samchain/econo-pairs-v1 huggingface dataset:
03.03.2021  The European Central Bank’s monetary policy: response to the pandemic crisis and future challenges* Universidad Autónoma de Madrid Pablo Hernández de Cos Governor of the Banco de España  *English translation of the Spanish original  Distinguished Rector, fellows, ladies and gentlemen, good morning: It is a great pleasure for me to be able to participate in this event organised by the Universidad Autónoma de Madrid. First, I would like to take this opportunity to share with you some thoughts on the role that the European Central Bank's (ECB) monetary policy has played in response to the COVID19 pandemic in the past year, helping to stave off some of the more serious consequences, at least from the economic standpoint, of the different waves of the disease in Europe. Second, I shall give a brief overview of current economic developments in the euro area and the role that monetary policy could play over the coming quarters. In the third part of my speech, I would also like to reflect on some of the medium and longterm challenges for monetary policy in advanced economies, which have prompted the main central banks, among them the ECB, to launch a review of their monetary policy strategy. ECB monetary policy measures in response to the pandemic The outbreak of COVID-19 in Europe in late February and early March 2020 triggered an unparalleled economic shock which required an urgent and decisive economic policy response to prevent the effects of the crisis from becoming permanent.

John C Williams: A new chapter for the FOMC monetary policy framework Remarks (via videoconference) by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the “In Conversation: New York Fed Presidents on COVID-19” Bretton Woods Committee Webinar, 2 September 2020. * * * Thank you, Bill. It’s great to be with you today, at least virtually, and I am looking forward to our discussion. But before we dive in, I thought I would offer some thoughts on the announcement made last week about the completion of the Federal Open Market Committee’s review of its monetary policy framework and the issuance of a new Statement on Longer-Run Goals and Monetary Policy Strategy.1 Before I continue—and you know what comes next, Bill—let me give the usual disclaimer that the views I express are mine alone and do not necessarily reflect those of the Federal Open Market Committee or anyone else in the Federal Reserve System. Allow me to add one last “before” caveat. Before I explain the new statement, it is important to reflect on the context in which the original statement was issued. Then I’ll share how the monetary policy framework of today positions us best to achieve our goals and manage the very challenging environment that lies ahead. The original consensus statement was issued back in January 2012 and represented an important step in the Committee’s progress toward greater transparency around its goals and strategy.
Rises in international goods and energy prices pose a particular challenge to UK monetary policy. Not only do they exert a strong direct influence over inflation as I’ve discussed, but – since the UK is a net importer of food, energy and goods – they also imply a squeeze on the real incomes of UK households. Simply put, the price of what the UK is selling has fallen relative to what the UK is buying, leaving UK residents worse off. So the MPC forecasts that, as we move towards the end of this year, this real income squeeze coming from higher international energy and goods prices will slow domestic demand and eventually result in higher unemployment and a looser labour market. That loosening does much to cool the domestically generated wage, cost and price pressures on which the MPC is rightly focused. It is this component of inflation over which UK monetary policy exerts greatest influence. That said, the bulk of the forecast decline in headline inflation in the MPC’s baseline projection owes to the assumption that energy prices will stabilise. Mechanically, the assumption of constant gas and oil prices – what economists call a ‘random walk forecast’ – that is embodied in the MPC projections beyond the next six months implies a zero contribution of energy prices to UK headline inflation in eighteen months’ time, in stark contrast to the strong positive contribution seen over the past eighteen months.

Positive transformations taking place around us will continue to pave the way for new growth opportunities for the industry. Collectively, we need to understand these developments and leverage on them to advance economic and social goals, and manage the attendant risks. Today, I would like to touch on three key issues, the rise of fintech and its impact on Islamic finance, the growing importance of responsible, inclusive and sustainable finance and the preconditions necessary to sustain a value-based financial system. One of the most significant transformational developments of our era is the technological revolution. More specifically, the fintech revolution was made possible by maturing social, mobile and cloud technologies. The digital revolution and widespread penetration of technology-driven applications in nearly every segment of the financial sector is already upon us. Fintech innovations are fundamentally altering the way we experience and deliver financial products and services. According to a recent McKinsey report, the number of fintech start-ups globally has now exceeded 2,000, more than twice the number less than a year ago. Such growth is expected to continue as innovators tap into the preferences of millions of technology savvy millennials who are more receptive to new ways of consuming financial services. Fintech is challenging the status quo of the financial industry. New business models will emerge. Delivery channels will challenge existing norms. Transaction costs will be reduced. Rather than looking at the fintech revolution as unwelcoming, financial institutions ought to embrace it as an opportunity.
This generally wasn’t necessary during the Great Moderation, when the economy was largely subject to a series of demand shocks. The inflation target could be achieved without causing undesirable volatility in 2  output and employment (so-called “divine coincidence” ). Despite the crisis, divine coincidence has continued to reign in the euro area and the US (see charts in the Appendix). Large output gaps and below-target inflation have pointed monetary policy in the same direction. That, unfortunately, has not been the case in the UK economy, which has been subject to a series of major supply shocks over the past five years, creating tensions between short-term output and inflation stabilisation. Brexit is the latest and potentially largest example. Brexit is a regime shift that has markedly increased the range of possible outcomes for the UK economy and therefore the potential paths of monetary policy. 1  Another dimension to uncertainty is ‘model’ uncertainty around the structure of the economy. That is distinct from uncertainty about possible future events, or ‘shocks’, affecting economy. Model uncertainty captures uncertainty around how the economy responds to those events, including to changes in monetary policy itself. 2 See Blanchard, O., and J. Galí (2007). "Real Wage Rigidities and the New Keynesian Model". Journal of Money, Credit, and Banking, 39(1), pp. 35-65.

Crucially, the Committee has also initiated an annual stock take of the supply side of the economy. It now publishes its best collective judgments on the natural rate of unemployment, the output gap, as well as the expected growth in productivity, labour supply and potential output. To draw out these points consider three examples of forward guidance by the MPC. The first occurred five years ago when the economy began to recover from the worst downturn since the Great Depression. During previous periods of accelerating growth and firming business confidence, the MPC had always tightened policy significantly (as evidenced in the correlation between survey indicators and MPC votes seen in Chart 1). On the basis of this past behaviour, the MPC would have raised interest rates by 2 to 3 percentage points between August 2013 and the end of 2014. For anyone who might suggest the MPC should have followed that reaction function, note that, even on unchanged policy, CPI inflation in the summer of 2016 was running at only about ½% and core CPI inflation around 1¼%. 3  In other words, the amount of volatility in interest rates should match the amount of uncertainty surrounding the economy. There should ideally be no additional volatility, or risk premium, due to uncertainty about how policy would respond.
And the Bank’s Agents have heard reports of some smaller businesses preferring to seek out non-bank alternatives for finance, including peerto-peer lending, insurance companies and investment funds to diversify their funding sources. So when assessing trends in credit supply, it is important to consider flows of lending from all sources, not just the banks. The extension to the FLS to include lending related to non-bank credit providers (including finance leasing corporations and factoring companies) recognises the importance of some of these forms of lending to SMEs. Finally, there are a number of small “challenger” banks who are successfully using the FLS to help expand and take market share from the more traditional lenders. You sometimes see the phrase “the banks are not lending to SMEs”. That is simply not true when you look into the details. The data on SME lending is not fully comprehensive nor of the best quality. But the data we do have suggest that since the launch of the Scheme, gross lending to SMEs has been around £ although repayments have been slightly higher, so the overall picture of slightly negative net lending is the difference between two much larger numbers. Within that aggregate picture there are many individual banks which have expanded their net lending to SMEs whilst others have contracted. That is partly why I have been advising business contacts to “shop around” for credit if they can.

They have reduced their budget deficits, pushed down their inflation rates to less than 2%, and brought their growth rates close to 3%. Favourable global economic conditions made it possible to create an environment suitable for the proper functioning of the system. Meanwhile, the European Monetary Institute completed the necessary preparations for launching the ECB, and transferred its responsibilities to that Bank at the beginning of July 1998. At its founding, there was a broad consensus that the ECB should be independent. There were continuing discussions about its main target, however, and even though this question seems to be resolved, sometimes it still appears on the agenda. The main point being discussed is that while price stability is specifically mentioned in the constitutional agreement as an objective of the ECB, the role of the growth and economic stability objectives is less clear. It is generally agreed that the primary task of central banks should be price stability, but some still argue that the price stability objective should not conflict but should cooperate with the growth and stability objectives. Others insist that since the existence of price stability brings about high employment and sustainable growth in the medium and long term, there is no conflict between the growth and price stability objectives. I believe that the ECB’s present policies, based on all these discussions, aim at price stability as its primary task, with sustainable growth and low unemployment as major objectives.
The only option that does not involve using another bank account is to buy bitcoins. Ola does not want to do this. Perhaps he is a little stubborn. He wants cash. The bank clerk is patient. He tells Ola that the bank can offer dollar or euro banknotes. Ola sees no alternative and withdraws euro banknotes. But he soon encounters another problem. In order 6/9  BIS central bankers' speeches  to use this currency to make purchases in Norway, the shop has to accept payment in euros. If not, Ola will have to deposit the euro banknotes in his bank account in order to make the payment – bringing him back to square one. What has been lost here? First, Ola has become completely dependent on a third party – the bank: payments can no longer be made directly between two parties, but must be channelled through a bank, a card company or an app. Today, you can settle a payment at a shop or with a neighbour in cash, without involving anyone else. Second, Ola has become dependent on the technology functioning as it should. Technology is not needed to settle payments in cash – as long as cash is available. Third, Ola is no longer anonymous when he makes a payment. All payment transactions using deposit money can be recorded. Anonymous payments are often associated with something negative, such as tax evasion or other criminal activity. But there is another side to anonymity – privacy.

Money must therefore also function as a store of value. The first coins to be struck, imprinted with the king’s mark as a guarantee of their weight, were produced in Lydia almost 2500 years ago – with the reverse bearing the mark of King Croesus. Since then, coins in a variety of metals have been widely used. The currency of Norway was directly linked to a metal for centuries, until the gold standard was abandoned in 1931. 1/9  BIS central bankers' speeches  Wealth in the form of silver and gold coins can – literally – be a heavy burden. The emergence of banknotes that could be exchanged for a specific monetary value in metal made it easier to manage large sums of money. A banknote is in reality a promissory note – an interest-free claim on the issuer. Its value depends on trust that the issuer will keep his word and that the banknote proves to have the promised value. The issue of banknotes by private entities was a fundamentally unstable system. The solution was to establish central banks in order to build abiding trust in the currency. The Swedish central bank, the Riksbank, the first central bank in history, was founded because the issue of banknotes by a private bank – Stockholms Banco – led to a banking crisis. The origins of the US Federal Reserve are similar: during the so-called “free banking” era, private banks could issue their own banknotes in various denominations.
So it really is a pleasure for me to be here today, to have the chance to “get out” and yet still be close to home. Dual mandate The Federal Reserve is charged by Congress with fostering economic conditions consistent with maximum employment and price stability. These two objectives are commonly referred to as our “dual mandate.” The Fed is different from most other central banks in that it has an explicit dual mandate. Although many central banks are instructed to mitigate disturbances to the real economy, most have a mandate to achieve only one goal – maintaining price stability. Usually, this is not an important distinction, since monetary policies that promote price stability are generally consistent with those that support full employment. However, in the rare occasion when tension arises between these two goals, policy must be formulated with careful consideration of the relative performance of one objective against the other and of the risks to the outlooks for both policy goals. Keeping this in mind, I’ll turn now to a discussion of my outlook for the economy and then offer my views on how best to chart a course for monetary policy. Real output gap Four years ago the U.S. economy entered what developed into the deepest downturn since the Great Depression; indeed, many are now referring to 2008–09 as the “Great Recession.” During recoveries from severe recessions, we usually see solid job and output growth, with the improvements in one fostering gains in the other. We are not seeing this today.

Putting these factors together, I would argue that the outlook for inflation is likely to remain low for the foreseeable future. The November FOMC forecasts for core inflation in 2012 were concentrated near 1.8 percent, and the forecasts for total inflation in 2013 and 2014 were in the range of 1.5 percent to 2.0 percent. My own assessment is that inflation will be at the lower end of these ranges. Fed performance Given the high unemployment rate and low job growth, I think it is clear that the Fed has fallen short in achieving its goal of maximum employment. As for the price stability component of our dual mandate, the majority of FOMC participants – including me – judge that our objective is for overall inflation to average 2 percent over the medium term. With my own view that inflation is likely to run below this rate over the next few years, I believe we will miss on our inflation objective as well. What Is the right course for policy? The traditional course of action when inflation is below target and real output is expected to be below potential is to run an accommodative monetary policy. I support such accommodation today. And I believe the degree of accommodation should be substantial. I believe that the disappointingly slow growth and continued high unemployment that we confront today reflects the fact that we are in what economists call a “liquidity trap.” Let me explain.
The Federal Reserve is also standing up programs to support the flow of credit to households, businesses, and state and local governments, so that they can weather this storm and continue to do their work, both now and when normal life resumes.7 Last week, we announced more details on these programs, which altogether provide additional funding of up to $ trillion.8 These programs are executed with the full support of the Treasury. We are also deeply committed to providing transparency around matters such as usage, eligibility, governance, vendor selection, and fees for these programs. The actions by the Federal Reserve, while sharing some similarities with those undertaken during the financial crisis, are specifically designed to deal with the unique economic challenges posed by the coronavirus. Our efforts supporting the provision of credit include a number of programs aimed at different 2/4  BIS central bankers' speeches  parts of the economy and work through different channels. One set of programs supports the availability of credit to businesses—importantly, including small and medium-sized businesses— through loans, commercial paper, and corporate bonds. The second set of programs targets the availability of credit to states and municipalities. But we cannot act alone: fiscal policy is also playing a critically important role. In particular, it can do what monetary policy cannot: provide for the public health response and transfer income to those most affected by the outbreak.

We are then using our existing frameworks to respond where necessary. We are disciplined. Just because something is new doesn’t mean it should be treated differently. Similarly, just because it is outside the regulatory perimeter doesn’t mean it needs to be brought inside. We apply consistent approaches to activities that give rise to the same risks regardless of whether those are undertaken by old regulated or new FinTech firms. Some of the most important questions we are considering include: -  Which FinTech activities constitute traditional banking activities by another name and should be regulated as such? 7  -  How could developments change the safety and soundness of existing regulated firms? -  How could developments change potential macroeconomic and macrofinancial dynamics including disruptions to systemically important markets? And  5  For further details on the New Bank Start-Up Unit, see: http://www.bankofengland.co.uk/pra/nbsu/Pages/default.aspx For further detail on the work of our FinTech Accelerator see: http://www.bankofengland.co.uk/Pages/fintech/default.aspx Systemic risks associated with credit intermediation including maturity transformation, leverage and liquidity mismatch should be regulated consistently regardless of the delivery mechanism. 6 7  4  All speeches are available online at www.bankofengland.co.uk/speeches  4  -  What could be the implications for the level of cyber and operational risks faced by regulated firms and the financial system as a whole? To illustrate some of the issues, consider how FinTech is affecting the financial services value chain (Figure 1).
In the long term, however, the current low level of interest rates is not compatible with price stability. If the economy performs as expected, the National Bank will further pursue the gradual adjustment of its monetary policy that has already been initiated. BIS Review 36/2006  1

In addition, as we have moved far away from near-zero interest rates, it makes sense to shift 3/5  BIS central bankers' speeches  away from a focus on normalizing the stance of monetary policy relative to some benchmark “neutral” interest rate, often referred to as “r-star.” Now, I have spent a good deal of my career studying r-star and I find it to be a useful concept for describing the economy’s longer-run behavior. Having said that, at times r-star has actually gotten too much attention in commentary about Fed policy. Back when interest rates were well below neutral, r-star appropriately acted as a pole star for navigation. But, as we have gotten closer to the range of estimates of neutral, what appeared to be a bright point of light is really a fuzzy blur, reflecting the inherent uncertainty in measuring rstar.8 More than that, r-star is just one factor affecting our decisions, alongside economic and labor market indicators, wage and price inflation, global developments, financial conditions, the risks to the outlook… I think you get the point. Returning to the balance sheet, the question of what exactly the new normal looks like is still being analyzed and discussed at the Fed.