samchain/econo-pairs-v1 huggingface dataset:
Jean-Pierre Roth: Monetary independence and monetary stability two sides of the same coin Luncheon address by Mr Jean-Pierre Roth, Chairman of the Governing Board of the Swiss National Bank, to the FEBRABAN Brazilian Federation of Banks, Sao Paulo, 18 November 2004. *  *  *  Ladies and Gentlemen It’s a real pleasure to be with you today. As you may know, our two countries have a long history of mutually beneficial relationships, going back as far as the 16th century. As very often in long-standing relationships, the first steps were quite difficult. In 1557, Protestant emigrants from Calvinist Geneva tried to found a “New Geneva” close to today’s Rio de Janeiro. Unfortunately, their obedience to the Protestant church was not considered as an asset at the time, and they had to leave the country rather precipitately. But hard work is a Swiss characteristic, and business relations between Brazil and Switzerland developed intensively in the 19th and 20th centuries. In 1907, diplomatic representatives were sent to Berne and Rio. As a matter of fact, the enormous potential of Brazil has been attracting Swiss firms from every sector of our economy. Nestlé and Jacobs-Suchard were among the first to cross the Atlantic in the 20s of the last century, but the chemical industry with Ciba, Geigy, Sandoz and Hoffmann La Roche rapidly followed in the 30s. After the Second World War, the machine-tool industry with Brown-Bovery, Schindler and Sulzer, to name only the most famous, joined the Swiss club, followed later on by Swiss banks.

The underlying payment chain is largely the same as earlier. So far mobile payments have primarily been used for transfers between private individuals or to charities, clubs and associations. In some cases, the payee receives the funds immediately, while in other cases it may take several days. For purchases in shops, cash and cards are fast and user-friendly payment instruments. This has probably held back the rise of mobile payments in shops, although they are rising there as well. A third area is mobile payments linked to online purchases. Services are being developed in all three areas. A look at the conference programme indicates that we will be hearing more about that today. There are still some challenges facing mobile payments. Most mobile payments are made using an international payment card. As their use becomes more widespread, this solution will not be viable in the long term. It will be too expensive. Another challenge is that users have to download a large number of apps to make sure that they can send and receive mobile payments. This is not very practical for users. Communication between apps, so-called interoperability, is key. Moreover, a solution with many different terminals at the cashier counter is not practical for customers or shops. Also for mobile payments, it is clear that standardisation and common solutions is the only viable path. Our aim is for mobile payments to be cheap and fast, and that apps can communicate and use the same shop payment terminal. The question is how to achieve that.
One important element is the importance of the services the firm provides to the broader financial system and the economy and the ease with which customers can move their business to other providers. Another is the extent to which the firm’s structure and activities create the potential for contagion – that is, direct losses for counterparties, fire sales of assets held by other  1  This would presumably require legislation. BIS central bankers’ speeches  1  leveraged financial institutions, or loss of confidence that might precipitate runs on other firms with similar business models. The presence of large negative externalities creates a dilemma for policymakers when such firms are in danger of failing, particularly if the wider financial system is also under stress at the same moment. At that point in time, the expected costs to society of failure are very large compared to the short-run costs from providing the extraordinary liquidity support, capital or other emergency assistance necessary to prevent catastrophic failure. The market’s belief that a TBTF firm is more likely to be rescued in the event of distress than other firms weakens the degree of market discipline exerted by capital providers and counterparties. This reduces the firm’s cost of funds and incents the firm to take more risk than would be the case if there were no prospect of rescue and funding costs were higher.

First, given the length of the foreclosure process, realised losses on the sub-prime mortgages which underpin securities may not total much more than $ billion so far. Second, if projecting forward the rate at which delinquencies are cumulating on recent vintages of subprime mortgages, we can estimate that losses on the securitised loans might ultimately exceed $ billion. Thirdly, using the sub-prime ABX indices to “mark-tomarket” sub-prime securities, can produce figures of $ to 400 billion. Against these figures, international banks have so far announced writedowns (net of hedging) of $ to $ billion. •  Although these are huge numbers, they amount to less than 1% of the total assets of the Large Complex Financial Institutions (LCFIs) in the US and Europe. In relation  2  BIS Review 24/2008  to GDP, even the higher estimates would be comparable to the losses in the Savings and Loans crisis. 2 •  But the securitisation model has not just made it difficult to scale the problem; it has added a large measure of uncertainty and opacity to the distribution of losses and that is a key factor in the continued reluctance to lend and the closure of most ABS markets. The current worries on the future of the monoline bond insurers reflected in their CDS prices in Chart 6 are exacerbating the uncertainties about individual banks’ exposures. The third factor is the dislocation of the investor base for ABS. Since the summer many of the main buyers of ABS have withdrawn from the market.
One example is the pharmaceuticals industry, where the development of new products would probably not be possible at the same rate if new medicines were not protected by patent laws. Incomplete competition is thus important for ensuring that product development takes place within research-intensive operations. There may even be special circumstances that make production most effective under limited competition. This applies in particular to various types of infrastructure, for instance the trunk network for electricity and water, which are what is known as natural monopolies, where it is more effective to society to only have one producer. These assertions are important to monetary policy. The Riksbank's target is expressed in terms of the rate of change in consumer prices, not in terms of maintaining a particular price level. It is important to distinguish between the effects on the price level and the change in the price level. If competition is incomplete and leads to a low level of cost consciousness or high profit margins, it may contribute to high price levels, but will not necessarily affect the rate of change in prices. It is conceivable that a country could have a high price level to start with, but a low expected inflation rate. An example of this is that several countries with high price levels, such as Sweden, Switzerland and Japan, have been among the countries with the lowest inflation rates in recent years.

10  Government Bill 01/02:167, "Changes in the Competition Act for more efficient combating of cartels, etc.". BIS Review 25/2002  5  registered in a special product register containing information on the exact contents also hampers import competition as most other countries do not have such registers. The fact that the Swedish market is small means that it is not economically viable for foreign manufacturers to make the adaptation required by Swedish rules or legislation. The existence of recycling systems for cans and bottles also makes import competition more difficult in the soft drinks market (soft drinks are approximately 40 per cent more expensive in Sweden than the rest of the EU). The fact that requirements motivated by concern for the environment could impede competition does not, of course, mean that they should be abolished. On the other hand, this is a good argument for coordinating the various regulatory systems in Europe. The bank sector  As I am today speaking to people who work in the bank sector, I thought I would take the opportunity to say a few words on competitive conditions in this sector. The bank sector was characterised by extensive regulations right up until the mid-1980s, which acted as an impediment to dynamic development in this sector. Few new operators could enter and competitive pressure was fairly low. However, the deregulation that has occurred since then has radically changed this picture.
Although the burden of servicing these debts is currently manageable because of the low level of mortgage interest rates, concerns about future servicing costs as interest rates normalise may lead the high stock of outstanding debt to weigh on these households’ spending. The possibility of unemployment may also encourage saving, though happily unemployment has so far risen by less than many observers, including the Monetary Policy Committee, feared. The relative robustness of employment, given the depth of the decline in output, owes something to the willingness of employees to accept low pay awards in the face of the downturn. Last year over a third of private sector pay settlements were pay freezes, and a recent survey of their business contacts carried out by the Bank’s regional Agents points to a similar outcome this year (Chart 2). Third, the Government allowed the fiscal deficit to rise in response to the downturn. That was helpful in cushioning the fall in demand. But the deficit now looks set to be around 12% of GDP this year, which is unsustainable in the medium term. That creates a difficult balancing act. Cutting spending and/or raising taxes is likely to result in lower domestic demand, though a failure to do so may lead long-term interest rates to rise, also hitting demand. The recent depreciation of sterling appears to owe something to heightened fears about the UK’s fiscal prospects.

In particular, FSTEP will offer scholarships to eligible top graduates from various universities to participate in its one-year fast-track training programme. I wish to congratulate FSTEP for the successful effort in designing a new syllabus and it continuous effort to improve the FSTEP programmes remain contemporary and relevant agreed to by all parties within the financial services industry. More importantly, it is my hope that FSTEP will continue to produce the quality of graduates that will meet the needs of the industry. I hope that all of you will have a fruitful discussion and dialogue. On this note, I declare open the event “FSTEP: Syllabus Enhancement”. 2  BIS Review 100/2010
To convince you of how important learning about key economic relationships is to decisions on monetary policy, let me show you two charts which illustrate some of the challenges facing the Monetary Policy Committee. A basic proposition common to most models of the economy is that if demand exceeds the supply capacity of the economy then there will be upward pressure on wage and price inflation. In the labour market supply capacity is often equated, in the long run, with a particular rate of unemployment. Chart 2 plots the unemployment rate against the inflation rate in the UK over the period 1993-2004. It shows the trade off between unemployment and inflation in the short run, also known as the Phillips curve. Unemployment fell from nearly 10% in 1993 to less than 3% in 2004. But – in stark contrast to the earlier post-war period – inflation remained virtually unchanged. How can we explain this phenomenon? Was it because the natural rate of unemployment also fell – perhaps as a result of labour market reforms enacted in the 1980s and 1990s? Or did the Phillips curve become flatter – perhaps because inflation expectations were anchored on the target so that deviations of unemployment from the natural rate generated less pressure on wages and inflation than before? Or was the outcome the result of a chance sequence of shocks that held inflation down?

See Capie and Wood (2001). BIS Review 36/2005  1  is the natural way to conduct policy when there is a great deal about its effects that we do not understand. The practice of monetary policy must recognise that monetary theory will continue to evolve. That is why my lecture is subtitled: practice ahead of theory. What can monetary policy do? In practice, monetary policy means setting the level of the official interest rate at which the central bank deals with the banking system.3 But ideas about how interest rates should be set, and with what objective, have been subject to radical changes since the 1970s. Let me give three examples. None is new; the subject has moved on. I give them to show that monetary policy operates against an everchanging backdrop of ideas about the way the economy works, a theme that lies at the heart of my lecture. First, it is now widely accepted that there is no long-run trade-off between output and inflation. Both theory – following Friedman and Phelps – and practice – particularly in the 1970s – showed that permanently higher inflation does not bring faster growth or higher employment, and may well reduce both. But in the post-war period views were different. In 1959 the Radcliffe Report on the Workings of the Monetary System seemed to support the idea of a permanent trade-off. The objectives of monetary policy included, it argued, “a high and stable level of employment” and “reasonably stability of the internal purchasing power of money”.
The corresponding figure for Sweden was a surplus of over 1 per cent; in line with the so-called surplus target.4 The much stronger state of public finances than in many other countries was largely a consequence of the fiscal policy framework that has gradually been developed since the 1990s.5 This put Sweden in a much better initial position in terms of its public finances when the financial crisis began. Fiscal policy contributes to stabilising business cycle fluctuations without any specific decisions being made through the so-called automatic stabilisers; that is through the fact that tax revenues fall and expenditure for various grants and benefits increases automatically when economic activity declines and unemployment increases.6 However, in addition to this, active decisions can also be made that affect revenues and expenditure. Despite the severe downturn in 2008–2009, public net lending in Sweden fell to only –1 per cent of GDP in 2009. This is much less than in the euro area, the United Kingdom and the United States (see Figure 6). Public indebtedness has increased substantially in the United States and in many European countries in recent years, partly as a result of the automatic stabilisers and partly as result of government intervention in the financial sector to deal with systemically-important banks that have experienced problems. In these countries, the scope to influence the economy using fiscal-policy stimulation measures is therefore very limited today.

That is why when the Bank was fundamentally reformed after the crisis, the procedures and structures of the MPC were largely replicated in the Bank’s two new policy committees, the FPC and the PRC. Crucially, all the Bank’s committees have access to the Bank’s information and analysis, all are well-informed about each other’s reaction functions and all can coordinate their policies when appropriate. The Bank’s Committees are independent but not isolated. The second lesson of the past two decades has been the importance of the flexibility in flexible inflation targeting. While the inflation target applies at all times, the remit has always acknowledged that inflation may deviate temporarily from the target on account of shocks. Since 2013, it has explicitly recognised that in exceptional circumstances, bringing inflation back to target too rapidly could cause undesirable volatility in output and employment. In exceptional circumstances like today when the economy is facing profound structural change, the MPC can extend the horizon over which it returns inflation to target from above in order to balance the effects on jobs and activity. After all, even though monetary policy cannot prevent the weaker real income growth likely to accompany the transition to new trading arrangements with the EU, it can influence how this hit to incomes is distributed between job losses and price rises. This brings me to my final point: while carefully circumscribed independence is highly effective in delivering price and financial stability, it cannot deliver lasting prosperity and it cannot solve broader societal challenges.
The specific interest rate path cannot and must not be looked upon as a guarantee and a path to which we unconditionally have committed ourselves. Should economic developments deviate from the projected path, the interest rate path will also shift. Instead, it can be said that through our communication we commit ourselves to a pattern of behaviour, a response pattern. If interest rate expectations can be influenced, it will in many cases be useful for a central bank to commit itself to a predictable response pattern. This kind of commitment can, if it is perceived as credible, have a positive effect on the  2  BIS Review 10/2007  economy’s functioning and enhance the effectiveness of monetary policy. I will revert to this theme shortly. A relevant question is the extent to which our communication actually influences interest rate expectations. Forward interest rates derived from yields at various maturities will in the absence of term premia and other risk premia normally reflect the market’s short-term interest rate expectations.1 When Inflation Report 3/06 was published in the beginning of November last year, the forward interest rate was on a par with our forecast for the next six months, but considerably lower thereafter. It is now almost three months since the previous Inflation Report was published. Since that time forward rates have increased and approached Norges Bank’s interest rate path. Forward rates somewhat further out are still lower than our forecast.

BIS Review 10/2007  3  Long-term bond yields have been at historically low levels in recent years. From lying in a broad range around 10 per cent at the end of the 1980s, they have fallen to around 4 per cent in the past few years. Developments in nominal interest rates must be seen in the light of inflation developments. High and variable inflation pushed up nominal interest rates earlier, both directly and via an inflation risk premium. Future inflation uncertainty generates uncertainty as to the real value of investments and investors may require an extra compensation – a risk premium – for this. Low and stable inflation over the past 10-15 years has probably led to a decline in the normal interest rate level. Nevertheless, it would appear that long-term interest rates have been lower in recent years than one would believe to be a sustainable level, at least in the very long run. 4  BIS Review 10/2007  According to economic theory, in the long term the real interest rate is determined by structural fundamentals such as productivity and population growth and households’ long-term saving preferences.2 It seems reasonable that there is a long-term relationship between an economy’s potential growth and the real interest rate. If potential growth is higher than the real interest rate, the return on fixed investment will be higher than the cost of investing. This provides an incentive to increase fixed investment. Higher demand for fixed investment normally leads to higher real interest rates.
This is particularly important for capital markets, because a climate asset’s value will be determined far more by where it is going, than by where it has been. Faced with the choice between assets from two companies, one with relatively low current emissions but no investment plans, and another with relatively higher current emissions but aggressive and credible future plans to lower them, an asset allocation strategy based exclusively on current 24 25  Results drawn from https://mitsloan.mit.edu/ideas-made-to-matter/why-esg-ratings-vary-so-widely-and-what-you-can-do-about-it https://www.researchgate.net/publication/342550204_Mind_the_gap_Machine_learning_ESG_metrics_and_sustainable_investment 10  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  10  metrics would not only underperform an alternative strategy that takes account of forward looking information, it would also risk failing to fund the very investments needed to tackle climate change. The biggest rewards will fall to those who are first to spot a heavy polluting company on its way to becoming credibly green. Forward looking disclosures can take many forms. At the highest level, they may set out issuers’ climate targets, and their chosen strategies for meeting them. They may give specific descriptions of investment projects. Or they may involve model-based projections of future performance.

And adaptation to structural change to the economy will mean putting capital into new businesses to replace those whose business models are no longer viable. Failure of risk transfer markets in things like directors’ and officers’ indemnity and – yes – business interruption would have a cooling effect on this necessary investment. So if a protection gap were to emerge through the reactions of insurers and insured to what they have learned about contract uncertainty, we should worry about the wider impact that that might have on economic recovery. I do see a risk of a protection gap. The pandemic has highlighted risks around unintended exposures in insurance contracts and unexpected links across risk areas under extreme circumstances. Most acutely on business interruption insurance – where we have seen vastly different interpretations of how policies should respond to the restrictions placed on businesses as a result of Covid-19, and the sums involved have perhaps militated against either insurer or insured settling for a compromise outcome to claims. The high profile of disputes over business interruption claims has done nothing to dent the popular caricature of an industry that is happier to accept premiums than to pay claims. This matters: it could have an impact on demand for policies, if businesses perceive them not in practice to offer the cover they need – not just in business interruption, but in indemnity policies that cover non-specific perils.