samchain/econo-pairs-v1 huggingface dataset:
BIS central bankers’ speeches  3  Another theoretical argument can be made suggesting that independent national monetary policies could be more expansionary when national fiscal policies turn restrictive in the pursuit of fiscal consolidation. In principle, national monetary policies have the advantage of being able to counter the negative pressure on inflation produced by the fiscal tightening. In practice, however, countries in urgent need of fiscal retrenchment do not necessarily experience lower inflation. At present, inflation is higher than the euro area average in Portugal, Ireland, Spain and, in particular, Greece. In a counterfactual without the euro, the national monetary authorities responsible for monetary policy could not implement a more expansionary policy stance than is currently the case in the euro area as a whole without endangering their credibility and the maintenance of price stability. These observations are broadly supported by the experience here in the United Kingdom. Despite the extra degree of freedom offered to policy-makers by remaining outside the euro area, economic activity in the UK remains further below its pre-crisis peak than either in Germany or France. In relative terms, the depreciation of sterling against the euro has not cushioned growth but rather led to a higher rate of domestic inflation in Britain than in the euro area. In sum, I would maintain that there are no clear reasons for believing that cross-country variation in economic performance within the euro area has proved larger than would have been the case if national monetary policies had been retained and the euro not introduced.

Current challenges therefore do not call into question the primacy of the ECB’s objective of price stability. On the contrary, it is precisely in this challenging environment that the benefits of price stability for Monetary Union as a whole will be reaped. The credible achievement of price stability reduces overall uncertainty in the macroeconomic environment and thereby keeps risk premia embedded in financial yields lower than would otherwise be the case. In turn, this will foster growth, and thus provide support to those countries facing financing difficulties. At the same time, price stability is a crucial element in restoring stability to financial markets and improving market access for distressed sovereigns and banks. That said, we must be careful not to overburden monetary policy, in both its standard and non-standard incarnations. Obviously, monetary policy cannot take up the slack where fiscal or other authorities fail to live up to their responsibilities. While central banks can, should and do provide liquidity support to financial markets, they cannot provide solvency support. That would represent an encroachment upon the domain of  6  See the analysis presented in Giannone, D., M. Lenza, H. Pill and L. Reichlin (2011). “Non-standard monetary policy measures and monetary developments,” ECB Working Paper No 1290. 7  See the framework developed in Ciccarelli, M., A. Maddaloni and J-L. Peydró (2010). “Trusting the bankers: A new look at the credit channel of monetary policy,” ECB Working Paper No 1228.
The greater premium on strong fundamentals, policy coherence and predictability will likely remain. There will be no one right answer in managing the trade-offs that come with the changed environment, and adjustment will sometimes be difficult. We will undoubtedly experience further bumps in the road. The renewed volatility we saw last month is evidence enough of that. Yet, I think we can remain generally optimistic about the prospects for adjustment so long as market participants continue to appropriately discriminate across countries, rather than treating EMEs as a single group. Furthermore, many EMEs generally appear to be better equipped today to handle the Fed’s prospective exit from its exceptional policy accommodation than they were during past tightening cycles. This reflects the fundamental reforms that EMEs have put in place over the  4  BIS central bankers’ speeches  past 15 years, as well as the hard lessons learned from past periods of market stress. Among the positives are: •  The absence of pegged exchange rate regimes that often came undone violently during periods of acute stress;  •  Improved debt service ratios and generally moderate external debt levels;  •  Larger foreign exchange reserve cushions;  •  Clearer and more coherent monetary policy frameworks, supporting what are now generally low to moderate inflation rates;  •  Generally improved fiscal discipline; and  •  Better capitalized banking systems, supported by strengthened regulatory and supervisory frameworks.

It is also encouraging to note that rating agencies have come forward to formulate rating methodology and review for takaful operators. Third area relates to the need for joint effort to shape prudential rules for takaful. For the formulation of prudential standards, the setting up of the IFSB remained one of the landmark developments in this decade. Established in 2002, the IFSB's core role is to promote prudent, transparent and robust development of the Islamic financial services industry through the promulgation of international prudential standards that are consistent with the principles of Shariah. The IFSB provides the platform for cooperation among the regulators through meetings, conference and the setting-up of working groups that give  BIS Review 95/2007  3  opportunity for the regulators to discuss and exchange information on issues confronting Islamic finance. For takaful industry, two developments are relevant that are: i.  the issuance of Issues Paper jointly by IFSB and IAIS on the applicability of IAIS core principles to takaful, and  ii. the formation of a working group to formulate corporate governance standard for takaful industry. In view that the formulation of the IFSB standards involves consultation with IFSB members, I would like to call more takaful operators to be members of the IFSB so as to provide the opportunity for the players to be part of the official consultation procedure for IFSB and to make comments on draft IFSB standards.
As regards gross capital formation, investment in housing will be spurred by the generation of employment and the availability of low-cost financing. This latter factor will also be conducive to business investment, further to the far-reaching clean-up of corporate balance sheets in recent years. With respect to external demand, exports may be expected to continue outgrowing the rate of expansion of the very markets on which they are targeted, which reflects the gains in competitiveness I referred to earlier. But I believe mention should also be made of a structural change, namely the most notable growth in the number of Spanish companies permanently – not just occasionally – orienting their activity towards foreign markets, without forgetting the gains in market share in their domestic markets, as gains in competitiveness enable firms to compete better not only abroad but also, obviously, in the domestic market against imports. Risks The Spanish economy has moved into 2018 on the back, we may say, of significant expansionary inertia. On the external front, and in Europe as a whole, we do not yet know and it is not easy to estimate the impact that the United Kingdom’s exit from the European Union may have, the impulses that the protectionist policies in various countries are prompting and the effects that may stem from the re-balancing of the Chinese economy.

There are no insolvency laws or bankruptcy forum to address sovereign solvency problems, and IMF attempts to do so during the last decade failed, for several reasons. What is clear is that in the case of an insolvent sovereign, further official finance can only be provided when that sovereign restructures its debts and, at the same time, undertakes serious and credible domestic fiscal adjustment and structural economic reforms.5  3  See US Treasury Secretary Rubin, 1998. 4  The results of the simulations have to be viewed with caution since they are sensitive to the quality of the underlying data and the assumptions used in the exercise. 5  See, for instance, Roubini, 2002. 2  BIS central bankers’ speeches  The third feature that generally sets sovereign and corporate debt workouts apart is the externalities they may generate. A debt restructuring of a sovereign may have severe implications, both for the debtor’s and the creditor’s economies. Most of the experience in this area has involved less developed countries. In these cases private sector involvement has largely been a concern for foreign creditors. Taxpayers in creditor countries were affected, depending on the size of the exposure of their respective financial system and on whether the soundness of that system was jeopardised. Measures have been used in the past to try to reduce this impact, in particular through regulatory forbearance. One example is the prudential measures which, during the 1980s, permitted US banks to book Brady bonds at their nominal value.
It is not the MPC’s job to control house prices, any more than it is our job to control share prices or the exchange rate; but just as we would not ignore the wider economic effects of a high exchange rate or a boom in the stock market, so we cannot, and do not, ignore the influence of soaring house prices on consumer spending and hence on the overall pressure of demand. Much attention has been paid to the historically high level of house prices relative to earnings, and what this might mean for the future path of house prices. A less discussed question - of more interest to you - is how much influence the current strength of the housing market is having on household spending; and what impact a weakening in the housing market might have on consumers. 2  BIS Review 41/2004  Healthy as household spending has been in the last few years, there has not a consumer boom on anything like the scale of the late 80s, when house prices last took off. Since early 1998, house prices have risen sharply relative to incomes; but household spending has only grown broadly in line with incomes. A buoyant housing market may still have had some influence on spending; and spending and house prices may have been influenced by some of the same factors. But spending and house prices do not seem to have moved together as closely as they have done in the past.

Monetary policy decision Before commenting our decision today, I would like to point out the changes that are shaping our current environment. In December 2005, when the present cycle of interest rate hikes began, we were concerned with the normalisation of the interest rate level – at the time the Libor was at 0.75% – while allowing the economy to reduce its level of unused resources. Our concern now is to ensure that monetary conditions are such that the healthy state of the economy does not jeopardise price stability in the medium term. We are still observing that the competitive pressure in the market is high, the labour market very flexible and that movement in the monetary aggregates is moderate. However, my analysis of the current situation has demonstrated that the inflation outlook has deteriorated in different respects since our last assessment: higher oil prices will have an impact on the consumer price index; economic performance, which is better than expected, will result in an improved utilisation rate and increase pressure on prices and, finally, a renewed weakening of the Swiss franc has neutralised the intended tightening in monetary conditions. Today's decision to raise the target range for the three-month Libor by 25 basis points takes into account this deterioration in the outlook for price stability. Inflation forecast graph I will now turn to the last part of my remarks. What is our inflation forecast?
In the euro area, the impact of these developments has been amplified further by Stage Three of Economic and Monetary Union, in particular as a result of the introduction of the euro, the single monetary policy and the integration of the euro area financial markets. I shall now briefly discuss how these underlying factors are expected to affect the banking sector. First of all, technology has already been shaping the structure of the financial system. It has reshaped the relative costs of different banking and financial services and facilitated the provision of new types 1  2  ECB Monthly Bulletin, “The euro area one year after the introduction of the euro: key characteristics and changes in the financial structure”, January 2000; ECB Occasional Paper Series No 1, “The impact of the euro on money and bond markets, July 2000”. European Central Bank, “Possible effects of EMU on the EU banking systems in the medium to long term”, February 1999; ECB Monthly Bulletin, “Banking in the euro area: structural features and trends”, April 1999. 1  BIS Review 83/2000  of services. The costs of collecting, processing and using information have decreased dramatically. This has, for example, led to greater efficiency in the provision of financial information and better techniques for assessing and pricing risks, in turn reducing the cost of external finance. On balance, it has tended to favour markets more than banks as it has allowed the former to rely more heavily on public rather than private information.

It has also affected banks’ income and cost structures, as they have been able to make profits as a result of advances in technology. That is, banks have been able to specialise in the provision of information and the monitoring of credit exposures, for example in the context of loan securitisation, thus raising the share of non-interest income. On the other hand, banks’ profits have come under pressure in some areas, such as lending to large firms. This resulted from the fact that technological progress has opened these areas to competition from inside the domestic banking sector, from international banks and also from other financial intermediaries such as institutional investors. In point of fact, the development of institutional investors has been facilitated by technological changes reducing the costs of collecting savings, gathering and disseminating public information, and assessing risks. Technological development has also facilitated the rapid development of new financial products. While a large proportion of innovations would not have been possible without the breakthroughs achieved in financial theory, it has been predominantly technological progress that has made the widespread use of these innovations possible. The second factor underlying the structural changes in the financial system and banking sector is the process of financial liberalisation which has been ongoing for some time already. It has allowed an increase in the overall level of competition in financial systems. In the EU, financial liberalisation gained momentum with the Single Market programme.
In this context, the path consistent with the end-year target and the uncertainty bands defined for the end of each quarter of 2008 are given in Table 1. Table 1: Inflation path consistent with the end-year target and the uncertainty band March  June  September  December  Uncertainty Band (upper limit)  9.10  8.50  8.30  6.00  Path Consistent Target  7.10  6.50  6.30  4.00  5.10  4.50  4.30  2.00  with  the  Uncertainty Band (Lower Limit)  In case of realizations of the end-of-quarter figures outside the band, the Central Bank shall submit an open letter to the Government disclosing the reasons of the deviation and the measures already taken and to be taken for convergence to the target, and share this letter with the public. Recently, the Overview chapter of the Inflation Report has been restructured in line with accountability principle. Accordingly, the Central Bank has started using Inflation Report to share its view pertaining to inflation and monetary policy outlook and the necessary measures to be taken to keep inflation close to the target. Thus, besides being the main communication tool of the Bank, the Inflation Report has therefore assumed an important role with respect to accountability principle as well. Accordingly, there will be more references given to the Inflation Reports in the case of possible open letters in forthcoming periods.

While, it forms a basis for the accountability principle, the law does not specify the size of the deviation from the target that will require such an explanation. In other words, details of accountability mechanism are left to the Central Bank’s own initiative. Therefore, the Central Bank has established an effective and enforceable accountability mechanism by setting a symmetrical uncertainty band of 2 percentage points in both directions around the point target. As stated above, the inflation target has been defined over a very comprehensive CPI index. The CPI index also comprises of price items that are beyond the control of the monetary policy such as food, energy and administered goods. In emerging markets like Turkey, shortterm fluctuations in exchange rates can lead to unpredictable temporary fluctuations in inflation as well. Since a sudden reaction of monetary policy to factors that are beyond its control will increase volatility in macroeconomic variables, inflation-targeting central banks adopt a medium-term approach and allow temporary fluctuations in inflation as long as the expectations are under control. In this framework, the primary objective of setting an uncertainty band is to establish a measurable criterion that will enable to determine to what extent the deviations from the point target will be tolerated with respect to the accountability principle. In view of the above-mentioned factors, it has been decided to keep the uncertainty band at 2 percent for 2008 as well.
In a market with a sufficiently large share of such deep-pocketed arbitrageurs, it can be argued that the development of house prices relative to incomes can be largely accounted for by the substantial decline and then flattening out of the real risk-free interest rate over this period. Miles and Monro (2019) apply such a framework to demonstrate this. However – as I will go on to describe – this relationship does not fully explain house price moves over shorter time periods, which may be affected by credit conditions. 6  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  6  decisions (as housing is also an asset). In this literature, expectations of future income, future interest rates, and future house prices and can all play a role. There is some evidence that current interest rates and current house price growth have an important influence on expectations (Charts 4 and 5). All of these factors were likely at play during the pre-Covid decade. Chart 4: Momentum in annual asset price growth 1.0  Regression coefficient on lagged asset price inflation using annual data  0.8 0.65 0.6 0.33  0.4 0.2 0.0 House prices  FTSE all share  Sample uses annual data from 1971-2020 for house prices, from 1977-2020 for FTSE allshare.

These simplifying assumptions mean that the analysis and resulting figures should be taken in context. 9  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  9  Chart 6: Mortgage debt: income  Chart 7: Price and non-price credit conditions 8 Percentage  140 Counterfactual  Actual  pp spread to OIS  Cumulated net percentage balances  -600  6  -400  4  -200  2  0  120 100 80 60 40  0 2007  20 0 70  75  80  85  90  95  00  05  10  15  200 2010 2013 2016 2019 2y75% mortgage spread (lhs) 2y90% mortgage spread (lhs) Availability of secured credit (CCS, rhs) Credit scoring criteria Maximum LTV  20  The blue line represents estimated demand for mortgages and the resulting impact on aggregate mortgage debt, under the assumption that there is no shortage of mortgages. Demand for mortgages is estimated based on factors including household wealth and incomes, the housing stock and the elements that contribute to the user cost of housing (including interest rates, maintenance and depreciation costs, property taxes, and expected capital gains). It is estimated for the period 1984-2007 when most borrowers were not credit-constrained. This forward demand equation is then projected forward based on realised values for incomes, house prices and the stock, assuming there are no constraints on credit availability or access to mortgages.
Figure 9 Chile: Total export volume and price (annual change, percent) 60  60  45  45  30  30  15  15  0  0  -15  -15  -30  -30  99  00  01  02  Volume  03  04  05  06  07  08  Price  Source: Central Bank of Chile. BIS Review 41/2009  13  Figure 10  Economic perception  (diffusion indices, percent) Business confidence (1)  Consumer confidence (2)  70  140  120  60  60  120  100  50  50  100  80  40  40  80  60  30  30  60  40  20  20  40  20  10  07 Brazil Chile U.S. Japan  Jul. 08  China Mexico Eurozone  Jul. 09  07  S. Korea  Jul. Brazil China U.S. Mexico  08  Jul. 09  S. Korea Chile Japan Eurozone  (1) S. Korea is anchored in 100. (2) Series for Japan, the Eurozone and S. Korea anchored in 50. Other series, indices with base January 2007=100. For Chile, Adimark's IPEC and ICARE/Universidad Adolfo Ibañez indices. Sources: Adimark, Bloomberg and ICARE/Universidad Adolfo Ibañez. 14  BIS Review 41/2009

Should the repo rate be used to slow down this development to try to prevent prices becoming so high that the fall, when it actually  BIS Review 37/2005  3  comes, will be too fast and too far? There are many examples of how the air has gone out of asset markets and thereby triggered or aggravated a downswing in economic activity. Or is it more reasonable to wait until the “bubble” has burst and then try to counteract the effects the best one can? This question is neither a simple one nor a new one. It is discussed by central banks around the world, whether or not they have specific inflation targets. And there is hardly a clear-cut answer. As I see it, the seriousness we in Sweden should attach to households' increased debt burden is closely connected with how we assess price trends in the housing market. Although there has so far been a large rise in prices, particularly in metropolitan areas, we have not seen the clearly speculative tendencies apparent in other markets, for instance Australia and the United Kingdom. In Sweden we still usually buy housing to live in it ourselves. In some other countries, where the tax legislation and housing loan markets are different from in Sweden, people buy one or more additional properties in the hope that they will rise in value, rather like buying equity or other financial assets.