samchain/econo-pairs-v1 huggingface dataset:
Benoît Cœuré: Monetary policy, exchange rates and capital flows Speech by Mr Benoît Cœuré, Member of the Executive Board of the European Central Bank, at the 18th Jacques Polak Annual Research Conference, hosted by the International Monetary Fund, Washington DC, 3 November 2017. * * * I would like to thank T. Kostka, A. Mehl, I. Van Robays and J. Gräb for their contributions to this speech. I remain solely responsible for the opinions contained herein. Central bank asset purchase programmes are often catalysts for significant cross-border capital flows. By compressing the (excess) return on domestic bonds, they encourage investors to rebalance their portfolios towards foreign, higher yielding assets.1 Such capital flows have reached historical dimensions in the case of the ECB’s asset purchase programme (APP), with both resident and non-resident investors moving out of euro-denominated securities and into bonds issued predominantly by the safest non-euro area sovereigns. I examined these flows in detail in a recent speech at the ECB’s Foreign Exchange Contact Group meeting.2 One intriguing observation I made in this speech was that there was no evidence of a causal link between such capital flows and exchange rate movements. Findings based on event studies instead suggest that, around the time of central bank asset purchase announcements, investors price the exchange rate mainly on the basis of the information these programmes provide to markets about the expected future path of short-term interest rates.

It is therefore important that practitioners and academics alike better understand how this channel propagates policy stimulus through financial markets, within and across economies. The zero lower bound, forward guidance and exchange rates Let me start by briefly recalling the two main propositions I made in my earlier remarks in July. One was that there is compelling empirical evidence that central bank asset purchase programmes are often associated with substantial cross-border capital flows. My first slide illustrates this point quite clearly for the euro area. 1 / 11  BIS central bankers' speeches  The second proposition was that asset purchases affect the exchange rate in broadly the same way as conventional monetary policy – that is, through expectations of interest rate differentials. To date, there is very little evidence to suggest that currency movements are a direct consequence of the impact on the supply of and demand for currency when investors rebalance their portfolios across borders. It is this second proposition that I would like to examine today in greater detail. In doing so, it is helpful to start by recalling the basic relationship between exchange rates and interest rate movements. I do this on the second slide. On the left-hand side you can see that, in the past, there has often been an intimate relationship between short-term interest rate differentials – measured here using bonds with a maturity of two years – and movements in the exchange rate, at least for the euro and US dollar pair.
22  It is the average of real unit labour costs across firms in the economy that matters for inflation. 8  BIS central bankers’ speeches  need to be mindful of the possibility that it represents part of a longer-term trend towards job polarisation. What matters for inflationary pressures, irrespective of the type of job, is the relationship between wages and productivity, as captured by unit labour costs. Across the economy, wage growth is barely above productivity growth. Unit labour costs are currently soft (growing at only around 1% in the economy as a whole), are below the growth rate necessary to meet the inflation target, and indicate that there is further to go before we reach the new sustainable level of employment. In other words, there is still slack in the labour market that must be used up, and the recent revisions to the profile of UK output up to 2012 seem unlikely to change that assessment materially. That slack is wasteful. And if it were to remain, inflation would remain below the 2% target. The MPC’s current best collective judgement is that, while it has narrowed rapidly, this slack is broadly in the region of 1% of GDP. As this margin of slack continues to narrow, we expect wages to pick up slightly faster than productivity, and unit labour cost growth should increase, consistent with meeting the inflation target. However, the MPC expects it will take the better part of three years for this to happen.

Mark Carney: Prospects for the UK labour market Speech by Mr Mark Carney, Governor of the Bank of England and Chairman of the Financial Stability Board, at the 146th Annual Trades Union Congress, Liverpool, 9 September 2014. *  *  *  President and Congress. It is a pleasure to be in Liverpool today to discuss the prospects for the UK labour market. The growth and distribution of jobs and incomes matter to everyone. Employment does much more than provide the means to support workers and their families; it is essential to personal fulfilment and human dignity. Part of that dignity is being paid a living wage. Over the past year, the Bank of England has ensured that it pays all of its 3,600 staff at least the living wage. And we have recently brought all our contracted service staff in central London up to the London living wage. We are in the process of our final review. But I can announce today the Bank’s intention to become an accredited Living Wage employer by the time of the next TUC conference. Of course, the Bank of England’s responsibilities for promoting the good of the people of the United Kingdom go much further than being a responsible employer. We manage monetary policy to achieve price stability: low, stable and predictable inflation. And we promote financial stability by regulating and supervising financial institutions as well as by taking targeted actions to insure against unsustainable indebtedness, as we did earlier this year for the housing market.
This probably means that extensive bond purchases will play a larger role than before when we want to affect rate-setting in the economy and contribute to financial stability. It is therefore problematic that the Government’s proposal for a new Sveriges Riksbank Act suggests several restrictions to practical monetary policy. The Government’s proposal for a new Sveriges Riksbank Act is problematic Quite recently, the Government decided on a proposal for a new Sveriges Riksbank Act. The proposal is now with the Council on Legislation and later this year or next year the Riksdag will take a stance on the proposal. I note that a number of changes have been made with regard to the views expressed by the Riksbank in the consultation last year. This is good. However, I am still worried about the usability of the act in practice. This concerns above all an artificial division between our two core tasks of price stability and safeguarding the financial system. Our 23 [35]  tools for attaining these objectives are divided into two different chapters – despite this being a question of largely the same tools. This is problematic. It all comes down to how we use our balance sheet. Let me take an example from the financial crisis 2008-2009.

I think this is unfortunate, as it will limit the Riksbank's capacity to safeguard a smoothly-functioning financial system. 38 The Sveriges Riksbank Act should be flexible and not govern in detail under what conditions and in what sequence monetary policy tools should be used. Technical and detailed limitations linking different items on the Riksbank’s balance sheet to different purposes – as the Government proposes in its new bill – would make it difficult to adapt monetary policy to the requirements of a particular situation. My picture is that the draft law deviates from international practice in the area of monetary policy and goes completely against the experiences that we have gained during the pandemic and earlier crises. I find it difficult to understand what one intends to achieve with the new proposal. The role of the balance sheet in monetary policy The Riksbank has several tools it can use in its monetary policy. Most people are familiar with the Riksbank’s policy rate. This is a short-term and risk-free interest rate that affects interest rates with a longer maturity, risky rates and ultimately the interest rates charged to households and companies. The impact of the policy rate on other interest rates can vary over time, and depends on factors such as the situation in the economy, conditions on the financial markets, and the structure of the financial sector. The Riksbank's other tools can be divided up, somewhat simplified, into extensive asset purchases and various forms of direct liquidity support to the banks.
Consequently, the optimal path of  BIS Review 46/2006  3  monetary policy may differ. Monetary independence gives us the capacity to react to asymmetric shocks and to limit their negative impact on the domestic economy. To sum up my arguments thus far, monetary independence allows Switzerland, first, to live with a comparatively low rate of inflation and, second, to reduce the impact of Switzerlandspecific shocks, which limits the volatility of Swiss inflation and growth. The third reason for monetary independence, which I would now like to turn to, is the protection of the Swiss interest rate advantage. Continuity of the interest rate advantage One major attraction of adopting the euro for countries with a record of high inflation was that national interest rates would drop in the run-up to the monetary union and converge to the German level, which was the lowest among the euro's founding members. Swiss interest rates, by contrast, have historically been lower, even lower than those in Germany. The reason why Switzerland enjoys the lowest interest rate levels in Europe has nothing to do with the appeal of our bank secrecy, as many believe. Switzerland is not a net importer of capital, but rather a major capital exporter. Traditionally, the Swiss economy displays a large excess of savings over investments. In 2005, our current account surplus represented 14% of GDP and Switzerland exported more capital than the whole euro area.

There are also relatively large variations between households with regard to the distribution of capital income from capital gains, yield and interest on different types of asset and liability. The effect of an expansionary monetary policy on income and wealth distribution can thus vary for this reason, too. Households’ capital incomes may, for instance, differ in their sensitivity to changes in interest rates. All else being equal, low interest rates benefit household with relatively large debts as interest payments become lower. Households with bank savings are correspondingly disadvantaged and households with relatively large interest-bearing assets thus have a lower yield. Here the maturity of the different assets and liabilities also plays a role. If, for instance, mortgages are mainly at fixed interest rates, the effect of interest-rate cuts will be less than if the loans are primarily at variable rates. A comparison between different income groups shows that liabilities as a percentage of disposable income are more than 250 per cent in all groups in Sweden (see Figure 2). With the exception of the group with the lowest income, however, there is generally little difference in the debt-to-income ratio between the groups. 5 A related question is how income from these two sources develop in relation to one another over time. See, for  instance, Karabarbounis and Neiman (2014) who find that the share of labour income has fallen in many countries and many sectors. 7 [14]  Figure 2.
This conference is focused on one important element of this: the role of financial markets in the setting and transmission of monetary policy. That is covered in the Bank’s publications on how the economy works, including the Committee’s 1999 paper on the Monetary Transmission Mechanism (MTM), and books describing the models used in forecasting. 1 But those high-level descriptions miss out an awful lot about how the real and financial parts of the economy connect. Financial variables are limited to the short-term interest rate, the exchange rate, and equities. Nothing on the role of long-maturity interest rates, or on credit spreads and risk premia – which misses out a whole universe of financial asset prices. Very little on credit more generally. Next to nothing on money. And nothing at all on the role of bank intermediation. These gaps were perhaps underlined by a degree of confusion amongst commentators about the way in which Money and Credit featured somewhat more prominently in the Committee’s discussions during the backend of 2006 and into this year (Chart 1). With both having been strong for a while, some asked whether this marked some kind of change in the reaction function, implying a greater stress on nominal variables. Given the near identity of deposits and bank lending, Money and Credit are often used almost inseparably, even interchangeably, with wider measures of non-bank credit looked at only when assessing the health of corporate and household sector balance sheets.

This common view will be established in a set of rules and standards which will be laid down and developed by the EBA and the ECB itself. With the Single Rulebook as a basis, other instruments will also ensure that the same approach is used in the supervision of all banks. This will include the Supervisory Manual and ECB regulations, guidelines and general instructions. BIS central bankers’ speeches  1  Resolution of credit institutions Single resolution, the second pillar of the banking union, is a necessary complement of single supervision. It is essential that if a bank enters into difficulties, it may be efficiently resolved with no or minimal costs for European taxpayers and with little impact on the European financial system and on the real economy. The draft Regulation on Single Resolution, submitted by the European Commission to the Council and the Parliament last July, builds on the concept, envisaged by the European Council more than a year ago, that is, a resolution system comprising a single resolution authority and a single resolution fund. In such a system, resolution will be based, first and foremost, on common EU “bail in” rules, whereby banks’ shareholders and creditors should first bear the cost of a bank resolution. Only if this were not enough, would the single resolution fund – meaning, the Industry – step in, making the fiscal backstop the very last resort.
But Spanish companies must also set in train strategies enabling them to harness the opportunities of enlargement and to increase their presence in the new areas of the single market, channelling their foreign direct investment efforts in that direction. Financial aspects of the Spanish economy Some of the financial features of recent developments in the Spanish economy are of particular importance. As I have said, monetary and financial conditions remained generous in the Spanish economy and, in step with this, financing received by households and firms grew by around 14% last year. This increase, which far outpaced the average for the euro area countries, led to a fresh increase in the private sector’s debt ratios which, in a few short years, have attained the average levels for the euro area. Significantly, the ongoing resort by companies and, above all, by Spanish households to debt in order to finance higher investment and consumption levels is principally a reflection of the favourable impact on agents’ expectations of the new setting of macroeconomic stability, which provides for higher sustainable growth in income and employment. One of the clearest consequences of the recent trend of financial flows in the Spanish economy has been the contribution made to curbing the scope of the recent cyclical downturn in Spain. That has helped the private sector maintain buoyant expenditure on the basis not only of its current revenue but also of its expectations of future income.

In the long run, the higher levels of both employer and employee National Insurance contributions will result in lower growth of real take home pay - that is simply the price of better public services. Real incomes need not fall but, for a short time simply grow more slowly than otherwise. Indeed, if productivity growth rose, then real wages growth need not fall at all. Profits may bear some of the brunt in the short run, but over the longer term the adjustment will be to wages because firms will need to earn the going rate of return on new investment. It remains to be seen whether the additional National Insurance contributions will lead to attempts by firms to push up prices to recoup the higher employers' contributions and by employees to push up wages to offset their higher contributions. The commitment of the MPC to keeping inflation on track to meet the target, and its track record since 1997, should help to anchor expectations of inflation to 2.5%, thus encouraging the adjustment to occur without a rise in inflation. It is certainly helpful that the increased contribution rates have been announced well in advance so that expectations of real wage rises can adjust. In recent months the rate of increase of average earnings per person has been extremely low, partly because of a fall in average hours worked. For the economy as a whole, average earnings rose by only 0.9% in the year to February - the lowest figure recorded since April 1967.
Nessén, Marianne (2016), Discussion of ”The case for unencumbering interest rate policy at the zero bound” by Marvin Goodfriend”, Jackson Hole, Wyoming, 25-27 August. Rachel, Lukasz and Thomas D. Smith (2015), “Secular drivers of the global real interest rate”, Staff Working Paper No. 571, Bank of England. Rogoff, Kenneth (2016), “It would be wrong to abandon the policy of negative rates”, Financial Times, 11 October. Rosengren, Eric S. (2015), “Changing economic relationships: Implications for monetary policy and simple monetary policy rules”, speech on 16 April, Federal Reserve Bank of Boston. Skingsley, Cecilia (2016), “Should the Riksbank issue e-krona?”, speech at the FinTech conference in Stockholm, 16 November, Sveriges Riksbank. Turk, Rima A. (2016), “Negative interest rates: How big a challenge for large Danish and Swedish banks?”, IMF Working Paper WP/16/198, International Monetary Fund. 13 [20]  Figure 1. Good GDP development in Sweden after financial crisis Index, 2007 Q4=100  Sources: Bureau of Economic Analysis, Eurostat, Office for National Statistics and Statistics Sweden Figure 2. Inflation fell early in Sweden Annual percentage change  Note. The CPI for the US and the HICP for others. Sources: The Bureau of Labor Statistics, Eurostat and Statistics Sweden. 14 [20]  Figure 3.

2 The long period of low inflation has also started a debate regarding the grounds for the Riksbank’s monetary policy and the inflation target, which as far as I can tell is more intense than in most other countries. In this sense, too, one can therefore in some ways say that we are pioneers. What I intend to do today is first to say a few words about this debate. Most often, the criticism merely states that the “monetary policy of the Riksbank is wrong”. The reasons for this vary: because a negative policy rate is not healthy, because housing prices are rising, because the krona is too weak or because the economy is already developing well. There is usually no detailed reasoning as to what the consequences would be if the policy was shifted in another direction. In particular, what is often missing, but I argue is crucial, is a discussion on why the advantages of the inflation target should no longer apply and what the consequences would be if the Riksbank abandoned it. After discussing the debate on monetary policy, I intend to conclude by looking ahead and examining the problems and possibilities for monetary policy in the future. Here, I focus in particular on a scenario where monetary policy is not made more expansionary despite a delay in reaching the inflation target. In Sweden, the policy rate has been negative since February 2015. This has not been an uncontroversial policy. The criticism can be divided into two types.
Much of this reflects the inevitable correction of exuberance on the part of borrowers and lenders, the conditions for which were created by the failure to tackle the global imbalances that left most major countries with unsustainable exchange rates, unsustainable paths of consumption, saving and borrowing, and unsustainably low long-term real interest rates. Our economy too needs to rebalance as it recovers, and that affects the pace of recovery. Although the downturn in UK GDP from the peak in 2008 to the trough in 2009, at around 6%, was broadly similar to that in most other industrialised countries, our recovery has been noticeably slower, with a cumulative rise in output from the middle of 2009 of only about 3½% compared with 6% or more in many other countries. But has the process of recovery and rebalancing been derailed or merely delayed? With the right prescription we can ensure that it has been only delayed. Three factors in particular have adversely affected the pace of recovery in the UK. The first is an especially deep and protracted squeeze on the level of many people’s real take-home pay. Over the past four years, money wages have on average been rising at less than 2% a year. And higher energy and food prices, as well as tax changes and a lower exchange rate, passing through to the level of consumer prices, have all contributed to the squeeze. On average, real take-home pay is no higher than back in 2004.

I trust that our product innovation will also promote the development of the bond market in Hong Kong. This creates a win-win situation for the investors, the placing banks and the Corporation. I like to thank the banking community for supporting our bond issuance. In particular, HSBC and Bank of China (Hong Kong) are underwriting a portion of the bond issue as well as placing the notes. My appreciation also goes to the other placing banks, namely, Bank of America (Asia), Bank of Communications, Bank of East Asia, Chiyu Bank, CITIC Ka Wah Bank, Dah Sing Bank, DBS Bank (Hong Kong), Hang Seng Bank, ICBC (Asia), Liu Chong Hing Bank, Nanyang Commercial Bank, Shanghai Commercial Bank, Standard Chartered Bank (Hong Kong), Wing Hang Bank and Wing Lung Bank. With your support, I am sure we will have another successful retail bond issue that is welcome by the investors. Thank you. BIS Review 81/2006  1
This, in the judgment of the Governing Council, warranted a thorough examination of additional information before drawing further conclusions for monetary policy in the context of our medium term-oriented monetary policy strategy focused on maintaining price stability. BIS Review 144/2007  3

The potentially large number or companies, SMEs in particular, that may be affected by these solvency problems in the current crisis plus the fact that the public sector can be an important creditor as well, given the generalised use of public guarantees during the crisis, introduce additional difficulties or specificities that should also be taken into account. In sum, withstanding the negative consequences of the COVID-19 crisis on the solvency of viable firms, is currently a major challenge for economic policymakers. Swift policy action taken since the start of the crisis allowed a liquidity crisis to be avoided and has helped translate the medical advances against the disease into more positive macroeconomic scenarios. However, we must now be ready to react to these solvency risks in order to prevent the current crisis from developing a financial component which, as we painfully know from recent experience, would only make the crisis more lasting and socially and economically more costly. Thank you for your attention. 2/2  BIS central bankers' speeches