samchain/econo-pairs-v1 huggingface dataset:
In addition, the reduction in the interest rate has probably contributed to holding up expectations of future inflation even when inflation is low. If there is confidence in monetary policy, economic agents will expect inflation to be close to target over time. Companies will draw up their budgets on this basis. This will then contribute to stabilising inflation. Many companies change their prices only once or twice a year. When they change prices, they probably take into account the expected rise in other prices. It has been important to prevent inflation expectations from falling and becoming entrenched at a low level. Surveys of inflation expectations nevertheless indicate that expectations are well anchored around the inflation target in the long term. The first signs of the effects of the interest rate cuts appeared in the foreign exchange market. The interest rate differential against other countries narrowed. It became more attractive to borrow and less profitable to invest in the Norwegian krone. The movement in the krone exchange rate was reversed and the krone depreciated through 2003 and into 2004. However, the impact on the krone exchange  2  BIS Review 27/2005  rate has been considerably dampened because external interest rates have remained low. High prices for oil and gas and other export goods also contributed to an appreciation of the krone last year. The depreciation of the krone in 2003 contributed to restraining the fall in prices for imported goods. The effect occurred gradually.

The interaction here came into clear evidence when employment in the general government sector fell after the expensive wage settlement in 2002. The authorities can achieve better economic policy results if they can commit in advance to a set of credible policy rules. Households, enterprises and capital market participants are forward-looking in their decision-making. It is therefore important that the authorities do not sow doubt, but on the contrary act in a long-term and predictable manner. There must be consistency between plans and actions. Monetary policy’s role is to ensure low and stable inflation. Experience shows that we cannot reduce unemployment over time by simply accepting somewhat higher inflation. In many countries, including Norway, confidence that inflation will be held at bay has increased because interest rate setting has been delegated to the central bank. BIS Review 27/2005  1  For monetary policy to contribute to stabilising developments in output and employment, economic agents must be confident that the inflation target will be reached. Inflation targeting has proved to be a sound system and particularly well suited to small, open economies. Normally, interest rate setting under an inflation targeting regime will also contribute to stabilising output and employment. In downturns, with prospects of low and falling inflation, the interest rate will be reduced to boost demand and prevent an inflation level that is too low. During an upturn when there are prospects of high inflation, the interest rate will be increased.
John Gieve: Seven lessons from the last three years Speech by Sir John Gieve, Deputy Governor of the Bank of England, at the London School of Economics, London, 19 February 2009. *  *  *  Introduction As you know I am about to leave the Bank of England after three years as the Deputy Governor responsible for its work on financial stability and as a member of the Monetary Policy Committee. It has been a game of two halves. The first 18 months from January 2006 to July 2007 were the tail end of the Great Stability, a period of nearly 15 years of continuous growth, low inflation, and falling unemployment. They were guided by and reinforced a wide consensus that economics had discovered the right way to manage the economy and that the UK was a good model of how to put it into effect. The second 18 months have seen an extraordinary reversal: with turmoil in financial markets, the credit crunch, and the onset of a severe global recession calling into question nearly every part of that consensus. The immediate challenge is to limit the depth and duration of the recession and bring the economy back onto a sustainable path with low but positive inflation. But we have just set out our analysis of the economy in our February Inflation Report and Charlie Bean explained the policy options we face in a speech earlier this week.

It is crucial in a period of economic hardship – with companies going to the wall and people losing their jobs – that people do not think the Bank is focused on a narrow inflation target for its own sake. If they feel that we are not accepting responsibility for what happens to growth and jobs, they will look for someone else to do so. If we want to preserve the framework we have a job on our hands – now more than ever – to explain our strategy to the general public. The Bank and MPC need to convince them that the policy we are pursuing is the best way of restoring growth and full employment without reawakening inflation. Indeed it is by bringing output back to potential that we will bring inflation back to target. Secondly, I share the view that setting a target for a measure of consumer price inflation which excludes the costs of home ownership has done us no favours. It is widely recognised as a flaw in the harmonised CPI across Europe but it is of particular significance in the UK given the critical role that home ownership plays here in household budgets and wealth. Something needs to be done to remedy that situation, and if progress can’t be achieved at a European level I think we ought to consider going it alone. More fundamentally, if inflation targeting by an independent central bank is an essential foundation of policy, it is pretty clearly not sufficient on its own.
Illiquid loans are converted into liquid bonds, which can easily be sold. Many investors are happy to have credit risk in their portfolios for better diversification. But they do not want to manage individual credits, and they also want liquidity in their investments. They therefore appreciate the securitised products. In recent years, however, it has become increasingly common for securitised loans (which have been converted into bonds) to be repackaged into various so-called structured credit instruments. An impressive variety of this type of structured product has arisen in a short period of time. Perhaps the most common form are those known as CDOs, Collateralised Debt Obligations. With a CDO it is possible to put together bonds from many different securitised loan portfolios and even to add other assets if desired. The idea is that the portfolio that has been put together is structured in different parts (tranches) with different credit risks (this is in practice often done by the large international investment banks). When interest income from the underlying assets starts coming in, it is distributed according to the order of priority of the tranches, or their seniority. First, the most senior tranches receive their allocation. After that the income is distributed to the second most senior tranches, and so on. Investing in a junior tranche thus entails greater risk than investing in a senior tranche, but on the other hand the earnings are higher. At the bottom is an equity-like part, which is only paid when all the others have received their share.

The banks’ investment companies had also done so to a great extent. The buyers of the investment companies’ certificates are usually risk averse investors who are choosing between buying short government securities and corporate certificates. When it became clear, or even when there was reason to suspect, that subprime loans were among the investment companies' assets, the demand for certificates fell drastically. Investors instead chose to buy short government securities, which meant that interest rates on these fell. One could say that the investment companies suffered a classic bank run. The parent banks were now forced to fulfil the liquidity guarantees they had made earlier. At the end of July the German bank IKB announced that it had suffered major losses through an investment company that had invested in subprime loans. Some weeks later another German bank, Sachsen Landesbank, experienced similar problems. 1  See also the Committee on the Global Financial System (2006): “Housing Finance in the Global Financial Market”, CGFS papers, No 26. 2  Subprime loans comprised an estimated 13 per cent of the total mortgage stock in the United States in 2006. BIS Review 136/2007  3  The banks then began to hoard liquidity and distrust spread throughout the bank system. Banks that had investment companies did not want to lend money as they might need it themselves to meet their own guarantee obligations. Even banks without investment companies were unwilling to lend money as it was uncertain where in the bank system the credit risk was actually located.
Inflation expectations may be sensitive to a large but temporary shock that moved inflation outside the range within which it has remained for some years. With their belief in stability jolted, households’ inflation expectations might move by much more than was justified by the temporary nature of the shock. That would make it more difficult for the central bank to bring inflation back to target. The moral of this particular story is that it may be risky to infer from the observation that inflation expectations are stable that all is well. There will be times when large and persistent shocks occur, and it would be unwise to count on inflation expectations remaining stable when actual inflation starts to deviate substantially from its recent range. So those are the three lessons that I have learnt from Alan: (i) a recognition that economics is not a set of doctrines but a way of thinking; (ii) the importance of using qualitative and quantitative information from a range of sources; (iii) there are a small number of fundamental objectives that are crucial and which we can judge by the Greenspan yardstick of whether we have freed businesses and households from the burden of expending resources to deal with unnecessary policy volatility. Alan’s departure from the central banking scene will deprive us of a source of wisdom, inspiration and leadership. To be sure, Alan’s words, whether spoken or written, will surely still reach us from the sidelines.

Alan, of course, has stressed this in the context of price stability. But it applies  1  Transcript of FOMC meeting 21/05/1996. BIS Review 56/2005  1  equally well to the system of taxes, property rights and public goods provision on which prosperity in a market economy relies. Alan famously defined price stability in the following terms: “price stability is best thought of as an environment in which inflation is so low and stable over time that it does not materially enter into the decisions of households and firms.” 2 I would suggest that implicit in this is a prescription that Alan might write for all economic policies, not just monetary policy: namely, that economic policy stability is best thought of as an environment in which the decisions of households and firms are not materially affected by the need to insure against future arbitrary or mischievous changes in government policy. Just as Alan would define a good monetary policy as one which leads people to stop talking about inflation, I think he would call a good tax policy one under which people stop talking about the tax system. In the last decade we have had a debate about whether such stability should be implemented by quantitative targets or not. In monetary policy we have seen the spread of ‘inflation targets’, and targets have begun to permeate other areas of economic policy too. You will not be surprised to learn that I think that such numerical targets have a role.
More specifically, the origin of the financial crisis showed that even in a relatively calm economic environment it is possible for financial imbalances and risks to build up and lead to disruptions spreading throughout the financial system and causing substantial costs to society. After the financial crisis there has been intensive work around the world on producing tools that can be used to prevent these systemic risks from arising. And a largely new policy area has taken shape; macroprudential policy, which is responsible for these tools. In principle everyone agrees that this policy area is needed and it has begun to be implemented around the world with slightly different institutional set-ups. In Sweden, of course, Finansinspektionen (the Swedish financial supervisory authority) has been given the responsibility for the macroprudential policy tools. 1 On the other hand, the responsibility for the overall task of promoting a stable and smoothly-functioning financial system will be divided between Finansinspektionen, the Riksbank, the Government and the Swedish National Debt Office. So macroprudential policy is intended to be the first line of defence in counteracting financial imbalances that can affect macroeconomic and financial stability. There is broad agreement on this. The issue now being discussed internationally, and on which the jury is still out, is how strong this line of defence can be and whether other policy areas may at least sometimes need to contribute to counteract this type of risk. A more specific question is whether monetary policy should also take into account risks linked to financial imbalances.

The Riksbank is the only instance that has the express task of trying to ensure that the inflation target is met. Of course, the Riksbank also has the task of “promoting a safe and efficient payment system”, which should be interpreted as acting to ensure the financial system is stable and functions smoothly. But, as I have already pointed out, the latter is a task that the Riksbank shares with the Government, Finansinspektionen and the Swedish National Debt Office. Finansinspektionen has the responsibility for the macroprudential policy tools, which comprise the first line of defence with regard to counteracting the emergence of financial imbalances. As I have just mentioned, there is an international discussion on whether monetary policy may need to support macroprudential policy in certain situations. But I have also argued that one condition for this is that there is firmly-established confidence in the inflation target. It is this confidence that creates the scope for monetary policy to take other issues into consideration. Confidence in the Riksbank’s inflation target has long been fairly firmly rooted. But what has happened in recent years is that inflation has fallen to very low levels, instead of beginning to  6  BIS central bankers’ speeches  rise towards the target as the Riksbank and other analysts have expected. The period with an inflation rate below the target has thus gradually become longer and longer. Parallel to this development, the long-term inflation expectations among economic agents have fallen.
Household debt in relation to disposable incomes is now at the same level as just before the banking crisis at the beginning of the 1990s, just over 120 per cent. The bulk of households’ loans have in various ways been secured on homes. A number of factors can help to explain this development. In the housing market the supply of new apartments has been low since 1993 (Figure 2). In the centres of the major Swedish cities, where prices have risen most, it is difficult to build homes at all. Meanwhile, demand has picked up as a result of robust growth in households’ incomes. Disposable incomes have risen by 35 per cent since 1995, measured in current prices. Moreover, migration to the big cities has boosted demand in the very areas where the supply is most limited. During the IT boom, the demand pressure in Stockholm was high, which was reflected in prices. When the equity market and particularly technology companies dropped in value, prices in Stockholm stagnated, but they continued to rise in Gothenburg and Malmö. In the credit market, falling interest rates have of course increased demand and made households more inclined to borrow. Households may also be borrowing more because they are less uncertain than before about how interest rates and inflation will develop. The future seems more predictable, which should increase the willingness to borrow at each given interest rate level. Since the mid-1990s we have gone from a period of high, fluctuating inflation to low and stable inflation.

The forecast for 2004-2006 is that of the National Board of Housing, Building and Planning . Household indebtedness Per cent 160  16  120  12  80  8  40  4  0 1980  0 1982  1984  1986  1988  1990  1992  Debt to income ratio (LHS)  1994  1996  1998  2000  2002  Post-tax interest ratio (RHS)  Sources: Statistics Sweden and the Riksbank  Households’ real and financial assets 45  5000 Real assets (Billion SEK, LHS) Financial assets (Billion SEK, LHS)  4000  40  Debt as percentage of total assets (RHS)  3000  35  2000  30  1000  25  20  0 1988  1990  1992  1997  1999  2001  2003  2004 kv2  Sources: Statistics Sweden and the Riksbank. BIS Review 67/2004  5  The major banks’ profits SEK billion, prices in 2004  Profit before loan losses  dec-04  0 dec-02  0 dec-00  30  dec-98  30  dec-96  60  dec-94  60  dec-92  90  dec-90  90  Loan losses, net  Sources: The banks’ reports and the Riksbank. 6  BIS Review 67/2004
We have a great consideration on this Association and we hope that its role will further be enhanced in the future, particularly on the principled topics that will characterize the development of the banking system and that of the financial system in general in the years to come. Honored bankers, I hope you share the same opinion with me that we become recently witnesses of a qualitative development of the Albanian banking system. I use the opportunity to express that positive assessments on the banking system have been given also in the report prepared by the World Bank and International Monetary Fund after the completion of their assessment made on the Albanian financial system (FSAP-Financial System Assessment Program). Of course, this is good news. Conclusions of FSAP, of this important international passport, are an indication of our earliest conclusions that the Albanian financial system is characterized by a supervised and effective banking system and by other segments that are still in the first development stages where regulation and supervision remain a priority. Regardless of what I mentioned above, sincerely feeling myself as a part of the banking system I would envisage that it needs better and faster motivation to reach higher contemporary standards in all the aspects of the banking activity. BIS Review 39/2005  1  The banking system has experienced remarkable developments recently.

2  BIS Review 39/2005  The main objective remains enforcing legal initiatives that would bring about the modification of legal and sub-legal basis. Modification of regulatory basis of Bank of Albania I have stated even previously that Bank of Albania aims at reviewing its regulatory basis with the sole intent to simplify it and to ease its implementation. For this purpose I have insisted on a continuous basis that the first contacts among mutual technical staffs to raise the banking system concerns on the regulatory framework enforcement should be established. After several discussions we come to the conclusion that the group of the following regulations should be subject of necessary modifications, and I would ensure you that work at the Bank of Albania has already started for this purpose. Methodical guideline on “foreign exchange risks” Observations: inclusion in the calculation of the open position of off-balance guarantees which include as unused credit limit, the financing commitments made and received, and registering of collateral estimated in foreign currency and received for guaranteeing the credit (all banks in the matrix). These are commitments that remain in force and for which, according to the current regulatory framework interpreting, the bank is required to create a real position (within the balance). It is proposed: to reformulate the methodical guideline, excluding the guarantees. Guideline “on bank regulatory capital” Observations: To make clearer systemization for the items being deducted from the additional capital, explaining that on which size deductions are to be calculated.
The increase may be a way of safeguarding the real economy in the long term A common reaction to the decision to increase the interest rate was that the Riksbank pays too much attention to inflation and too little attention to the real economy. I would like to comment on this claim. One reason for increasing the interest rate was that an increase was needed to prevent the high level of inflation from becoming entrenched. This could happen if the price increases for energy and food begin to spread to other areas. This could ultimately lead to a risk of the Riksbank's ability to hold inflation in check being called into question and of inflation expectations remaining at a consistently high level. This is what happened in the 1970s in many parts of the world, although inflation at that time became entrenched at much higher levels than would be the case today. But even though the levels are much lower today, it could still be relatively costly to get inflation back to the target. It cannot be ruled out that this could require quite a long period with high interest rates and restricted demand. There is thus a risk that conducting too expansionary a policy today would sooner or later give rise to costs in the real economy that, furthermore, could be quite considerable. I do not feel, therefore, that it is correct to say that the increase in the interest rate is an indication that the Riksbank does not care about the real economy.

In our latest assessment this was based on the belief that inflation was somewhat higher than now proves to be the case. But monetary policy does not have such a degree of precision that it can control inflation to a tenth of a degree. And, moreover, inflation in July was high and far above the inflation target even after the downward revision of the figure. In the discussion ahead of the interest rate decision, I and other members of the Executive Board highlighted the weak labour market indicators which uniformly pointed to a weaker development of employment, which is also in line with the Riksbank's forecast. After the decision, the Labour Force Survey for August has been presented. This shows that employment increased by a moderate 0.5 per cent on a 12-month basis, which is marginally lower than the Riksbank's forecast. At our September meeting, we had access to the initial version of the National Accounts for the second quarter. These showed that GDP did not increase at all compared to the previous quarter and increased by only 0.7 per cent on a calendar-adjusted12-month basis. Now that the revised version of the National Accounts has been published, we can see that growth in the first two quarters has been marginally adjusted downwards in both cases. This means that growth in the first quarter was 2 per cent on a 12-month basis and with calendar effects taken into account. The corresponding figure for the second quarter was 0.6 per cent.