FOMC) reacted aggressively in response to the recession and financial crisis. The FOMC quickly lowered its policy rate – called the federal funds rate – to essentially zero (Chart 12). The aggressive pace for lowering the fed funds rate reflected lessons learned from Japan’s earlier experience dealing with a housing market boom and bust. At the same time, the FOMC increased its provision of liquidity to the financial system.

In this recession, there was an actual decline in consumption rather than just a slowdown (Chart 2). When households need to cut back on their consumption, they typically do so first with durable goods – for example, by delaying the decision to replace a car or to trade up to a nicer house. It is no surprise then that auto sales dropped significantly (Chart 3). Housing starts had been declining since late 2005, and the decline continued during the recession (Chart 4). Producers reacted quickly to the sharp decline in consumer demand, but inventories still rose sharply relative to sales (Chart 5). In order to realign production to the declining level of demand, firms quickly cut their staffing levels, which resulted in a rapid rise in unemployment across all age groups (Chart 6). From the peak in December 2007 to the end of the recession, private non-farm payroll employment declined by 7.3 million jobs – bringing employment below its level in January 2000 (Chart 7). The severity of the Great Recession is very apparent when you realize that an entire decade’s worth of job growth was lost. Household wealth declined sharply as well during the Great Recession due to losses both in equity and real-estate wealth. The household saving rate increased in reaction to this negative shock to household wealth (Chart 8). Several factors were likely behind the higher saving rate. First, as already noted, households likely increased their saving rate to begin to rebuild their wealth.
Spain has made relatively more progress than other euro area countries in reducing the volume of non-performing loans built up during the crisis. Moreover, economic growth – albeit at lower rates – can be expected to continue to help to gradually reduce them over the next few years. Despite these improvements, the level of unproductive assets of Spanish banks (especially those related to business in Spain) remains relatively high and above precrisis levels. 3/11  Reducing unproductive assets continues to be a challenge for the industry, requiring banks to strengthen the application of active management policies to their impaired assets. In this respect, the agreements to sell troubled asset portfolios announced over the past year will accelerate the reduction of future NPL ratios more than initially estimated solely on the basis of the cyclical improvement in the economy and the experience of previous credit cycles. In order to address this challenge, which most other European banks also face, the European economic and supervisory authorities have taken initiatives to accelerate the reduction of NPLs. In particular, the European Commission announced a package of measures in March this year, which included a proposal to review the capital requirement regulations and an NPL provisioning schedule. Correcting the high level of impaired assets is key for two basic reasons. First, because the balance-sheet clean-up will improve banks’ profitability and solvency. That is to say, it will free up resources currently devoted to financing unproductive assets and allow them to be used to finance new lending.

In particular, I would like to mention that the ECB made recourse to these operations repeatedly in August 2007 and again in September this year to provide overnight liquidity in addition to the liquidity provided at its weekly main refinancing operations. In addition, as already mentioned, in the past two weeks, overnight fine tuning operations have been used regularly to re-absorb the excess liquidity provided to the euro money market. 2. The Eurosystem has very significantly increased the average maturity of its lending to euro area banks. The outstanding amount of refinancing provided via longer-term refinancing operations has increased by around € billion since 2007. The latest measure in this respect consists of a series of special term refinancing operations with a maturity of six weeks, which were launched in September 2008 and will be continued until at least beyond the end of the year. Consequently, and in order to keep the total amount of outstanding refinancing unchanged, the amount of liquidity provided via the one-week main refinancing operations has been reduced correspondingly. 3. On 8 October, due to intensified tensions in the financial market, the ECB took the absolutely exceptional decision to adopt a fixed rate tender procedure with full allotment for all its weekly main refinancing operations as long as market conditions dictate. Third, in October 2008 the ECB reduced the corridor of the standing facilities around the interest rate on the main refinancing operations was reduced from 200 basis points to 100 basis points.
Debt ratios for indebted individuals in different age groups Per cent 500 400 300 200 100 0 1 (27) 2 (33) 3 (38) 4 (42) 5 (47) 6 (51) 7 (56) 8 (61) 9 (66) 10 (76) Age deciles (average age within decile) Source: The Riksbank  Many borrowers do not reduce their debts, and those that do reduce them slowly Let me now also shed some light on how debts change over time. Between 2012 and 2013, 24 per cent of the individuals with mortgages increased their debts and 16 per cent had unchanged debts. Just over 60 per cent reduced their debts in the same period (see  BIS central bankers’ speeches  7  Chart 6). For those that reduced their debts in this period, the reduction corresponds to an average remaining amortisation period of 99 years. In other words, 40 per cent of the individuals that have mortgages have increasing or unchanged debts, and those that reduce their debts do so very slowly. Over the three years for which we have data, the proportion of individuals reducing their debts has in fact increased and the proportion increasing their debts has decreased. On the other hand, the increase in the proportion of individuals reducing their debts has been very small. All in all, the analysis of the Riksbank’s credit data thus shows that debt ratios are fairly evenly-distributed across income groups. They are also spread throughout the country. The analysis also shows that debt ratios are high even for older borrowers.

And that brings me to a theme of my remarks today: What does “normal” monetary policy look like going forward? Before I say even one more word, I should stress that what I have to say represents my own views and not necessarily those of the Federal Open Market Committee (FOMC) or anyone else in the Federal Reserve System. Strong, Strong, Strong My view on the U.S. economy is well summarized by the most recent FOMC statement, in which variations on the word “strong” appeared five times in describing the U.S. economy. 1 Central bank communication can be difficult at times, but, at least in this case, our message is very clear. Indeed, the Federal Reserve has attained its dual mandate objectives of maximum employment and price stability about as well as it ever has. Most indicators point to a very strong labor market—including an unemployment rate of 3.7 percent—and inflation is right on target. With fiscal stimulus and favorable financial conditions providing tailwinds to the U.S. economy, the outlook is for more strong growth. Let me put some hard numbers to that: I expect real GDP to increase by around 3 percent this year and by 2.5 percent in 2019. Assuming this forecast comes to fruition, this will be the longest expansion in U.S. history based on data going back over 150 years. This above-trend pace of growth should lead to continued solid job gains and further declines in the unemployment rate.
But, in the end, our region’s economic dynamism is essentially driven by the private sector, and this is why the key to unleashing mutual prosperity is in your hands. 15. Whether you are a banker, an investor, or an entrepreneur, it is you who will be using these financial and infrastructure linkages. I would therefore urge you all to tap onto this tremendous opportunity that is arising by, for example, •  Venturing abroad to invest in new markets in ASEAN;  •  Expanding your businesses through our linked capital markets; and  •  Taking part in the new regional logistics based sector. Ladies and gentlemen, 16. I am very pleased to learn that tomorrow you as representatives of 36 banks from ASEAN+3 countries will be signing the “Bangkok Declaration” to bolster your mutual cooperation. This demonstrates that the private sector has already taken the cue from us in the public sector to tap on opportunities in the region. I congratulate you all in advance and hope that other industries would follow suit. Thank you very much for your attention. BIS central bankers’ speeches  3

Strategic or industrial goals can also be pursued, such as facilitating the access of domestic firms to new foreign technologies, or more generally bolstering national industries. One such example is provided by the new Chinese State Investment Company, which could possibly use a large fraction of its assets to recapitalise the Chinese banking sector. In a word, sovereigns are also in charge of economic policy and it is intrinsically difficult for them to maintain schizophrenia between their actions as policy-makers and their decisions as managers of public assets. The strategic allocation of their risky assets can therefore be expected to be used, in some cases, as another policy instrument. Given these specificities of sovereign holdings of risky assets, it is legitimate to wonder whether the growth of these holdings raises new challenges for central banks and the international community. Transparency I will conclude on the issue of the appropriate transparency level for SWFs. Should SWFs be more transparent than other institutional investors? This question must be addressed from two different perspectives: accountability and financial stability. As a public institution, an SWF should disclose a minimum set of information because of its fiduciary responsibility. Over the recent past, public institutions have responded more and more favourably to the arguments in favour of transparency. In particular, the benefits of greater accountability and the benchmarking of sovereign institutions tend to outweigh arguments in favour of secrecy. For instance, most central banks nowadays report their FX reserves holdings to the IMF under the SDDS and publish a detailed annual report.
Along the same line, the Taylor rule was, obviously, used before John Taylor estimated it. Regardless causality, monetary policy and central banking have changed significantly. The movement toward granting central bank independence around the world has been a positive one. Of course, this comes with the challenge for central bankers to demonstrate that this is really a good thing, something that certainly has been questioned in some countries during the recent crisis. Although central banks were created to address problems in the banking sector, over time, their objectives moved to more general aspects such as economic development or growth. Then, since the 1980s, and with the success of the Great Moderation, central banks increasingly, and rightly so, focused on price stability. Unfortunately, financial stability, another issue at the core of central banking, was overlooked. Monetary policy has abandoned money supply and exchange rates as nominal anchors, to target directly inflation and anchoring nominal variables via inflationary expectations. To reinforce credibility and to gain legitimacy, communication has become central to the conduct of monetary policy. Many challenges remain; in particular how to incorporate the financial stability goal into policy making, but the evolution of policy making has been enormous, in particular for emerging economies. However, progress in economics has not been completely successful, and many challenges remain to make economic analysis more helpful to guide policies, and that is the issue I want to discuss next.

Currently, we have a semi-automated real-time delivery versus payment (DVP) system in place. It is a stop-gap measure but it serves as an important infrastructure in the settlement of the scripless government bonds. The system, when fully developed, will be supplemented by the intraday liquidity facilities and queuing mechanism, employing the latest digital signature technology to ensure secured and smooth real-time delivery and payment transactions. We are entering an era when capital flow across borders can only become more volatile than in the past. And we still have fresh memories of how disruptive it was before the crisis. In fact, it was a major cause of the crisis. How do we go forward? How do we guard against this? The work on the new International Financial Architecture seems to be very much lacking in the area of the behavior of key players, especially the highly leveraged institutions. In the eyes of the large  3  BIS Review 30/2000  Western countries, such issues have somewhat lost their urgency since the event surrounding the Long-Term Capital Management (LTCM) left the headlines. In the absence of such rules, it appeared that emerging markets can only look to our own selves for protection. We have to help ourselves. A well functioning bond market is an important tool in this respect. It will act as a reservoir that absorbs capital inflow, and channel it to good use.