samchain/econo-pairs-v1 huggingface dataset:
This means that abrupt changes in prices or risk have a very low probability. The fallacy of this assumption has been clearly shown by Mandelbrot for stock prices, and it has been further demonstrated in many recent (and non recent) episodes for other asset prices and risk premia. Examples of the use of normal distribution in financial modelling would include the following: •  The most frequently used tool for risk measurement (VaR) frequently ignores "fat tail" risks. Many VaR measures are calibrated according to the expected loss of a portfolio under normal circumstances. Models with "fat tail" distributions are available, but seldom used, due to lack of reliable data over a sufficient period of time. •  Implied volatilities are usually extracted from option pricing, based on normal distribution. They are then used as inputs into trading strategies and models. As a result, the assumption of normal distribution widely "contaminates" the pricing, risk assessment and investment strategies across a whole range of markets and instruments. •  Finally, the pricing of many structured products is based on historical correlations among asset prices, with the assumption that those correlations are stable and do represent the ordinary state of nature. On the contrary, experience has shown that those correlations can change radically during a crisis, frequently collapsing to one, and take price movements to the extreme ends of the probability distribution. Procyclicality Many changes have been introduced in recent years to accounting and capital regimes in order to make them more risk sensitive.

One striking example is the pharmaceutical industry, where very innovative, but also potentially dangerous, products are put on the market with (almost) no accident. The reason, of course, is that those products themselves are subject to strict, and costly, testing and approbation procedures. This cannot be transposed to the financial industry, where innovation takes place under a different regime (with no protection for intellectual property). Nevertheless, some product control or standardization may contribute to reducing extreme risk. For instance, those countries where loan to value ratios were strictly enforced tend to experience less credit accidents than others. Those trade-offs may not be stable in time. For that reason, it is important that regulation and supervision become more responsive to changes in circumstances and the macro economic environment. This is the essence of the so called "macro prudential" approach to financial supervision. Implementing such an approach may prove very challenging. Early detection of incipient disequilibrium inside the financial system is conceptually difficult: no crisis looks like the previous one and the search for "early warning" indicators has not yielded fully convincing results. There is also an institutional challenge in bringing together different authorities with different mandates and approaches to financial stability. In the words of C. Borio "there is still considerable reluctance to calibrate prudential instruments more systematically from a macro prudential perspective".
Charles L Evans: Is it time to return to business-as-usual monetary policy? A case for patience Speech by Mr Charles L Evans, President of the Federal Reserve Bank of Chicago, at the 56th National Association for Business Economics (NABE) Annual Meeting, Chicago, Illinois, 29 September 2014. *  *  *  Thank you. I would like to thank the National Association for Business Economics (NABE) for inviting me to speak this morning. The organizers of this annual meeting were farsighted in arranging the conference around the theme of long-term strategies. As the many excellent speakers make clear, there is much to ponder as we contemplate the future of monetary policy. And I welcome the opportunity to talk to you today about my views on the appropriate strategy for determining the timing and pace of our eventual policy normalization. Before I begin, let me note that the views I express are my own and do not necessarily represent those of my colleagues on the Federal Open Market Committee (FOMC) or within the Federal Reserve System. Introduction and summary As you know, for almost six years, economic conditions have led the FOMC to keep its primary policy tool, the federal funds rate, at its effective zero lower bound (ZLB). When will it be time to finally lift the funds rate from the ZLB? Of course, the answer to that question depends on our progress toward our mandated goals of maximum sustainable employment and price stability.

In fact, this is the first crisis episode when the initial reaction of the National Bank was loosening and not tightening the MP. This time, despite the strategy of de facto fixed exchange rate, solid fundamentals and strong official reserve buffers allowed for loosening of the monetary policy and adopting regulatory flexibility. Also, our initiative for access to the ECB backstop facility, which was also supported by other central banks in the region, and the positive ECB response, allowed for wider space for accommodative policies. The symbiosis of these actions has enabled conducive financial conditions, i.e. decline of borrowing interest rates at historically low levels and uninterrupted credit flows growing at a rate of 6% annually, double than in the EU, that helped "ring –fencing" of the labor market, preserving wages and jobs. Where do we stand now, what are the major challenges ahead and is it time for complacency? A common denominator for all policy makers at the moment is the lingering uncertainty. Many scenarios are in place, from smooth and orderly recovery, through strong rebound with price pressures, ending to stalled recovery amidst new and more virulent strains. From a central bank perspective, our advantage is that there is still policy room for maneuver, although narrowed.
The Rt Hon Sir Edward George GBE: The progress of the euro  Speech by The Rt Hon Sir Edward George GBE, Governor of the Bank of England, at the Cercle de L’Union Interalliée in Paris on 24 October 2000. *  *  *  Thank you, Mr Chairman. I am grateful to the French Section of the Franco-British Council for giving me this opportunity to address this distinguished audience here in Paris, and I am delighted to share this public platform with my dear colleague, Jean-Claude Trichet. You have invited us to speak about the progress of the euro. I am very happy to do so from my British perspective - at least for the time being - as a keenly interested observer. My perspective you might expect would be very different from that of Jean-Claude, who was, and is, one of the principal architects of and a major driving force behind the process of European monetary union - one of the true founding fathers. In fact you will find that our analysis and assessment of the euro’s progress so far is very similar. I hope that will not come as too great a disappointment to you! We would certainly, I think, agree that the preparations for and introduction of the euro at the beginning of last year were a technical triumph. The euro-payments infrastructure is generally working well and has underpinned the integration of the euro money market which is an essential precondition for the effective implementation of Eurozone monetary policy.

In this regard, a stress testing system, introduced in 2007, already contributes to better assessing banks’ risk management and evaluating adequacy of capital assets to potential risks. In view of the large number of foreign banks presently operating in Algeria, continued efforts are being made to develop bilateral cooperation on their supervision. In conclusion, prudent management of resources and continued strengthening of the financial and banking system stability allow Algeria to consider its medium term economic objectives with a relative confidence. However, the deepening of the international financial crisis and its drastic spillover effects on the world economy is already affecting the country through a number of channels, notably: •  a reduction in its savings capacity. The sharp decline in oil prices is drastically reducing hydrocarbon export receipts and consequently government’s savings capacity. A prolonged weakness of oil prices would inevitably erode the financial wealth accumulated in the stabilization fund with a correlative reduction in international reserves;  •  a reduction in the yields on the investment of international reserves, as a consequence of low interest rates in international markets. 2  BIS Review 21/2009
monetary policy formulation process as  In addition, we also intend to establish  well. Accordingly, we will reduce the  two other important consultative  number of Monetary Policy Committee  committees in relation to financial  (MPC) meetings to 8 meetings per year  system stability and private sector views  from the current level of 12 meetings per  on Central Bank policies and regulations. year. Consequently, around 5-6 weeks  We are of the view that the inputs of  will be devoted for analysing the latest  such committees would also be helpful  developments in the economy and  in devising appropriate monetary policy  developing model-based  decisions. macroeconomic forecasts, thereby facilitating the provision of in-depth and more forward looking insights to the monetary policy formulation process. We will continue to monitor developments in the monetary sector closely and adopt timely and effective monetary policy measures, supported  The above improvements envisaged in  by other macroprudential measures in  the monetary policy decision making  order to ensure stable monetary  process are expected to be  conditions and price stability, thus  implemented before the end of 2017.  facilitating envisaged economic growth. This will entail revising the Monetary Law Act to accommodate some of the new changes to be introduced in this process in the medium-term.

The real need is to convey our reaction function, which publishing a path for Bank Rate would not obviously accomplish. We need to communicate how we are likely to react to the different types of shock that can drive the economy away from its steady state path. A complete specification is not feasible. We do not have a 100% correct model of the economy. And policy cannot sensibly be described by a simple mechanical rule but, rather, is determined by the judgment of policy makers, with the composition of the one person/one vote committee evolving over time. But at any particular time, some possible shocks – and so sources of risk to the inflation outlook – seem more important than others. As the Governor has announced, 29 the MPC is therefore planning to do more to explain our collective assessment of risks. 27  Before I was a member of the MPC, I was on the secretariat, so I have attended nearly every MPC meeting since 1997. 28  See response to question 285 in oral evidence to the House of Commons Treasury Select Committee inquiry on “the Monetary Policy Committee of the Bank of England: Ten years On”, April 2007. 29  King, M. A. 2007, “The MPC ten years on”, lecture to the Society of Business Economists, May. BIS Review 66/2007  7  Communications about the transmission mechanism, and the place of money within it Grasping our reaction function requires an understanding of how we think the economy works.
It is as if their judgements were expected to be consistently instinctive rather than objectively based upon their individual, open-minded, assessment - reached after careful analysis - of the most recent information available at the particular time. As a result serious economic commentary seems - perhaps temporarily - to have ceded some ground to ornithomancy - which, as of course you know, is the ancient practice of divining the future by observing the behaviour of birds - especially their flight patterns! This I suspect contributed to the surprise reaction to last week’s further rise in interest rates - which proved once again that “Hell hath no fury like a wrong-footed financial commentator”! It should not have been such a great shock. In the Inflation Report which we published a month ago we set out the analysis as I have described it to you this evening, and we drew attention to the fact that the outlook for monetary policy remained finely balanced - as it has clearly been for some months. We drew attention also to the major uncertainties surrounding the central inflation projection. These uncertainties included both the level of the exchange rate and developments in the labour market. It was - as we explained in our press notice last Thursday - the subsequent “news” essentially on these fronts, and particularly the sharp acceleration in private sector earnings growth, that caused the Committee to conclude that the necessary slowdown in domestic demand growth had become more pressing.

It showed that there existed areas in which we needed to think further or maybe even revitalise old knowledge. Not least, it  6  BIS Review 68/2010  made it apparent that, while central banks had become more adept at handling normal shocks to demand and supply, there remained a great deal to be learned regarding the manner in which imbalances on the financial markets ought to be handled. So what consequences can we expect the crisis to have for central banks’ method of working in the future? Is there reason to supplement current monetary policy reasoning – and, if so, how? A large part of what I will address here today consists of matters that are currently the subject of intensive international discussion. The final result of these discussions remains to be seen. Nonetheless, let me think aloud on the manner in which central banks’ work may be affected and on the challenges we will face. Effects on potential output and growth? One challenge concerns attempting to assess the manner in which the crisis will affect the economy’s long-term production capacity or potential output. This is significant for several reasons. Firstly, the deviation between actual and potential output, the output gap, is a measure of the stability of the real economy. Secondly, the output gap can affect the manner in which inflation develops. If the production of an economy exceeds its long-term production capacity (that is to say, if the output gap is positive), this tends to exert upwards pressure on inflation.
Information asymmetries When talking about information in the context of the financial turmoil, a key dimension of interest regards the role of informational asymmetries in the money markets (though I will often refer to the euro money market, it goes without saying that the issue of information asymmetries and adverse selection equally applies to money markets in other currency areas). Indeed, during the current turmoil widespread uncertainty about the distribution of exposures to sub-prime losses across financial institutions has led to the inability of distinguishing sound from unsound financial institutions, almost bringing inter-bank trading to a halt in August. The disruptions to inter-bank trading were compounded by banks’ uncertainty about their own liquidity needs reflecting various factors: (1) difficulties in tapping market funding sources (particularly the US dollar-denominated asset-backed commercial paper market), (2) larger than anticipated recourse by investment funds to committed credit lines, and (3) at least for some banks, uncertainty about the possible need to take over struggling off-balance sheet conduits and structured investment funds. Although the interventions by the ECB have since had a stabilising effect on the euro money market rate at the very short maturities and, more generally, this market has recovered some of the lost ground, lack of confidence among commercial banks continues to restrict trading activity and inflate counterparty risk premia (particularly in the unsecured term money market).

Of course, any such support policy, if anticipated, will be taken into account when banks establish their risk management frameworks for “tail” events. Still, one cannot generally conclude from this that central banks should not re-act and support the system in the case of severe tensions. To rigorously analyse moral hazard issues relating to financial crisis management by central banks, one first needs to distinguish between different but interrelated types of policy interventions. The reason for this is that the possible effects on incentives of different measures can be very diverse. However, this differentiation has often been missed when criticising central bank actions on the grounds of moral hazard considerations. 3  A. Giovannini and L. Spaventa (2007), “Subprime lessons: fix the information gap”, 5 November 2007, http://www.voxeu.org/index.php?q=node/690. BIS Review 143/2007  5  Let me distinguish briefly between four possible types of central bank measures: First, moral hazard issues have been raised in relation to the case in which the central bank lowers its key policy rate in response to financial turmoil. It has been argued that, if central banks lower interest rates at a time of market corrections and declining asset prices, economic agents may believe that the policy-makers are prepared to use monetary policy to support asset price valuations in order to prevent market downturns. If such belief becomes widespread, investors are likely to engage in excessive risk-taking behaviour, thereby sowing the seeds of future financial crises.
The moderation of labour costs, which fell again in real terms in 2003, and the greater flexibility of hiring arrangements as a result, inter alia, of the successive reforms introduced, were the factors behind the improved working of the labour market as from the late nineties which has led to a high capacity for employment generation. The improvement has proved to be a firm support for the sound performance of the economy, as it has enabled labour supply to increase, allowing a flexible response to increasing demand. Al the same time, the increase in employment has boosted household income expectations, which has helped sustain domestic demand. The composition of the Spanish economy’s growth has continued to be essentially underpinned by household consumption and construction. The improvement in the determinants of private consumption, which accelerated in 2003, was also assisted by the easing of the inflation rate last year. That made for an increase in the purchasing power of disposable income. Residential investment, despite the strong increase in the relative price of housing, continued to rise at a high rate. And this, combined with notable growth in public infrastructure works, fuelled the sustained increase in construction. Investment in equipment and exports of goods and services also recovered in 2003, but their contribution to GDP growth was still modest. Indeed, it was these components which kept the pace of recovery moderate. Investment in equipment increased by 1.9%, leaving behind the heavy contraction of 2002.

Fifth, central banks and regulatory authorities in most emerging economies in Asia have the broader mandate that includes a focus on the development of the financial sector as a means not only to enhance the growth and development potential, but also to reinforce a strong foundation for financial stability. In Malaysia, the development and reform of the financial sector in the decade that followed the Asian financial crisis has not only developed the financial sector to better serve the Malaysian economy, but it has also better positioned financial institutions to withstand the destabilising episodes emanating from external shocks. This has included strengthening financial intermediaries, not only in terms of scale but also in their financial positions, risk management and governance practices. This has contributed to more efficient financial intermediation while improving access to financing, particularly for small and medium scale businesses. Efforts to develop a vibrant capital market have meanwhile opened up alternative channels for financing, while mitigating concentration risk in the financial system and enhancing its ability to absorb large and volatile cross-border capital flows. These factors will place Asia on a firm foundation to achieve its growth and development goals. While public policy clearly has an important role, it is as important for the financial industry to align itself with the desired outcomes of sustainable growth within a longer term horizon.
It is also my hope that by establishing a robust global regime, we can mitigate the incentives for national regulators and supervisors to impose local rules that make it hard for globally active institutions to manage their operations on a global basis, thereby undermining the global integration of markets that has supported economic globalization. Over the next 12 to 18 months, regulators will be particularly busy in implementing these reform efforts. Broad legal statutes now have to be turned into specific rules and regulations governing business practices, conduct and operations. Doing this well – in particular, in a way that is sufficiently informed, deep and broad – will be very important. Basel III and the  1  Governor Daniel K. Tarullo, Comments on “Regulating the Shadow Banking System”. Brookings Panel on Economic Activity, September 17, 2010. 8  BIS Review 131/2010  Dodd-Frank Act are important markers on this road, but it will always be a journey to a neverreached destination of perfection. Thank you for your kind attention. I would be happy to take a few questions. BIS Review 131/2010  9

For example, we are investigating a waterfall functionality which would allow users to receive payments in digital euro above the holding limit by linking a digital euro account to a commercial bank account. The waterfall approach is a way of managing end users’ retail CBDC holdings via the automated conversion of retail CBDC in excess of a holding threshold into a bank deposit held in a linked commercial bank account chosen by the end user. See the digital euro glossary. Holding limits could also be differentiated by type of user, to account for the payment needs of citizens typically on the payer side and businesses that will mainly be on the receiving end of digital euro payments. 20. Panetta, F. (2022), “More than an intellectual game: exploring the monetary policy and financial  stability implications of central bank digital currencies”, speech at the IESE Business School Banking Initiative Conference on Technology and Finance, Frankfurt am Main, 8 April. 21. Broad engagement with market stakeholders will ensure that a digital euro meets users’ needs. A relevant set of initiatives have been put in place, including market contact groups, surveys and calls for expression of interest on the technical design features of a digital euro. ECB experts are also exchanging views on a digital euro with representatives from European civil society organisations and academia. See the ECB’s statement on stakeholder engagement.