samchain/econo-pairs-v1 huggingface dataset:
These variables also affect the exposures of different entities to various categories of risk. This is very much what we observe in practice, where even imbalances arising in some other sector often create ripple effects throughout the financial system and, where this is not robust enough, in the rest of the economy. Consistently with this view, it can be argued that financial stability is best pursued by implementing a coherent set of policies which respond to the underlying macroeconomic fundamentals. Recent episodes of financial crisis, for example, have shown that through their effects on expectations and on  1  This paper was delivered at a seminar organised by Société Universitaire Européenne de Recherches Financières (SUERF), in conjunction with the Central Bank of Malta on Thursday 27 March 2003. 2  Knight, M. 2002. “The Central Bank’s Role in Fostering Financial System Stability: A Canadian Perspective”, in Financial Risks, Stability, and Globalization; ed. O.E.G. Johnson. Washington, D.C.: International Monetary Fund. pg. 314.  asset prices more generally, unchecked variations in property prices can contribute to precipitating a crisis. Similarly, it is often forgotten that a combination of excessive public deficits with an over reliance on short-term capital flows and an overvalued currency is the perfect recipe for a turnaround in market confidence, and consequently for sudden reversals in capital flows.

We still estimate this neutral range to be at 5–6%, provided that inflation is close to the Bank of Russia’s target of 4%. Thank you all for your attention. 3/3  BIS central bankers' speeches
Macroprudential regulation and financial imbalances Macroprudential regulation of banks must be based on an understanding of how systemic risk arises. This understanding has been brought a step further since the financial crisis. There is a growing academic literature on the basis for macroprudential regulation. One of the main themes is how systemic risk can arise in the interaction between the financial sector and the real economy. Research is at an early stage, and so far no specific framework stands out. Some conclusions seem, however, to be robust across the various approaches. Many studies single out rapid credit growth in particular as a symptom of rising systemic risk. The theoretical literature is based on the principle that credit is a good. Borrowing enables households to smooth consumption over the life cycle and businesses to finance investments, thus promoting prosperity. But the literature also shows that debt can lead to vulnerability. Risk can be priced too low as a result of market failures of various kinds. Mispricing can contribute to excessive debt and the build-up of financial imbalances. Regulations that counteract credit swings may lead to fewer and less severe economic downturns. Chart: Rapid credit growth leads to deeper downturns The relationship between debt and systemic risk also finds support in many empirical studies. This chart shows the results of a study conducted by Jordà, Schularick and Taylor on downturns in 14 advanced economies, including Norway. 1 The study covers the period from 1870 to 2008. The chart illustrates two important findings.

How much of this business will resist the current period of stress remains an open issue, but euro area monetary statistics have shown no sign of a major decline in these money holdings so far. -  In terms of new products, the recent emergence, at least in France, of high-yield liquid deposits that are accessible via direct banking on the internet is very likely to have reduced the interest elasticity of money. Of course, monetary policy, in the euro area and elsewhere, is not committed to react mechanically to monetary developments. Nevertheless, to make the best use of the informational role of money, central banks must be able to filter out the noise that affects current monetary data, disentangling temporary factors from shifts in trends, supply shocks from demand shocks, with the latter possibly resulting from certain financial innovations in the context of globalisation. Fully assessing the effects of financial innovation is thus a real challenge for monetary analysis. Considering the practical difficulties ahead, this seems to me to offer a fruitful field for applied research. Challenges for communication in times of stress: disentangling monetary and financial stability objectives Financial market disruptions that may follow times of exuberant financial innovation may pose significant risks to macroeconomic stability. However, by their very nature and notably the highly non-linear dynamics they may trigger, such events, as well as the magnitude and speed of their macroeconomic consequences are uncertain.
It is now conceivable that the pre-Covid peak in output in 2019Q4 will be restored in the course of the current quarter, and quite possible that unemployment could peak lower than our May MPR forecast. And inflation now looks likely to peak well above 3% and maybe nearer to 4% – the biggest news to our earlier inflation projections is yet to come. Reflecting all this I am somewhat less confident than I was that there remains a margin of spare capacity in the economy. Looking further ahead there are three key considerations which are shaping my assessment of the outlook and the risks around it:  1. Are developments temporary or more persistent? 2. Are they economy-wide or sectoral? 3. What they mean for the balance of supply and demand in the economy? As set out in the MPC’s June minutes, the Committee’s expectation was that “the direct impact of commodity prices on CPI inflation would be transitory”. Their central expectation was for “a temporary period of strong GDP growth and above-target CPI inflation, after which growth and inflation would fall back”. I agree with that initial assessment – though it’s important to stress here that ‘transitory” does not mean ‘here today, gone tomorrow’. I learnt recently for instance that some businesses are bringing forwards their shipping arrangements for Christmas stock.

Other policy makers have faced similar challenges, and have found highly innovative and effective ways to overcome them, such as the Treasury’s furlough scheme. And of course the intellectual challenges faced by economic policy makers have been tiny compared with the very substantial challenges faced by the healthcare and other key workers who have had to tackle the Covid pandemic itself, as well as those who have suffered from the disease. My previous Strand Group lecture, “The First 50 years of the Government Economic Service”, touched on some of that earlier experience. 2 My MPC colleague Silvana Tenreyro made a similar observation in her 2018 speech on models in macroeconomics. 3 Or to give the quote from Korzybski (1933) more fully: “A map is not the territory it represents, but, if correct, it has a similar structure to the territory, which accounts for its usefulness”. 4 It’s not for nothing that the Bank of England’s central forecasting model is known as COMPASS. 1  2  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  2  Figure 1: The MPC’s approach to its forecasts has evolved during the pandemic  3  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  3  An evolving approach to the outlook  The MPC, supported by the efforts of Bank of England staff, has continued to make use of forecasts throughout the Covid period.
More competitiveness gains from the past depreciation may yet be realised, and in any event, unlike for much of Montagu Norman’s time, our exchange rate will remain flexible. Nonetheless, sustained borrowing from abroad to consume at home is hardly a recipe for a balanced and sustainable expansion. Borrowing to invest, improve productivity, competitiveness and incomes is. Amidst much commentary about an unbalanced recovery, it should not be forgotten that business investment has accounted for more than a quarter of GDP growth over the past six months. The MPC’s forecasts rely on continued rapid growth of business investment over the next few years, leading to a revival in productivity and real wages, which in turn will allow consumption to grow without an unsustainable decline in household savings. Creating the right conditions for investment is thus essential. In a world of corporate caution this will likely require interest rates consistent with our guidance. The Bank is well aware that such a monetary stance could encourage other risks to develop. For instance, there is evidence of growing vulnerabilities in financial markets. Across asset classes, implied volatilities are well below their long-term averages. Spreads in high yield and peripheral bond markets have collapsed. And covenant-light loans are the new normal. While the banking system is much more robust to spikes in volatility, end investors may not have fully absorbed the extent to which financial reforms will distribute shocks across the financial system.

5  4  Ten years ago, former MPC member Kate Barker estimated that construction of around 260,000 homes a year would be necessary to contain real house price growth at 1 per cent per annum (Barker, 2004). Far fewer have in fact been built in the years since – just 110,000 in 2013. Because housing demand tends to rise more than oneBIS central bankers’ speeches  To be clear, the Bank does not target asset price inflation in general or house prices in particular. It is indebtedness that concerns us. This is partly because over-extended borrowers could threaten the resilience of the core of the financial system since credit to households represents the lion’s share of UK banks’ domestic lending. It is also because rapid growth in or high levels of mortgage debt can affect the stability of the economy as a whole. An economic expansion is more precarious if there are a large proportion of heavily indebted households. History shows that the British people do everything they can to pay their mortgages. That means cutting back deeply on other expenditures when the unexpected happens, potentially slowing the economy sharply. That’s why recessions that follow rapid credit growth tend to be deeper and longer lasting. It is for these reasons that the Bank of England’s Financial Policy Committee (FPC) is mandated to address systemic risks arising from unsustainable levels of debt, leverage or credit growth.
8 In such an ideal scenario, each economy would be perfectly positioned to withstand economic shocks. This portfolio theory provides a benchmark for assessing the degree of financial integration in a given country. Over the last decade many countries have indeed been reducing their risk positions in equity markets through this mechanism, and in several developed countries the tendency to invest in domestic equity assets has decreased. However, the latter are still far from having a theoretically optimal portfolio, i.e. one with a zero home bias. In 2003, equity home bias amounted to 70% in the euro area and the US, and almost 90% in Japan (see Chart 1). 9 The degree of home bias in the fixed income market is also high, and has only decreased over time in the euro area (see Chart 2). Chart 1. Home bias in the equity market for the Chart 2. Home bias in the debt instruments market euro area, the US and Japan (annual data) for the euro area, the US and Japan (annual data)  Sources: IMF, Thomson Financial DataStream, Sources: BIS, IMF, ECB calculations. ECB calculations. Note: The home bias of the euro area is Note: The home bias of the euro area is computed computed excluding intra-euro area asset trade excluding intra-euro area asset trade allocation. allocation. We can, therefore, say that the global tendency to invest in the home market has been declining, albeit possibly more slowly than one would have expected, and only in the equity market.

Foreign exchange reserves In the last decade, emerging countries have constantly sought to expand their foreign exchange reserves. The emerging markets’ average reserve ratio has more than quintupled from 4 percent to over 20 percent of GDP since 1990 (Obstfeld et al. 2009, Matteo y Lagos et al., 2009). One cannot assume, however, that equilibrium has been reached and that the demand for reserves will stabilize. On the contrary, there are strong indications that this trend will persist, or even be amplified, following the crisis. How much reserves are enough? Theoretical reasoning would balance the benefits of holding reserves against their cost, with some notion that there is an optimum. On the benefit side, reserves can be detained or accumulated for a variety of motives:   to smooth out the impact on consumption of shocks on the current account, which is the most basic and traditional motive, even in the absence of international capital flows    as a result or by-product of foreign market intervention to prevent exchange rate appreciation. This is usually defined as a “mercantilist” motive.   as precaution against possible abrupt capital outflows (the “sudden stop” syndrome)  The costs of holding reserves are also well identified:   there is a direct opportunity cost because foreign exchange reserves’ risk / return profile may be lower than for other, alternative, investments.   finally, as reserves accumulate, countries are getting increasingly exposed to exchange rate risk and face the possibility of significant valuation losses.
The installation of new equipment, which was judged necessary at the beginning of the year, is taking place only very gradually, in particular at small and medium-sized companies. Retail activity perked up considerably in May. Employment levels in industry showed little change, except for the automobile industry where cutbacks continued. They fell slightly in the building sector, whilst holding steady in the retail and market services sectors. Permanent staff levels showed no significant change, although certain companies - primarily those engaged in seasonal activities as in the food-processing industry - made increased use of temporary staff. BIS Review 66/1997

Abstracting from credit and liquidity risk, the most prevalent source of risk for longterm debt is duration risk: that is, the sensitivity of the bond price to changes in the yield curve. I will come back to this when discussing the duration channel of large-scale central bank asset purchases. [11] Monetary policy exerts its effects on the yield curve not only through pure rate expectations but also through term premia. Chart 4 shows a model-based estimate of the yield curve response to a change in policy rates for the euro area. [12] The surprise used here is a combination of what I previously described as a pure rate surprise and a forward guidance surprise. It therefore affects yields across all maturities. While Chart 4 shows that changes in rate expectations explain the bulk of the yield curve response, part of it is attributable to changes in term premia. Chart 4 Instantaneous impact of conventional policy surprise on expectations and term premia (basis points)  Source: ECB calculations. Notes: The chart depicts the instantaneous impact of a conventional monetary policy surprise on the yield curve and its components. The policy surprise is identified through high-frequency changes in the common component of a set of euro area short-term interest rates of maturities up to one year. The surprise (normalised so that the one-month rate is reduced by 10 basis points) thus captures effects beyond a pure target rate surprise. These effects may be interpreted as a signalling element of conventional monetary policy.
Let me qualify my view by saying that the reality is much more complicated. So let me go quickly over some salient details of the euro crisis and its current impact on Asia. A great deal of uncertainty, much of it induced by lack of policy clarity, surrounds the euro crisis. This is reflected by how global FX markets have been in turmoil as investors fled euro and Asian emerging markets assets for safe havens. The Thai baht was not spared from this turbulence and experienced high volatility and bouts of weakening pressure. However, investors eventually returned to emerging markets in Asia as yields in advanced economies moved lower and Asian fundamentals improved amid slowing inflation pressure. In Thailand, government bonds, in particular, have proven attractive. In fact, foreign participation in both bond and equity is now above pre-Lehman levels. However for equity, the rate of return was  BIS central bankers’ speeches  1  slow of late; net inflows were negative last year but are now slightly positive for the second half of this year. Amid all this turbulence, all this back-and-forth, the baht fluctuated in tandem, first depreciating in the first quarter of the year up until July and then appreciating somewhat. This trend was punctuated by bouts of volatility each time euro policy faced implementation difficulties once push comes to shove and member nations have to make the difficult tradeoff between national interests and supra-national interests. But back to the question of how the euro crisis will play out.

Before passing on the floor, I would just like to mention that Mrs. Lomax has previously visited Romania. Ten years ago Mrs. Lomax was negotiating development programs in Romania on behalf of the World Bank with a team including myself and some other people in this audience. She is now here again to assist us in preparing to achieve another goal related to Romania’s development, that of lasting price stability. 2  BIS Review 28/2005
This definition is more passive in terms of implying how one should act under normal circumstances, but has the advantage of focusing on the situations we attempt to avoid. The latter definition is related to the high costs of financial instability in the last few decades. Costs in terms of loss of GDP can be substantial. A study of the economic costs of banking crises concluded that even though such crises have been less frequent in high-income countries than in low-income  1  See for example Schinasi, Garry J. (2004). ”Defining Financial Stability”. IMF Working Paper No. 04/187  BIS Review 34/2005  1  countries, they have persisted over a longer period and average total output losses have thus been higher.2 The preferred definition of financial stability varies across countries. Recognising the need for a relevant operational definition regardless of the current situation in the financial system, the Central Bank of Norway has chosen to adopt the broad definition of financial stability. How do the authorities analyse financial stability? Given an understanding of what financial stability should imply, the authorities can analyse potential threats to financial stability. There are two complementary approaches: In the first approach, we need to focus on risk factors originating within the financial system. Institutions, markets and infrastructures are continuously faced with risk factors such as credit, liquidity and market risks. Analyses have become even more challenging in recent years as the financial system has become more complex and interwoven both across industries and borders.

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This is consistent with economic activity fluctuating around its full capacity level, going from periods of capacity under-utilization to periods of over-utilization. So the maximum level the MPR will ultimately reach and when this will happen in the current cycle is something the CBC Board will be analyzing as events unfold. This year to date, a 200 basis point increase has already accumulated in the MPR and we believe further increases will be needed. The magnitude and timing of these increases will respond to incoming data, risks and their implications for inflationary prospects, taking into account the lags that are inherent to monetary policy. Thus, no scenario can be ruled out. It is likely that in the coming meetings the magnitude of the correction will be reduced and there may even be pauses. Likewise, although today it seems less likely, it can also happen that the recent pace is maintained if inflationary risks so recommend. In any case, there seems to be consensus in market expectations that smaller adjustments will be required going forward. Actually, most forecasts place the MPR around 6% at the end of this year (figure 17). Conclusions The last several years have been very complex. Policy makers have faced probably the greatest challenges in decades. Swings in economic activity, inflation and expectations, among many other variables, have been marked in unprecedented ways. Chile’s macroeconomic policy framework has given proof of its flexibility and effectiveness, succeeding in mitigating and overcoming the effects of the world crisis. Today we face new, significant challenges.

Concluding, I would like to highlight the suggestions found in the report that it is now the time for the financial sector to focus on firms, as the basis for employment, innovation, productivity and economic growth. Thus, the development policies should focus on the firms and their future, as a source of convergence growth. The economic development policies and priorities, at micro and macro level, should focus on: the improvement of the institutional and financial infrastructure; the development of the capital market; the investments in infrastructure; and, the regional integration. * * * Dear participants, The EBRD Transition Report 2017–18 is an important document to all of us. Irrespective of our status as decision-makers, policy-makers, researchers, academics or journalists, the Report provides ample information to further corroborate our analyses and conclusions. I invite you to further read the Report and materialise its conclusions rationally and responsibly in your analyses for the present and the outlook of our economy, and beyond. Thank You! 3/3  BIS central bankers' speeches