samchain/econo-pairs-v1 huggingface dataset:
Miguel Fernández Ordóñez: What should be done during the macroeconomic adjustment phase in Spain? Speech by Mr Miguel Fernández Ordóñez, Governor of the Bank of Spain, at a Lunchconference organised by El Correo de Andalucía, Seville, 25 September 2008. *  *  *  Since August last year the world’s developed economies have been convulsed by two very severe shocks: the rise in oil and other commodity prices and the outbreak of financial turmoil that has reached dimensions that nobody could have imagined initially. The increase in commodity and oil prices seems to be easing, and yet the events of recent weeks suggest that, as regards the turmoil, we are probably experiencing the most significant financial crisis since 1929. There are already numerous reports by domestic and international agencies (IMF, OECD, Bank for International Settlements) analysing the causes and consequences of the situation the industrialised economies are currently going through. At first it was thought that the repercussions of the financial crisis would be concentrated in the US economy. Then it was considered that other industrialised economies in which debt, the external imbalance or the property boom may have been important, like the UK, Spain, Ireland and New Zealand, might also be affected, while other countries would remain beyond the contagion. But this has not been the case. The effects have reached all countries. As we have just seen with the release of Q2 European growth figures, countries with large external surpluses such as Germany, have also posted a very weak economic performance.

The multifaceted interplay of ever greater processing power and storage capacity, together with the increase in the mobile use of services, are opening up entirely new business areas. This is also reflected in the large number of different business models currently represented in the Swiss fintech industry. The slide 9 shows the different business models in Switzerland. Only 15% of the enterprises within this segment are focusing on DLT, while the remainder are spread across other fields of application. One of the key areas for fintech is retail payments, i.e. payment transactions for companies and private individuals. A well-functioning system of payment transactions for end customers is a key pillar in any efficient economy. This payments area is undergoing a period of rapid technological change. Page 6/8  As with all fintech innovations, the primary focus is on the user-friendliness and speed of the services offered. Technological advances have led to marked changes in consumer expectations and requirements. Consumers want payment services to be ever faster and more user-friendly, and they want to be able to use them wherever they may be. End consumers these days are asking why it should take them longer to make a cashless payment than to send a WhatsApp message. As elsewhere, customers expect immediate service when it comes to payment transactions, and demand round-the-clock availability as well. To satisfy these demands, fintech companies and banks are working on new solutions, such as new applications, functionalities and services.
I shall confine myself to saying that the changes have affected all the elements making up the well-known capital ratio, which is the centrepiece of solvency regulations.3  2  “A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.” 3 Any regulatory ratio is structured on the basis of the definitions of what should eligible for calculation purposes, both in the ratio’s numerator and denominator, and of the level it should reach. The new regulations have changed these three elements of the ratio: (i) the numerator shows a figure for capital calculated in keeping with a new, much more demanding definition; (ii) the way in which risks are translated into weighted assets has been changed in the denominator and various caveats have been added regarding the use of internal models; and finally, (iii) the required ratio level has been raised considerably, and additional "buffers" have been added, inter alia, to cover the risks systemic institutions evidence. 7/13  While the capital ratio is important, it is not by any means the only significant measure. The crisis has shown that focusing solely on one metric may be counter-productive. Thus, other elements have been added. These complement the classic solvency metric, and relate to banks’ liquidity or leverage. Moreover, the focus has been placed on banks’ business model and governance.

There are a wealth of initiatives at present: the G20, the United Nations, the Financial Stability Board and the OECD are all involved. And notable within the EU, undoubtedly, is the European Commission’s action plan on sustainable finance. In the case of Spain, we should mention the Draft Climate Change Law. In the central banking and banking supervisory milieu, I would mention the work of the Network for Greening the Financial Sector (NGFS). We participate actively in this network, which has just published its second report. This includes best practices for boosting the role of the financial sector in complying with the Paris Agreement. Banks themselves are increasingly joining ethical or responsible banking initiatives, observing international principles that not only look at environmental sustainability aspects, but also at the social impact of investments. The development of so-called “sustainable bonds” is also being encouraged. These are much in demand by investors, for which a growing market is being created. We should be mindful that compliance with the Paris Agreement goals necessarily entails very substantial changes in our productive model. Clearly, too, to be successful, any transition of this type must include far-reaching measures and instruments that affect practically all economic agents, not only credit institutions. 12/13  However, banks can and should play a key role in this transition. At the start of my address I talked about the fundamental role of banks as a necessary filter for distinguishing between viable economic projects.
Although I expected some slowing due to the rise in mortgage rates in the middle of 2013, the extent of the slowdown has surprised me given that the recent pace of housing starts – roughly 1 million per year – is far below what is consistent with the economy’s underlying demographic trends. I think housing has been weaker than anticipated because several significant headwinds persist for this sector. First, mortgage credit is still not readily available to households with lower credit scores. Second, some people are coping with higher student loan debt burdens that have delayed their entry into the housing market as first-time homebuyers. This, in turn, makes it more difficult for existing homeowners to sell and trade-up. Third, there may be some ongoing difficulties increasing housing supply. The housing downturn was very deep and protracted. It takes time to shift resources back into this area. Also, in some markets house prices still appear to be below the cost of building a new home. Thus, in those markets, it remains uneconomic to undertake new home construction. Although I expect that  2  BIS central bankers’ speeches  the housing recovery will resume, the pace will likely be slow, especially relative to past economic recoveries. With respect to the outlook for prices, I think that inflation will drift upwards over the next year, getting closer to the FOMC’s 2 percent objective for the personal consumption expenditure (PCE) deflator.

Delaying the end of reinvestment puts the emphasis where it needs to be – getting off the zero lower bound for interest rates. In my opinion, this is far more important than the consequences of the balance sheet being a little larger for a little longer. With respect to the issue of how the FOMC will control money market rates with an enlarged balance sheet, the Federal Reserve already has the necessary tool – the ability to pay interest on excess reserves. However, the degree of control could be further buttressed. Enhancing confidence in the Fed’s ability to control money market rates, and hence, inflation, might also help keep inflation expectations well anchored. BIS central bankers’ speeches  5  One method the Fed has been testing is an overnight, fixed rate, reverse repo (RRP) facility. The Federal Reserve posts a fixed interest rate and accepts cash from counterparties, which include some banks, dealers, money market funds, and government sponsored enterprises, on an overnight basis in return for a security. The repo facility is “reverse” because the direction in which the funds and securities move – participants are lending funds to the Fed rather than vice versa. Users of the facility are making the economic equivalent of an overnight collateralized loan of cash to the Federal Reserve. If implemented, the facility could be set up as “full allotment,” which means that there is no cap on the amount of funds accepted from any of its counterparties at the posted overnight interest rate.
4  BIS Review 9/2001  Credits The monetary projection for 2001 envisages continuation of the intensified credit activity of banks registered in 2000. It is consistent with the expected growth in the banks deposit potential and the growth in the government deposits with the Central Bank. In 2001, total banks’ credits in favor of the non-government sector should increase by Denar 5,420 million or by 13.1%. Observed by structure, the Denar credits are projected to increase by 10.9%, or by Denar 3,610 million, while the foreign currency credits are projected to increase by 21.5% or by Denar 1,810 million. The monetary policy will be aimed at achieving the projected dynamics of the economic growth in the Republic of Macedonia, creating room for growth of banks’ credits to the non-government sector. Simultaneously, the downward trend in lowering the share of the non-performing credits in total banks’ credit exposure is expected to continue. This should derive from the initiated improvements in the commercial banks’ credit policy, stimulated by the strengthened banks' corporate governance, on one hand, as well as by the continuous strict supervision examination on the banks operations by the Central Bank, on the other hand.

Many of the originators were forced into bankruptcy at the start of the year and in the last few weeks we have seen Bear Stearns’ announcement that two of its funds have lost all or nearly all of their investors’ money. I suspect the speed and scale of the changes were outside most stress test simulations. And while the most dramatic changes may have happened there will now be a long period as the implications work through the ratings of other derivatives and the full range of instruments are marked to market. A related lesson is about liquidity in new markets. The worry has been that at times of stress, liquidity would dry up and it would be impossible to trade out of positions. That would not just lock firms into losses but would disrupt strategies which require continuous dynamic hedging – for example, strategies such as constant proportion portfolio insurance (CPPI). Again that has been a feature of recent weeks. It has been widely reported that a couple of the lenders to the BSAM funds put their collateral on the market but were not able to sell as much as they wanted. That is connected to the fourth lesson, the vulnerability of valuations in sophisticated derivatives. These are not widely traded so valuations are usually based not on market prices but on models which draw in turn on correlations established over the recent past. This is a fundamental and unavoidable feature of new products and markets.
BIS central bankers’ speeches  the past three decades is extraordinary, and it has helped to lift billions of people around the world out of poverty. However, the Chinese economy’s post-crisis performance has been bolstered by a large build-up of debt, which has more than doubled to reach almost 200% of GDP. As had been the case in the advanced world, the Chinese debt boom owed much to an explosion of shadow banking, which relates to the second lie of finance. Lie II: “Markets always clear” Beneath the new era thinking of the Great Moderation lay a deep-seated faith in the wisdom of markets. Policymakers were captured by the myth that finance can regulate and correct itself spontaneously. They retreated too much from the regulatory and supervisory roles necessary to ensure stability. 3 That “markets always clear” is the second lie, one which gave rise to the complex financial web that inflated the debt bubble. In markets for goods, capital, and labour, evidence of disequilibria abounds. In goods markets, there is ‘sluggishness everywhere’. Left to themselves, economies can go for sustained periods operating above or below potential, resulting, ultimately, in excessive or deficient inflation. Yet efficient market forces ‘should’ bring about changes in prices sufficient to equate demand with potential, leaving inflation as a purely monetary phenomenon. In labour markets, there is ‘rigidity everywhere’. Rather than fluidly adjusting to equate the demand for labour with its supply, periods of deficient labour demand can persist, sustaining mass unemployment and joblessness.

Writing to Morcom’s mother, he declared, “I know I must put as much energy if not as much interest into my work as if he were alive, because that is what he would like me to do.”  3  All speeches are available online at www.bankofengland.co.uk/news/speeches  3  To many, Turing is renowned for his “indispensable”3 codebreaking contributions at Bletchley Park during the Second World War.4 The advances Turing made in cryptanalysis then – including co-inventing the Bombe computer for solving ciphers and applying statistical techniques to speed up rates of decryption – were pivotal in cracking the hitherto unbreakable German Enigma code. Turing’s work gave the Allies a crucial advantage in the battle for the Atlantic and is widely credited with hastening the end of the war by at least two years, potentially saving millions of lives in the process. That alone would be more than enough for one lifetime, but Turing’s contributions range far more broadly than those that have been rightly celebrated in print and on screen. One of Turing’s lesser-known interests was biology. In later life, Turing pioneered morphogenesis by applying his knowledge of mathematics and computer science to understand how plants and microorganisms develop their shapes and patterns. Turing used computers to simulate the results of hypothetical chemical reactions to develop truly original insights in this field.
A recovery appears to have finally taken hold, spurred by reduced uncertainty and easier credit conditions. There are good reasons for optimism that the recovery will be durable. But the journey back to full recovery is long and many challenges still remain. Monetary policy is there for the long haul. That is the essence of our forward guidance. 6  BIS central bankers’ speeches  References Haddow, A., Hare C., Holley, J., and Shakir, T. (2013) “Macroeconomic uncertainty: what is it, how can we measure it and why does it matter?”, Bank of England Quarterly Bulletin, 2013 Q2. Ben Haim, J. (2010) “Info-Gap Economics: An operational introduction”, Palgrave McMillan Bloom, N. (2009) “The Impact of Uncertainty Shocks”, Econometrica 77:3, pp 623–685 Bloom, N., Bond, S. and Van Reenen, J. (2001). “The dynamics of investment under uncertainty”, IFS Working Paper, No. W01/05. Bond, S.R. and Lombardi, D (2004) “To buy or not to buy? Uncertainty, irreversibility and heterogenous investment dynamics in Italian company data”, IMF Working Paper no. 04/104. Disney, R, Haskell, J and Heden, Y (2003), “Restructuring and productivity growth in UK manufacturing”, Economic Journal, Vol. 113, Issue 489, pages 666–94. Dixit, A. and Pindyck, R. (1994) “Investment Under Uncertainty”, Princeton University Press Gilchrist, S, Sim, J and Zakrajsek, E (2010), “Uncertainty, financial frictions, and investment dynamics”, 2010 Meeting Papers No. 1285, Society for Economic Dynamics. Lazear, E and Spletzer, R (2011), “Hiring, churn and the business cycle”, NBER Working Paper No. 17910.

The MPC intends not to raise Bank Rate or reduce the stock of asset purchases at least until the unemployment rate reaches a threshold of 7%, subject to three knockouts designed to guard against risks to price and financial stability. But abstracting from the details of these thresholds and knockouts, our message to you – the businessmen and women driving this recovery – is clear. You can plan for the future in the knowledge that the MPC intends to keep interest rates low until we have seen a prolonged period of strong growth, unemployment is significantly lower, real incomes are higher. Based on some of the reporting, you might be forgiven for thinking that forward guidance is far more complicated than this. To take just one example, let me read to you the opening sentence of an article last month reporting on the MPC’s November Inflation Report. Under the headline “Forward guidance fails”, the article began: “The Bank of England now expects the economy to grow strongly next year, highlighting the fact that its policy of forward guidance has effectively failed.” Strong growth, falling unemployment: if that’s failure, I wish I’d failed long before now! The aim of the Committee’s guidance isn’t to provide a commitment that interest rates won’t rise until some particular date in the future. Monetary policy has to respond to the changing state of the economy. We can no more commit to keeping our prices and quantities unchanged irrespective of economic circumstances than you can.
To illustrate my points, let me use the work that the Bank of Thailand has been engaging with the financial institutions during the past couple of years. We have provided guidelines to improve corporate governance within the Thai financial sector to complement the on-going change within the corporate sector. Bank directors are now required to have no more than 3 directorships in other profitseeking institutions, so that they will have more time to carry out the required duties, as directors should do. Before, 82 directors did not qualify, but 60 of those have now complied. And for the rest, arrangements were made for them to observe the guideline. To improve internal management, we ask major shareholders not to vote for the independent directors so that minority shareholders are better represented on the board. Audit committees are now a requirement and many banks now have nomination and compensation committees to reduce the power of the major shareholders. Most also have risk management committee or, at least, asset and liability management committee. To further increase transparency, commercial banks now have to announce at the end of each month their NPL level, penalties and fines imposed by the authorities, as well as the amount of their related lending. By year-end, we will launch the Director's Handbook for the financial community and further encouraging increased transparency of appointment and compensations. Of course, we cannot change others without changing ourselves at the Bank of Thailand.

On this front, Thailand has done remarkably well, registering a substantial increase in net inflow of foreign direct investment in the four years following the crisis despite the overall net capital outflow due to debt repayment within the banking sector. Foreign direct investment (to the non-bank sector) increased from an average around 1.4 billion US dollars during 1992-1996 to 3.4 billion US dollars during 1997-2000. Though much work is required on the corporate sector in the march toward modernization of the Thai economy, the government and the central bank also have vital roles in maintaining stable economic environment and providing the required infrastructures to allow the private sector to drive forward to create wealth and prosperity. Several long-term plans have been made in the past couple years. On the macroeconomic front, the Bank of Thailand has adopted Inflation Targeting as a framework of our monetary policy since May 2000. It may be a little too early to claim our success, but the results thus far have been encouraging. Long-term interest rates of the interpolated 14-year government bonds were reduced from 8.3 percent at the beginning of 2000 to currently at 6.1 percent. Inflation remained subdued and will stay within the target range during the next two years. The maturity of state enterprise debentures offered in the market increased from a maximum of 7-year in 1998 up to 20 years in 2000, reflecting greater confidence on the long-term economic stability.
1  The scale of the phenomenon is truly unprecedented, yet the causes are well known. There are two main and quite clear reasons behind this demographic transformation. First, the fertility rate has dropped substantially since the second half of the 20th century. Specifically, the number of live births per woman has halved, from 5 in 1950 to 2.5 in 2020. And second, life expectancy has increased dramatically, in parallel with extensive improvements in health and nutrition. While world life expectancy at birth stood at only 47 years in 1950, it exceeds 72 years today. In other words, since 1950 life expectancy has increased by 3.5 years for every decade. The fall in fertility and the rise in longevity also mean that, in the coming decades, the working age population will grow significantly more slowly than total population. Not only  2  that: it is worth noting that in some geographical areas this divergence might become dramatic. For instance, the United Nations (UN) estimates that in Europe the number of deaths has outnumbered that of births since the mid-1990s. As a result, the UN projects that the workforce in Europe will shrink by close to 80 million people from now to 2050. This is equivalent to saying that Europe will lose 1.6 out of 10 workers over the next 30 years. Note also that this projection already incorporates a positive net inflow of migrants that would offset, to a degree, the labour supply shortage.

In such a world, by adjusting the level of the federal funds rate, the FOMC could be fully confident that it could generate the appropriate financial conditions necessary to support achievement of full employment and price stability. In fact, the response of financial conditions to changes in short-term interest rates is not rigid and predictable. Instead, as we shall see shortly, the linkage between the federal funds rate and financial conditions changes over time, as it is influenced by a whole host of other factors. Recent evidence suggests that even the relation between short-term and long-term rates has shifted substantially over the past 15 years.4 Moreover, at times, we have observed cases in which financial conditions did not move in the same direction as the monetary policy stance. Let me highlight two recent divergences which indicate that we need to keep a separate eye on the evolution of financial conditions. The first occurred in the mid-2000s. In June 2004, the FOMC decided to begin raising the federal funds rate target in order to remove policy accommodation. It raised the target in 25-basis-point increments at 17 consecutive meetings, pushing the rate up from a starting point of 1.0 percent to a peak of 5.25 percent. Despite this tightening of monetary policy over two years, financial conditions failed to tighten in a similar manner. This can be seen by looking at the behavior of well-known measures of financial conditions during this period (Exhibit 1).