samchain/econo-pairs-v1 huggingface dataset:
As a consequence, the euro is becoming extremely attractive, as a vehicle, a transaction, an investment and a reserve currency. As you may know, as central bankers, we remain neutral as far as the internationalisation of the euro is concerned. We are neither encouraging, nor discouraging the process. But, as a citizen, I cannot help and feel proud of having one the two main currencies in the world. Long term prospects Looking into the future, I would like to try and answer four questions: is monetary integration sustainable in the long run? What are the prospects for the enlargement of the euro area? Can the euro serve as a model for other regions in the world? And finally, is monetary union going to lead to further political integration in Europe? Solidity of the euro area I am aware that there still is, on this side of the Atlantic, a lot of skepticism about the future for the euro. Four years ago, one of your leading academics, (Martin Feldstein) wrote a piece in Foreign Affairs arguing that monetary union would reignite conflicts and war in Europe. This is, of course, the extreme form of a basic argument: that there are too many divergences between European states for them to withstand the pressures of monetary unification. Put in simple economic terms, it boils down to the argument that the euro is not an optimum currency area. In my view, this is less and less true.

And the reason for this optimism is the euro. The single currency has the potential to bring enormous benefits to European nations, which they can use to achieve a high degree of stability and prosperity, in the interest of all countries in the world. 4  BIS Review 43/2007
It is of course, extremely difficult to know what would have happened in the absence of the asset purchase programme; not least because Bank Rate was at a record low and because other, major central banks also loosened policy sharply. There might never be agreement on a precise quantification of its effects but my own view is that the asset purchase programme was extremely successful in meeting its immediate objectives. 4 In particular I would pick out the following points which were all consistent with the various channels through which QE can work:   Broad money growth, although anaemic, did not fall by as much as should have been expected given previous contractions in nominal GDP growth (Chart 1);    Analysis by some of my colleagues 5 suggests that asset purchases may have lowered long term interest rates on gilts at 5–25 years maturity by around 100 Basis points relative to what would otherwise have been the case;    Demand for risky assets increased: spreads on corporate bonds fell markedly, and issuance of both corporate bonds and equities picked up to record rates in 2009 (Chart 2 and Table 1);    Inter-bank borrowing rates fell back sharply, most likely because significant increases in commercial bank reserves reduced the need for banks to borrow from each other in the inter-bank market. For example, three-month sterling LIBOR 6 rates fell from over 2% in late 2008 to under 1% during the course of 2009 (Chart 3).

2 While the form of this policy was “unconventional”, the ultimate goal was identical to any normal reduction in Bank Rate – namely to stimulate nominal demand in the economy, and hence help the MPC achieve its remit of targeting 2% CPI inflation. The UK was not alone in adopting unconventional measures. Both the Federal Reserve Board in the United States, and the European Central Bank undertook a range of alternative measures too. Although the precise nature of the  1  In the central bank community, asset purchases are known as an example of an “unconventional” monetary policy. 2  See Fisher (2010) “The corporate sector and the Bank of England’s Asset Purchases” available at http://www.bankofengland.co.uk/publications/speeches/2010/speech423.pdf . BIS Review 135/2010  1  programmes differed from country to country, all three central banks saw their balance sheets expand, funded by an increase in commercial bank reserves. 3 At the time we started the asset purchases, it was far from clear how successful the policy would be. None of those involved had ever personally experienced a financial crisis as big as this, nor a recession so deep. And no one had direct experience of conducting a major asset purchase programme in the UK. In the press and amongst other economic commentators there was a lot of scepticism expressed about the likely efficacy of the policy.
In fact, these events have taken place at a time when the Spanish economy, too, continues to show considerable buoyancy that is prolonging its already long expansionary phase. Output grew in the first half of this year at a rate of around or slightly above 4% (in line with  BIS Review 134/2007  3  the performance in the closing months of 2006) and the vigour of activity was compatible with a more even balance between domestic and foreign sources of spending. In particular, the contribution of net external demand, which trimmed two percentage points from growth in certain months of 2004 and 2005, improved in 2006 and continued to do so in the first half of this year. At the same time, the share of business investment in domestic demand has continued to rise at the expense of private consumption and residential investment. The process of normalisation of monetary and financial conditions that commenced at the end of 2005 has contributed effectively to achieving this more balanced composition of spending. Moreover, the healthy performance of the world economy in 2006 and, in particular, the recovery of the euro area have spurred exports after several years of weakness. On the supply side, the growing availability of labour resources in a highly expansionary demographic setting helped to smooth the adjustment of activity to this robust demand, preventing excessive cost and price pressure from building up.

The increase in doubtful assets and defaults in US mortgages has set in motion a global process of upward revision of credit risk premiums, which in the climate of economic boom of recent years had sunk to very low, barely discriminatory levels, prompting what was probably excessive investment in potentially high-risk activities. These investments were further driven by the proliferation of new financial intermediaries specialised in the credit risk transfer markets to which I referred earlier. In particular, in the current bout of turbulence a major role has been played by institutions that raise funds by issuing very short-term fixed-income securities and use the proceeds to acquire structured products linked to long-term loans, including US sub-prime mortgages. The liquidity risks associated with such practices have been clearly under-estimated by these specialised institutions. And the consequences have been felt in the money markets because some credit institutions agreed to provide liquidity to these specialised institutions if, upon maturity, the latter did not manage to roll over the funds raised via the issuance of securities. This led to a serious liquidity crisis in the money markets of a good number of industrialised economies, including the euro area. Central banks, and the ECB in particular, reacted rapidly and implemented emergency processes to inject the amounts of liquidity demanded by the market. This prevented the lack of liquidity from compounding the crisis and sent a message of calm and reassurance to the markets.
11 The Bank of England survey found that respondents preferred interest-earning assets to back stablecoins intended as a store of value, but other models could be appropriate when stablecoins were used largely for transactional purposes. Responses to the Bank of England’s Discussion Paper on new forms of digital money (March 2022) 12 Hauser, Andrew (2019) Waiting for the exit: QT and the Bank of England’s long-term balance sheet, remarks at the European Bank for Reconstruction and Development,  London; Åberg et al. (2021) “Demand for central bank reserves and monetary policy implementation frameworks: the case of the Eurosystem ”, ECB Occasional Paper No. 282. 13 Bank for International Settlements, Central bank digital currencies: financial stability implications (September 2021). 14 Bank of England, New Forms of Digital Money (June 2021). 15 Norway and Sweden have seen large declines the demand for currency in recent years. In the U.S., the extent to which faster, or new forms of payments would affect the  demand for currency may be smaller even as the use of cash in U.S. consumer payments declines, given the important international demand for U.S. dollars. 16 Some have argued that stablecoins might not be the best assets to exchange on a distributed ledger and that tokenized deposits might be a better option. See Rod Garratt,  Michael Lee, Antoine Martin, and Joseph Torregrossa, The Future of Payments Is Not Stablecoins, Federal Reserve Bank of New York Liberty Street Economics, February 7, 2022.

However, what seems more challenging to me is being able to reach the delicate balance between achieving our policy objectives and, at the same time, avoiding collateral damage, to the transmission of monetary policy and particularly to the stability of the financial system. It would probably be short-sighted to think that a CBDC would have no impact on the financial system. Of course it may replace cash to some extent, but it is difficult to believe that it will not attract a fraction of deposits as well. This means that a CBDC could have implications for financial stability, monetary policy, and the allocation of credit to the real economy. However, dispensing with its issuance in order to preserve the status quo is not an option either. Let me explain. We are in the middle of a  3/6  BIS - Central bankers' speeches  whirlwind of change, so the question should not be "what should we do to avoid change?" but rather, "what should we do to ensure the stability of the financial system, in the midst of change?". That said, CBDCs may come in different shapes and forms; therefore, adequate design and implementation are needed in order to minimise their impact. This is not a minor task and requires careful analysis. There are many interlinked design options and they all have to be considered, both individually and holistically, in order to ensure they are a perfect fit. This is, in fact, what the Eurosystem is currently doing in the context of the digital euro.
In the Spanish case, the pension system reforms introduced in recent years have addressed this challenge by, among other measures, putting back the retirement age, introducing a sustainability factor linking the initial pension to the increase in life expectancy and setting in place a new mechanism making the annual rise in pensions conditional upon the system’s revenue and expenditure being balanced, with ceilings and floors duly in place. On the estimates available, in benign macroeconomic scenarios, these reforms would be successful in countering the effect of the expected increase in the so called dependency ratio, the ratio of the population aged over 65 to the working-age population, on pension spending and, therefore, would contribute to restoring the system’s long-term sustainability. 4/9  But, without further increases in the system’s revenue the adjustment mechanism would operate chiefly through reductions in average pensions relative to the average wage, i.e. via a reduction in the public pension replacement rate, thus, raising the issue of the “social sustainability” of the adjustment mechanism. Beyond specific proposals, what remains crucial is that any reform strategy should be transparent, increases the link between intertemporal contributions and benefits of the system and is anchored in an adjustment mechanism that guarantees its financial balance. In this context, a medium-term fiscal programme is needed to complete successfully the fiscal consolidation process. This programme should detail the legislative initiatives needed to achieve the targets and include a prudent medium-term macroeconomic and fiscal revenues forecast.

What we observed before the crisis, and what we became painfully aware of when it erupted was, however, that public and private agents in some countries did not change their behaviour, that financial markets did not play any disciplining role and that the loose application of the Stability and Growth Pact and the Broad Economic Policy Guidelines rendered them ineffective as stabilisation devices. The Pact and the Guidelines were not strong enough to prevent the accumulation of a series of imbalances. We also discovered two other gaps during the crisis: too little attention had been paid to how financial markets work within a monetary union and no crisis management mechanism was available. To be stable, the European building needed operational repairs. The stability principles, as conceived in Maastricht, were insufficient and a new culture of stability had to take over. The ECB acted on several occasions to curb the so-called “tail risks” – the risk of the monetary union breaking up – and to gain the time needed for others’ actions to bear fruit. It is worth noting, however, that monetary action can hardly go beyond this as the cracks detected in the building were not of a monetary nature. At the Member State level, fiscal consolidation policies and structural reforms were needed and are being implemented to better accommodate domestic behaviour to the patterns of stability required within a Monetary Union. As for euro area governance, a deep process of reform has been undertaken.
Situation in the banking sector As our Financial Stability Report published today describes in detail, the situation in the Swiss banking sector deteriorated considerably in 2008. The turbulence in the money and credit markets that had erupted in mid-2007 worsened in 2008, also spilling over to other areas. The two big banks, in particular UBS, were hit hard by these negative developments. As you know, together the two institutions recorded a total loss of some CHF 30 billion in 2008. 1 They took extensive measures to strengthen their resilience. In addition to reducing risky positions, they raised sizeable amounts of private capital. The resilience of UBS was further strengthened by the package of government measures announced by the Federal Council, the SNB and the then Swiss Federal Banking Commission (SFBC, now FINMA or Swiss Financial Market Advisory Authority) in October 2008. Owing to all of these measures, the big banks’ capital situation at the end of 2008 improved slightly compared to the end of 2007, despite the massive losses incurred. However, our assessment is that, overall, risks in the big banks’ books are still material. This is all the more serious since, compared to the end of 2007, the profit potential of the big banks is lower. Banks with a domestic business focus, i.e. cantonal, regional and Raiffeisen banks, present a much more favourable picture. Although the overall profitability of these bank categories declined in 2008, it still remains above the long-term average.

In reality, this is precisely where the moral hazard issue associated with the implicit guarantee of the “too big to fail” (TBTF) status becomes relevant. By definition, a TBTF financial institution can expect to be rescued from bankruptcy. As a consequence, the banks’ bondholders know they will not bear the cost of excessive risk-taking and therefore they need not  4  5  Though determining the precise level of socially optimal risk-taking is difficult to gauge for the economy as a whole, excessive risk-taking by an individual institution is easier to detect. In Switzerland, a FINMA circular on remuneration schemes lays down rules for the remuneration of employees of financial institutions. Cf., FINMA Circular 10/1, “Minimum standards for remuneration schemes of financial institutions”, October 2009. 6  Executive compensation schemes which could represent an additional mechanism for improving managerial compensation include schemes that align managerial compensation with the long-term objectives of the firm. Skills are better assessed in relative terms and on a risk-adjusted basis. Therefore, a compensation scheme that rewards better-than-average corporate results and refers to risk-adjusted performance measures may reduce risk-taking and reward more skills. For a more complete discussion, cf. “The Squam Lake Report: Fixing the Financial System”, Princeton University Press, May 2010.
As we have seen, movements in the dollar/mark exchange rate were magnified as far as the Swiss franc is concerned in the past, but are much dampened since the birth of the euro. When the euro depreciated against the dollar at first, the Swiss franc did so too, but to a much lesser degree. And later, when the euro recovered against the dollar, the franc appreciated as well, but again to a lesser extent. In order words, our effective exchange rate has been less affected, the movement of the dollar being offset, at least to some extent, by a movement of the euro in the opposite direction. It seems to me that this phenomenon has benefited not just Switzerland, but also many other countries with their own independent currencies, such as the United Kingdom, Canada, Australia, New Zealand, Singapore, and Norway. I would be very curious to know what your experience has been in this respect. This evolution might not last. Perhaps it is the outcome of chance, but it has been sufficiently persistent over the past few years to be noticeable. Maybe one day some bright graduate student will write a thesis on this topic, and confirm or falsify my hypothesis, but in the meantime let me outline why I think that there are some good reasons to believe that the stability of the international monetary system has been enhanced by the creation of the euro.

As a consequence, the return on capital is relatively low and wages are comparatively high, particularly so for unskilled labour. We thus tend to specialize in capital intensive and high-value added activities. External shocks tend to impact on us in a way that is not quite the  BIS Review 72/2004  1  same as on the rest of Europe. Moreover, we also have to cope with home-brewed shocks. It is for these reasons that we are eager to keep an autonomous monetary policy. Furthermore, if markets became convinced that in the future the SNB’s actions would simply mimic those of the ECB, they would rapidly force a convergence between Swiss nominal interest rates and those of the eurozone. Our real interest rates might remain lower for a while, given our relatively large supply of physical capital, but a tendency towards equalization would nonetheless set in. What this might mean for us is a higher rate of inflation for some time, together with a collapse in asset prices and in domestic gross capital formation. A mixture of higher interest rates and high, sticky wages would be very harmful to our economy. The third fear that was sometimes expressed, although here I must say I was rather sceptical myself, was that the euro would gradually render the Swiss franc obsolete. With many of our trading firms billing and paying their suppliers in euros, there might be a tendency for them to adopt the euro more generally for their accounting as well as for their domestic transactions.
One of the early tasks of western advisers was to try to convince the would-be central bankers in the east that monetary policy was not just a matter of regulating the supply of banknotes. And many of the same people found it difficult to accept that the provision of credit by a central bank whether to government or to enterprises - is likely to have inflationary consequences. When the basic problem is a shortage of national savings (often because the state is pre-empting private savings through its budget deficit and off-budgetary spending), the central bank cannot magically create extra real resources by relaxing monetary policy. Were it so, we central bankers would be even more popular people than we are now. The response of the eastern European and CIS central banks to their new goals has been tempered by a number of factors: -  how long the old culture had prevailed;  -  how democratic the new regime is (independent central banks do not get on well with autocracies);  -  the size of the country;  -  the availability of foreign currency to the government, whether from export revenues (oil or gas) or loans from international financial institutions; and  -  in the case of the ten (yes, ten!) applicants from the region to join the EU, how quickly they believe they need to move into line. The differences between these central banks are perhaps most marked in relation to monetary policy and financial relations with the government.

I shall confine myself largely to what is happening in Europe. The increasing globalisation of financial markets is one pressure for change across the world. But in western Europe, the Maastricht Treaty and the preparations for Economic and Monetary Union are requiring central banks to review their statutes and to align their operating procedures. But I also want to talk about the central banks of Eastern Europe. They are feeling similar pressures several hope that their countries will accede to the European Union within five years or so - but their origins are very different. In 1989 most of the state banks of central and eastern Europe had little understanding of the rôle of a central bank in a market economy. Since then they have had rapidly to acquire the knowledge and skills needed to tackle acute inflationary pressures while many of their leading banks were effectively bankrupt. At the Bank of England, we have been actively involved in helping them by drawing on our own experience as central bankers, adapting the lessons we have ourselves learned over the years to the unique circumstances of the transition economies. Much of this effort has been channelled through our Centre for Central Banking Studies which we established in 1990 to provide technical assistance and training to other central banks.