samchain/econo-pairs-v1 huggingface dataset:
Urban Bäckström: Monetary policy in a small open technology-oriented economy outside the major currency blocs Speech by Mr Urban Bäckström, Governor of the Sveriges Riksbank and Chairman of the Board of Directors and President of the Bank for International Settlements, at the Conference on New Challenges for Credit Markets and Monetary Policy, hosted by Handelsbanken and held in Stockholm, 18 May 2001. *  *  *  Thank you for inviting me to this conference and to discuss the Swedish economy and monetary policy with such a distinguished group of people. Today I intend to begin by looking back at economic developments in recent years in Sweden. That should help to put the current discussion about the Swedish economy in perspective. After that I shall be saying something about the economy's recent cyclical path and how I assess the future in the light of the information that is presently available. Economic policy realignment in the early 1990s The direction of Sweden's economic performance during the 1990s contrasts sharply with the unstable, inflationary path we experienced in the 1970s and '80s. That stop-go policy contributed to the recession in the early '90s, which was the worst for over sixty years. The 1970s and '80s illustrate how a long period of high and variable inflation creates an atmosphere of uncertainty and instability. Slowly but surely, long-term conditions for production deteriorate. It was partly in the light of these experiences that Swedish economic policy was realigned in the early 1990s.

The apparently unending increase in expectations of rising share prices on U.S. stock markets stimulated the capital imports, which continued to such an extent that the dollar rose to high levels against other currencies. Together with large investments in the real capital stock, which led to a capital-deepening process and hence an acceleration of productivity, the dollar's appreciation held back the price impulses that normally accompany growing pressure from wage costs. BIS Review 42/2001  3  It is not yet possible to tell to what extent the U.S. economy will experience a lengthy, more difficult process of adjustment. That is probably the background to how the Federal Reserve has acted in recent years. A series of interest rate hikes during 1999 and 2000 was presumably intended to restrain the euphoria and excessive expansion. When a downturn then became evident, it seemed desirable to try to limit the mood swing by means of the marked interest rate cuts we have seen this year. It is precisely the Federal Reserve's vigorous action that underlies certain analysts' view that the current economic slowdown will be fairly mild and brief. …and the tensions between supply and demand in Sweden Since the previous inflation report, demand in the Swedish economy has slowed down somewhat. This is true in particular for industry. Incoming statistics also indicate a slightly weaker growth in household sector consumption. Employment, on the other hand, remains strong even though more forward indicators of the labour market are signalling slower growth later this year.
And, therefore, credibility is not to be taken for granted in the way we seek to stabilize the path of the economy in the face of shocks. At its broadest, in a world where medium-to-long-term inflation expectations are anchored principally by virtue of the central bank conducting policy consistent with the declared regime, the policymaker has little incentive to ‘cheat’ on stabilisation policy. That is because developing a reputation for being time inconsistent on that part of its task would risk a perception that it would be time inconsistent on achieving the inflation target over the medium run. In other words, it would risk undermining the credibility of the regime. A potential area for research is whether a ‘stabilization bias’ problem would reappear in models that combine central bank discretion with persistent deviations of mediumterm expectations from target stemming from imperfect or gradual learning by households and firms about the authority’s long-term objectives and its commitment to them. (c)  Would price-level targeting make stabilisation policy more effective? It is occasionally argued that stabilisation policy would be more effective if central banks targeted the price level rather than a rate of inflation. That need not mean a flat price level. It might mean that the central bank committed to deliver a path for the price level with a positive rate of inflation on average. The difference from today’s inflation targeting would be that bygones would not be allowed to be bygones.

The number of countries engaged in this global event and consequently the number of the involved of children and young people has been trended upwards. This year, GMW will take place in around 175 countries and will involve around 40 million children and young people. The global health and economic emergency caused by COVID-19, and its social effects have affected almost all aspects of life to all age groups of the society. We know that different age groups are experiencing these effects in different ways. Hence, related to students and younger people, in addition to health aspect, the pandemic has posed to them challenges in the field of education and employment. For these reasons, it is more important and relevant than ever, to provide them with the required knowledge on the personal finance management and the correct use of banking products. In this context, the theme of this year competitions and activities to take place is “Take care of yourself, take care of your money”. This theme highlights the crucial importance of knowledge in an evolving digitalised and innovative market, which enable people to avoid physical contact while using the financial and banking products, hence providing for a better protection of public health.
22 Bholat et al (2015). 16  5  All speeches are available online at www.bankofengland.co.uk/speeches  5  and techniques have been used in recent Bank research to improve our understanding of the functioning of the economy and financial system. Volume th  The statistical bedrock of macro-economic analysis, since at least the middle of the 20 century, has been 23  the National Accounts. The National Accounts have always relied on an eclectic range of data. In the  past, manor accounts on land use, crops and livestock were used to estimate agricultural output. Industrial production was measured by sources as varied as numbers of iron blast furnaces and books listed by the British Library. And services output was estimated based on merchant shipping tonnage. 24  With more data than ever coming on stream, that use of new and eclectic data sources and methods is, if anything, gaining further ground within statistical agencies. In the area of consumer price measurement, MIT’s “Billion Prices Project” uses data from over 1,000 online retailers in around 60 countries to collect 15 million prices on a daily basis. This approach has been found to offer a timelier (and cheaper) reading on 25  consumer prices than traditional surveys. Online price data have also been found to improve short-term  26  forecasts for inflation in certain markets. In the same spirit, the UK Office for National Statistics (ONS) is exploring the use of ‘web scraping’ to complement existing price collection methods.

Dealing with capital inflows Traditionally, the primary concern in emerging market economies about large capital inflows has been that they may be financing an unsustainable current account deficit that could derive in a sudden stop of capital inflows. A sudden stop scenario is particularly costly since it involves a painful restructuring of the economy from non-tradables to tradables and a large correction in the exchange rate with potentially large balance sheet effects, which could result in high volatility and output losses. This view regarding large capital inflows has largely been shaped by current account crises like the ones in Mexico and East Asia in the 1990s. As the evidence I showed, the current account in emerging market economies still displays, on average, a surplus. Therefore, they do not currently present a serious threat, but it is necessary to explore the policy implications of large capital inflows. 1  1  Here I will discuss briefly the main tools from a macro point of view. For further discussion on these policy options, see De Gregorio (2010a). 2  BIS Review 124/2010  In many experiences capital inflows have been exacerbated by policy actions. Most noteworthy are the attempts of authorities to defend an artificially weak currency. The expectations of an appreciation generated by this policy create further incentives for capital inflows. For this reason a flexible exchange rate should be the first line of defense. This is also consistent with providing the monetary authority independence to use monetary policy.
The yield and forward curves observed in the market are the probability-weighted averages of these possible paths, aggregated across market participants. A perceived binding lower bound on monetary policy rates skews the predictive distribution upward, since it truncates the distribution of conceivable future short-term rates from below: as the overnight interest rate reaches the lower bound, interest rate paths that would have embodied expectations of a further cut at a higher level of the actual overnight rate are, by definition, eliminated from the set of conceivable outcomes; conversely, rates above the lower bound receive a higher relative weight and the expected value of interest rates is mechanically pushed up.3 While longer-term yields are likely to decline even as the central bank cuts the short-term rate towards its lower bound, the truncated asymmetric distribution of expected future short-term rates means that they decline by less than they would away from the lower bound. The resultant tightening bias, in turn, can be quite costly, since it tends to arise in situations of strong and persistent disinflationary pressures and in the wake of a previous sequence of sizeable rate cuts. A policy of negative interest rates mitigates this tightening bias. In particular, the observation that a central bank is prepared to take interest rates to levels below zero induces a re-evaluation of technical feasibility constraints. A salient feature of this re-evaluation is the disappearance of the qualifier “zero” in the economic debate on lower bound constraints.

The funding cost relief is direct for those banks that switch from more expensive options to 9 / 19  BIS central bankers' speeches  TLTRO financing. However, there is also an indirect channel that benefits the entire banking system: while looking ahead banks will have to step up their issuance in order to satisfy regulatory requirements, the TLTRO programme will help avoid cliff effects by allowing banks drawing TLTRO funds to cancel or postpone plans to issue bonds in the market. This reduction in the supply of securities relative to what we would see in the absence of TLTRO III creates a scarcity channel that puts further downward pressure on bank bond yields, resulting in funding cost relief across the board. The upshot of cheaper bank funding is higher credit volumes and lower lending rates to the wider economy via the bank lending channel.9  10 / 19  BIS central bankers' speeches  In fact, our experience with previous TLTROs (TLTRO I and II) was that these operations had a significant effect on funding costs, particularly in more vulnerable euro area countries. Moreover, the lower funding costs were passed through to customers. Particularly in vulnerable countries, banks that participated in TLTROs cut their lending rates by more than their non-participating peers (see Chart 6). The policy package In assessing the impact of our policy package, we must also take into account that the instruments were designed to be complementary and mutually reinforcing.
You can imagine the chaos this caused, even on the scale of the 1970s. And a couple of decades later, many companies and individuals suffered when things went wrong in the Lloyd’s Market. Events like these, resulting in part from poor regulation, of course do great harm to the UK’s reputation as a good place to do insurance business. A more extreme event still was the failure of HIH Insurance in 2001 in Australia. About 200 permanently disabled people claiming on salary continuance policies with HIH stopped receiving their regular payments, which they often relied on for day-to-day living expenses. Thousands of holders of professional indemnity, public liability, home warranty and travel insurance policies found themselves uninsured for claims made by or against them. And almost $ 2 billion of construction activity was put on hold whilst replacement builders’ warranty insurance cover was sought. This illustrates the fact that we particularly need to be mindful of innocent third parties who don’t actually buy insurance policies, such as the victims of motor accidents and employees who suffer workplace injuries or illnesses. Such covers are compulsory and the motorists and companies who buy them are even more likely to select the lowest price. Without regulation, that would present an obvious opportunity for unscrupulous insurers. 4  All speeches are available online at www.bankofengland.co.uk/speeches  4  You will notice that I have not mentioned the most spectacular insurance failure of all – that of AIG in 2008, which played a significant role in the financial crisis.

On the general insurance side, average motor and household premiums and changes in premiums were not in our assessment affected by the introduction of Solvency II. In both motor and household, rates hardened in 2015 due to greater loss experience, and UK motor insurers were particularly 4  affected by the reduction in the ‘Ogden rate’ . Risk-free market interest rates and corporate bond spreads continue to be the dominant driver of annuity prices – this relationship does not appear to have changed since Solvency II came into effect. The limited impact of Solvency II on pricing should not surprise us, given 5  that the running costs of the new regime represent 0.07% of insurance premiums in the UK, which you could think of (for instance) as 35p on an average motor policy premium last year of £  As we get more experience of operating Solvency II, however, it is right that we make our implementation of the directive work better. That means, for example, reducing unnecessary costs and complications which have no prudential benefit. We are therefore consulting on an extensive package of reforms for the part of the Solvency II framework over which we have discretion. We are making a series of proposals to give firms greater confidence in using the MA. We propose to reduce the amount of time firms (and we) have to spend on discussing and agreeing minor changes to internal models. And we will cut reporting requirements, particularly for smaller firms.
The loans have given many countries the breathing space to implement reforms, however, and it is important that they make use of this. At the same time the EU countries have agreed on a number of measures for stricter budget discipline. For example, reforms have been decided on that will strengthen the current fiscal policy regulations. These are measures that do not have an immediate effect, but which nevertheless manifest a political will that should create long-term confidence in a crisis that has largely political overtones. 8  Reinhart, Carmen M. and Kenneth S. Rogoff, “This Time Is Different: Eight Centuries of Financial Folly”, New Jersey: Princeton University Press (2009). 6  BIS central bankers’ speeches  When we held our monetary policy meeting in April, Greece had been granted a second support package by the EU and the IMF, and had reached an agreement with private lenders on a debt write-down in return for promises of fiscal policy tightening. The euro area countries had also agreed to increase the capacity of their rescue funds, which was a step in the right direction. 9 After that, an agreement was reached at the IMS spring meeting to reinforce the IMF’s resources with USD 430 billion for lending to crisis-torn countries. Building up these financial “firewalls” is an important step in creating confidence in the financial system. There is often impatience with regard to the sluggishness of the political processes dealing with type of problems we are now seeing in the euro area.

At the same time as it will take a while for the euro area countries to bring down their debt levels, it is important to point out that these countries are not alone in facing budget consolidation. The United States is also facing the challenge of improving its public finances. USA – fiscal policy challenges The US public debt amounted to 103 per cent of GDP in 2011, and is expected to rise to 107 per cent in 2012 and 110 per cent in 2013. As a comparison, the average public debt for the 14 largest euro area countries amounted to 80 per cent in 2011, while the forecast for 2012 and 2013 is 82 and 84 per cent respectively. 7 The well-known economists Reinhart and  6  The World Economic Forum weighs together a number of indicators of a country's competitiveness, for instance, the quality of the infrastructure, the level of education, financial development, etc. See http://gcr.weforum.org/gcr2011/ for a more detailed definition. 7  IMF Fiscal Monitor (April 2012), “Balancing Fiscal Policy Risks”. BIS central bankers’ speeches  5  Rogoff conclude in an extensive study that a public debt exceeding 90 per cent of GDP entails risks to long-term growth and stability. 8 When public debt reaches these levels, economic growth is rarely sufficient to reduce the debt, in their opinion. The US economy is thus facing substantial fiscal policy challenges.
Although the adjustment would ultimately be greater if it occurred slowly, a very rapid contraction would deliver such a jolt to the finances of many households and businesses that loan losses would result. It is likely that a range of risks will have to be faced, but efforts must be made to minimise the probability of a financial crisis that could harm potential output and living standards. In the final  2  BIS Review 41/2007  analysis, the critical factor is how strong and well equipped the financial system is to withstand shocks, i.e. its resilience. The crucial factor behind the Central Bank’s assessment that the financial system is now more resilient to shocks is the banks’ stronger liquidity and equity positions than a year ago. The major commercial banks have a diversified income base that extends to many countries. Another advantage is the somewhat different business models they have used in their expansion. Their diversified assets give less reason to fear the consequences of an unexpected strain on the financial system. Iceland’s strong fiscal position underpins the banks’ international credit ratings. Other important factors have been the strengthening of Iceland’s foreign reserves and the Central Bank’s capital. Both measures represent natural responses to changes caused in the Central Bank’s operating environment by the very rapid expansion of the commercial banks, especially abroad. Although the main function of a financial stability report is to highlight risks, factors conducive to strengthening the long-term economic outlook should also be duly noted.

We are able to control the interest rates in the money market via various policy instruments through an efficient liquidity management and affect the money market rates in the favored direction and to the required extent. Accordingly, I would like to underline that in addition to the average funding cost, Interbank Repo Market rates shown in the chart should be closely monitored for a better assessment of the monetary policy stance. We will gradually raise this predictability of the monetary policy in the period ahead and ensure that interest rates in the Interbank Money Market to hover around 6.75 percent except the days on which the EPS is implemented. To enhance predictability in the funding strategy, we will limit the stock amount of the weekly funding we provide through the quantity auction method at 4.5 percent, not to exceed TL 10 billion until the year-end. Moreover, issues regarding the implementation procedures besides the funding amount to be made under this method as of 2014 will be elaborated on in the Monetary and Exchange Rate Policy for 2014 to be published in December 2014. Under this outlook with a gradual increase in predictability, I would like to remind you that our monetary policy will remain cautious until the inflation outlook becomes consistent with the medium-term projections. In the third quarter, interest rates were down from the previous reporting period across all maturities, with a larger decrease in the shorter end, while the yield curve trended upwards (Chart 5).
the seventeen countries sharing the single currency. The status and role of the United Kingdom, the dynamics of the British domestic debate on Europe, and the cooperation with the Continent in addressing the crisis are not the focus of my remarks. I have three main propositions. First, membership of EMU entails much deeper policy changes than were originally realised. In 1991, Hans Tietmeyer, the former President of the Bundesbank, remarked that “monetary union is not just a technical matter. It is in itself, to some extent, a political union”. What has become clear is that countries that adopt the euro as their currency are required to adjust fundamentally the way in which they conduct their economic and financial policies. At the same time, ensuring overall stability requires far-reaching coordination in economic and financial governance. It would be difficult to understand that in the world’s second largest monetary area governance is outsourced solely to the markets and ratings agencies. Effective governance of an economic area of such importance requires much closer economic and financial union. Second, in response to the crisis, a much more radical change in euro area governance has taken place than many observers seem to acknowledge. Europe tends to reform incrementally, at times creating frustration at the pace of change. But those increments now add up to a fundamental overhaul of its economic management.

Italy has agreed to a technocratic government to ensure structural reforms are implemented, and invited the IMF to give extra credibility to this process. All euro area countries, except those under a programme, have committed themselves to bringing their budget deficits below 3% of GDP by 2013 at the latest. Overall, the forward commitments of euro area countries to fiscal sustainability go far beyond what has been agreed in the U.S. or Japan. Each of these measures, seen individually, may not represent the “shock-and-awe” or “big bazooka” that some commentators and markets participants call for. But when seen collectively, they represent a comprehensive broadening and deepening of euro area economic governance. And relative to a reasonable benchmark – the status quo ante – they are very significant developments. It is also worth noting that many steps have been taken to strengthen the financial sector regulation and supervision. Under the leadership of the G20, a remarkable amount of work has been done by the Financial Stability Board (FSB) and the Basel Committee in a demanding timeframe. Profound regulatory reforms need to be implemented to address the underlying deficiencies that have become apparent in our financial system. In general, Europe is exceeding international benchmarks in implementing these reforms. The Commission issued a proposal in July 2011 aimed at transposing the Basel III framework into EU Law. By doing this, it is among the first to introduce the Basel III framework and is taking a leading role in delivering on the G20 commitments.