samchain/econo-pairs-v1 huggingface dataset:
Financial Stability and Low for Long Speech given by Sir Jon Cunliffe, Deputy Governor Financial Stability, Member of the Monetary Policy Committee, Member of the Financial Policy Committee and Member of the Prudential Regulation Committee  Society of Professional Economists Annual Conference, London 14 October 2019  I am grateful to Katie Low, Rand Fakhoury, Richard Harrison, Iren Levina, Ryland Thomas and Matthew Waldron for their help in preparing these remarks. 1  All speeches are available online at www.bankofengland.co.uk/news/speeches  Jane Austen’s face appears on the Bank of England’s latest £ note, which entered circulation in September 2017. But the Bank’s association with one of the world’s finest authors goes back much further: as the meticulously kept records of the Bank show, the successful novelist invested much of the proceeds of her writing in Bank of England Annuities. In July 1815, for example, she purchased ‘Navy Five per Cent annuities’ – an undated Bank of England security – with a face value of £ ‘Navy Fives’ were a popular investment during the Napoleonic Wars, paying annual interest, as the name suggests, of 5%. Jane did not purchase the stock at par value – research using the Bank’s archives has established that she paid around £ – making an annual nominal interest rate on her risk free investment of nearly 6%1. Today, a comparable risk free asset – a 30 year gilt – is yielding around 1% nominal.

According to some, it has been difficult to understand the motives behind some of the decisions and it has not been very clear why the decisions reached were preferable to the alternatives. I can have some understanding of this criticism and I will return to this. But first I would like to discuss the question of what is meant by a clear monetary policy. It is not self-evident, as we shall see, and different people appear to mean slightly different things. A theory-based policy is not necessarily clearer The academic literature on monetary policy often describes inflation targeting as the central bank minimising a so-called loss function. This loss function is a weighted sum of a measure of the variability of inflation and the variability of the real economy. The loss function can, somewhat simplified, be written as  measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee’s policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments.” 13  Vredin, Anders, Martin Flodén, Anna Larsson and Morten Ravn (2012), Enkla regler, svåra tider – behöver stabiliseringspolitiken förändras? (Simple rules, difficult times – does stabilisation policy need to be changed?)
And notably, riskier forms of debt – those most sensitive to a change in market conditions – have recently been growing most rapidly. Issuance of leveraged loans and high yield bonds reached a record level last year. 8  6  Paragraph 5 of ‘Record of the Financial Policy Committee Meeting on 12 March 2018’, available here. See Chart 11 in Deloitte (2018), ‘The Deloitte CFO Survey Q1 2018’, available here. 8 Leveraged loans are loans to companies that typically display some of the following characteristics: high levels of indebtedness, a non-investment grade credit rating or ownership by a private equity sponsor. The latter is defined as bonds rated below investment grade. 7  6  All speeches are available online at www.bankofengland.co.uk/speeches  6  Last year more than half of the issuance was used to refinance existing debts more cheaply. In the early stages of this year, however, there are signs of that changing. Issuance has been higher than in the same period last year and less is being used to refinance. 9 (slide 9)  These forms of debt accounted for around only 10% of bond and bank loans issued to UK companies last year. But if the pattern of the first 3 months of the year were to continue, they would still – alone – add 3% to the overall stock of corporate debt this year. So recent developments demand careful scrutiny. If they continue, we’ll need to assess, in particular, whether they increase the risks faced by banks.

These days, your participation in the workshop takes another and even more significant meaning in the wake of the tragic consequences caused by the strong earthquake. It helps to show that, despite many losses, we are resilient and will continue to work to overcome the emotional and economic hardships of this tragic event, shed the desperation, fear and despair, and return to normal activity. I wish the workshop a great success, and all guests and participants a pleasant stay in Tirana! 2/2  BIS central bankers' speeches
This is the same methodology as Oxera (2011) with a downward adjustment for the risk free rate to the nominal yield on 1-year UK gilts and considers that support can be realised at any time during the year. The figure for global banks is an estimate based on the UK figures. (b) Calculated by comparing the difference in funding costs calculated as an annual average for individual banks, based on the difference in the average funding cost of benchmark financial institutions rated at the support rating and the average funding cost for financial institutions rated at the standalone rating. This difference is then multiplied by the rating-sensitive liabilities of the bank or building society. Data availability for non-UK banks is less granular. BIS central bankers’ speeches  25

In my view, regulatory issues relating to the profusion of financial innovations that emerged during the last boom episode should now rank high on the agenda. Indeed, regulatory lapses seem to me to lie at the heart of the subprime crisis, which appears to many as a “credit boom gone bad” 5 . Recent research by Dell’Aricia, Igan and Laeven (2008) shows for instance that delinquencies in the US subprime mortgage market are statistically larger in areas that experienced larger increases in the number and volume of loans, because the latter was linked to a decrease in lending standards. In turn this deterioration in lending standards by banks can be explained by changes in market structure (with the entry of new aggressive competitors) and the increasing recourse by banks to asset securitization and loan sales. BIS Review 37/2008  5
Since 2004 – that is, before the crisis – average productivity growth among the 99%-ers has averaged only 1%. This suggests that, among a significant swathe of UK companies, levels of productivity must have flat-lined or fallen. This lower tail of companies shares one important feature with the upper tail: neither is confined to particular regions or sectors. Near-zero rates of productivity growth among the 99%-ers are a feature of all regions and almost all sectors (Table 1). Even the best-performing region (London) and best-performing sector (professional, scientific and technical) in the lower tail has mustered productivity growth of only 2% and 4%. 11  Cornell University, INSEAD and WIPO (2017). Department for Business, Energy & Industrial Strategy (2017). 13 Department for Business, Energy & Industrial Strategy (2017). 14 These numbers control for differences in the sectoral composition and sizes of firms between the countries in question. Further detail of the method used here is set out below Chart 7 in the annex. 12  5  All speeches are available online at www.bankofengland.co.uk/speeches  5  We can look more precisely at the fraction of firms who have seen effectively no rise in productivity since before the crisis. 15  For the UK as a whole, that amounts to around half of them. For some regions and st  sectors, the fraction of firms that have stood still in the 21 century is closer to two-thirds. This tail of seriallystagnating companies is long indeed.

In practice, it would appear that such responsiveness has not increased over the last decade, while empirical evidence supporting a growing role of global measures of economic slack in the inflation process of the euro area and other advanced economies has been limited. On balance, not only is the net effect of globalisation on euro area prices difficult to accurately gauge, but it may also be changing through time. For this reason, the ECB continues to actively monitor possible ongoing changes in the inflation process. At the same time, efficient adjustment can be best facilitated by focusing on price stability and continuing to solidly anchor inflation expectations in the face of considerable relative price shocks. Developments in the real estate sector Let me conclude with some remarks on residential property prices. As with other asset prices, residential property prices are closely monitored by the ECB in terms of our economic analysis. Within this context, while we take the euro area real estate sector into account in assessing risks to price stability, we certainly do not target house prices, or for that matter, any other asset prices. We do monitor asset prices closely because of the potentially high costs for price stability and for the economy as a whole that are associated with strong appreciations and rapid reversals in asset prices. Also, our monetary analysis covers the monitoring of money and credit which often reflect the evolution of prices and house purchases.
With regard to the communication of monetary policy, one possibility would be to supplement the interest rate forecast with a promise to condition the policy on a particular development in the economy, for instance that inflation should reach a certain level before the policy rate is raised. This kind of conditionality can be regarded as a way of reducing the risk that monetary policy will put the brakes on too early in an economic upturn. This, in turn, can be seen as a means of emphasising the importance of symmetry in the inflation target. One problem for the Riksbank and many other central banks over the past decade has been that inflation has tended to systematically undershoot the target. The importance of treating the inflation target symmetrically and not putting the brakes on too early in economic upturns also appear to have been guiding principles for the strategy changes announced by the US Federal Reserve at the end of 19  Clarida (2019) premised in May 2019 that the review the Federal Reserve had begun earlier the same year was “more likely to produce evolution, not a revolution, in the way we conduct monetary policy”. 10 [15]  August. I think these changes are interesting and thought-provoking, and the Riksbank will analyse them thoroughly. References Ball, Laurence M. (2014), “The Case for a Long-Run Inflation Target of Four Percent”, Working Paper WP/14/92, IMF. Blanchard, Olivier, Giovanni Dell’Ariccia and Paolo Mauro (2013), “Rethinking Macro Policy II: Getting Granular”, IMF Staff Discussion Note 13/03, International Monetary Fund.

Let me also say that we are experiencing a period of market nervousness, a period where we see volatility in markets in general and re-appreciation of risks. We think that these developments in financial markets deserve attention. Shifts in market sentiment need careful monitoring. We will continue to pay great attention to the developments in the market over the period to come. I am now open to questions. BIS Review 89/2007  1
Social benefits were improved during this time. Compensation for sick leave was raised and the qualifying day was abolished. Furthermore, legislation was introduced for job security and co-determination in the workplace. Many believe that firms’ costs rose and that production was disrupted by sick leave and other kinds of leaves of absence that had also been introduced. These factors are difficult to assess but it is likely that they contributed. At the same time as the oil price shock, the Swedish economy was also hit by a domestic cost crisis which resulted in a decline in production. In spite of this, firms retained employees to a greater extent than in other countries, which led to lower growth in labour productivity. 2  BIS Review 56/2003  Moreover, in the mid 1970s, there were dramatic changes in capital formation, which undoubtedly explain some of the slowdown in productivity growth. Of course, this capital growth is in turn the result of a variety of economic conditions for enterprise and the public sector, including those mentioned earlier. For the most part we speak about investment activity in our country in gross terms. This concept also includes such investment that is needed to replace the depreciation that occurs during all production. When we exclude the part of gross investment that is made to compensate for this depreciation, we are left with net investment. Net investment is the new additions to the capital that is already employed in production in the form of plant, machinery and buildings.

For example, episodes of volatile capital flows may return, while the economy’s long-term competitiveness remains in need of improvement. Policy objectives in 2011 The Bank of Thailand envisages two economic policy objectives this year: (1) to safeguard macroeconomic stability, and (2) to continue strengthening underlying fundamentals of the economy. Both objectives should be interpreted in the broad sense, for example, macroeconomic stability entails price stability, financial stability, as well as fiscal sustainability. Likewise, strong economic fundamentals encapsulate resilient private sector, efficient public sector, and sound banking sector among others. Given these broad goals, the Bank of Thailand and everyone all have parts to play. The government, for example, is in charge of ensuring a sustainable fiscal position in the long-term, and an efficient disbursement of budget so as to best strengthen the economy. Monetary policy Maintaining economic balance is key to the making of monetary policy, as it is one of the most important pre-requisites of macroeconomic stability. In practice, this means that as the economic activity returns to normalcy, monetary policy stance must similarly be normalized. Failure to do so will add undue pressure on inflation, ultimately posing risks to macroeconomic stability. Thus this year, the monetary policy committee (MPC) will need to continue normalizing monetary policy. The amount and pacing of policy interest rate adjustments this year will be consistent with the outlook for growth and inflation as well as the surrounding risks.
For a period of time – even perhaps a few years – wages can rise somewhat more without jeopardising the inflation target – for example, if the ratio of wages to national income is unusually low following a crisis and businesses are able to absorb some of the increase. This has been the case to an extent in the past few years. Other factors could counteract larger wage increases as well – for instance, declining foreign-currency prices of imports and a stronger króna have contributed to declining inflation even though wages have risen considerably more than the sum of the inflation target and the increase in productivity. But there are a number of indications that we will not be able to rely on these countervailing factors next year. By then, the slack will have disappeared from the economy, the ratio of wages to national income is at or above its historical average, and there are no premises for further appreciation of the króna, as the current account surplus is narrowing and the real exchange rate is no longer below its estimated equilibrium value. Nevertheless, different wage increases could be negotiated for different groups if there are grounds and will to do so. As I draw near the conclusion of my talk today, I would like to shift gears a bit and say a few words about credit ratings.

As regards timing, it is worth mentioning that it was not until very recently that inflation expectations have moved as close to target as they are now. As regards the latter question, most measures of the monetary stance have been well within normal range for quite a while, and there are few other signs that it has been too tight, expect perhaps in the past few months. For example, nominal growth in broad money measures about 6% after adjusting for factors that are largely unconnected to domestic economic activity, such as deposits of failed financial institutions in active ones. This growth is consistent with the situation that should exist when the economy is at equilibrium – when inflation is at target and output is at capacity. An examination of nominal GDP growth gives a similar result. Based on forecasts for 2014, it will average 5% in Iceland over the period 2011–2014, as compared with just under 4% in the US and the UK, about 2½% in Sweden – which is just above the inflation target alone– and about 1½% in the euro area, which is even below the inflation target for the region. This has been used to support the argument that monetary policy has been too tight in the euro area and Sweden, but as the figures show, this rationale does not apply to Iceland.
The repo rate was cut to almost zero and the Riksbank announced its intention to let the repo rate remain at this level for a relatively long period of time. The turbulence on the financial markets also meant that monetary policy had less of an impact than normal. The Riksbank responded to this by complementing monetary policy with extensive lending to the banks. In this way, monetary policy has helped to dampen the fall in production and employment. It has also helped to keep inflation in line with the target in the longer term. This is what I intend to talk about today. First, however, I would like to say a few words about some of the principles that are important when assessing monetary policy. What should we consider when we assess monetary policy? When can one say that the monetary policy conducted over the past year has been good? The answer to this question naturally depends on what the target for monetary policy is. The Riksbank has an explicit inflation target according to which the annual change in the consumer price index (CPI) should be 2 per cent. As monetary policy acts with a time lag, it should be based on forecasts. The Riksbank’s forecasts are based on the assumption that the repo rate – the Riksbank’s policy rate – will develop in such a way that monetary policy can be regarded as well-balanced.

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
Thus, monetary policy should respond immediately in order to avoid that initially restricted inflation pressures translate into an enduring deterioration in inflation expectations. Recent decisions of the Brazilian Central Bank should be understood in that context. Their effects over activity and inflation – potentially helped by some liquidity tightening in progress since the first months of the year – are cumulative and will undoubtedly produce effects in the coming quarters. International evidence, as well as the Brazilian experience under inflation-targeting, shows that there are no advantages of sustaining high inflation rates for long periods. On the contrary, high inflation rates lead to higher risk premia, to shorter planning horizons and consequently to lower potential growth of the economy. Its most harmful outcome is the deterioration in income distribution, as low-income brackets are harder hit by the negative effect of inflation on their purchasing power. It is now clearer than ever that fighting inflation generates benefits in terms of decreasing poverty and reducing social inequalities. Thus, the Brazilian Central Bank has acted and will continue to act in order to bring inflation back to the midpoint target of 4.5% promptly, that is, during the course of 2009. This stance is designed to avoid the consolidation of a negative inflationary environment, in which monetary policy would lose efficiency. It should be clear to the public that the Brazilian Central Bank will not have a complacent approach regarding inflation. The Bank is committed to act in order to bring inflation to the midpoint target during 2009.

This is the approach that minimizes costs for economic activity and for the society at large, contributing to consolidate a sound, efficient, and fair economic structure. Thanks for your attention! 2  BIS Review 108/2008