samchain/econo-pairs-v1 huggingface dataset:
For instance, a structural low interest rate level such as typically observed in Switzerland can help explain a relatively high credit-to-GDP ratio in international comparison. Similarly a prolonged period of exceptionally low rates such as the one we are currently experiencing is a potential explanation for an increase in credit volumes. At a superficial level this relation is obvious. Low interest rates reduce the cost of servicing a given credit which becomes affordable for a broader range of households. Alternatively, borrowers can afford higher credit lines. Moreover, low interest rates translate into higher asset prices and higher notional wealth. The increased collateral values support higher credit lines and decrease the amount of credit rationing. This is, in particular, relevant with  6  Stiglitz, J. and Weiss, A. (1981)  BIS central bankers’ speeches  3  reference to the real estate market where higher house prices imply higher mortgage volumes to finance the same stock of housing. The rationality of this explanation has to be relativized, however. This is certainly the case if we think of credit financing long run projects such as real estate. Here the average interest rate over the life-time of the credit must be relevant for investment decisions. An exceptional, prolonged period of low rates might imply a decrease in the lifetime average rate, a form of “window of opportunity”.

And as it is difficult to pass negative interest rates onto retail customers and as the introduction of fees provides only limited remedy, some of the banks will have to adapt their business models. Also, consolidation will continue to be necessary to increase efficiency in the long term. We are now already seeing that concerns about the future profitability of banks are affecting their share prices. The euro area bank index fell by around 40% between August 2015 and August 2016. This decline was driven by, among other things, a worsening outlook for the global economy and growing concern about the effects of the low interest rate environment and nonperforming loans. When banks’ share prices fall, their cost of equity increases, which could then reduce the net return on lending. This may cause banks to become more conservative in their lending in future and to raise the cost of lending. Internal calculations have shown that a decline of around 10% in a bank’s share price reduces corporate lending by around 0.5 percentage point. Allow me, however, to comment on the sometimes severe criticism, especially from Germany, that we face: the German banking sector is one of the largest in the euro area but at the same time it’s the least efficient. German banks have a cost-income ratio of 73%, which is much higher than that of the rest of the euro area.
Chart 3 shows that the slope of the short-run Phillips curve has moved around during the post-war period, apparently in response to changes in the monetary policy regime. In the 1970s labour market pressure was not offset by tighter monetary policy, leading to a spiral of wage and price inflation. The short-run Phillips curve steepened, with larger inflationary consequences of any deviation from the natural rate of unemployment. As monetary policy became more focused on controlling inflation, the Phillips curve flattened in the latter part of the 1980s and 1990s. Such changes in the monetary policy regime can also be detected in the behaviour of inflation over time. Table 2 shows that the persistence of inflation – measured by the estimated explanatory power of past inflation in predicting current inflation – has fallen quite markedly since the inflation target was introduced in 1992. Was this  4  BIS Review 36/2005  because the failure of monetary policy to react quickly to an inflationary shock in the 1970s meant that inflation remained high for some time? And has the prompt response of monetary policy meant that movements in inflation more recently have proved short-lived? The answers to these questions matter for monetary policy. But the economy is continually evolving, and we can never definitively conclude that one answer is right and the others wrong. So learning about changes in the structure of the economy lies at the heart of the daily work of central banks.

Because inflation expectations matter to the behaviour of households and firms, the critical aspect of monetary policy is how the decisions of the central bank influence those expectations. As Michael Woodford has put it, “not only do expectations about policy matter, but, at least under current conditions, very little else matters”. Indeed, one can argue that the real influence of monetary policy is less the effect of any individual monthly decision on interest rates and more the ability of the framework of policy to condition inflation expectations. The precise “rule” which central banks follow is less important than their ability to condition expectations. That is a fundamental point on which my later argument will rest. It should be clear that, just as Maradona could not hope to score in every game by running towards goal in a straight line, so monetary policy cannot hope to meet the inflation target by leaving official interest rates unchanged indefinitely. Rates must always be set in a way that is consistent with the overall strategy of keeping inflation on track to meet the target; sometimes that will imply changes in rates, at other times not. Learning and its implication for monetary policy The academic literature on monetary policy rules has performed a great service in emphasising the importance of expectations. But there are two basic problems with the use of rules. The first is that the validity of any given rule depends upon the model of the economy that underlies it being true.
But I am also convinced that expanding the effective size of Asian financial markets through greater integration across jurisdictions, can make our economies better able to absorb the volatility of international capital as effectively as the US and European markets. It is therefore heartening to observe that several initiatives for promoting the development of the financial markets in the region are bearing fruit. A notable example is the Asian Bond Fund (ABF) initiative championed by EMEAP central banks. The ABF has been created specifically to encourage the development of bond markets in Asian economies, with the ultimate goal to create an integrated regional market. In developing the ABF, we have achieved a few firsts, including the introduction of the first exchange-traded bond index fund in Asia, arranging for two Asian markets to allow exchange-traded funds for the first time, and opening up the renminbi inter-bank bond market for the first time to foreign investors. The process leading up to the launch of Asian bond funds has shown that cooperation between central banks in the region can successfully deal with a number of technical and conceptual issues, which bodes well for the further development of this initiative as well as potential initiatives in other areas of financial market development. The successful experience of ABF has laid a strong foundation for enhanced regional cooperation by central banks to promote financial integration in Asia. There seem to be at least three aspects in which further development of central bank cooperation may be useful.

28(1) and 28(3) of the Statute) and alternative methods for measuring monetary income (Art. 32(3)). Lastly, very few decisions are taken unanimously; they require the attendance of all members at the meeting. The Recommendation of the ECB addressed to the European Council for the amendment of Art. 10(2) of the Statute (assignment of voting rights and rotation system in the Governing Council of the ECB) was adopted unanimously. 3  General Council can be regarded as a “transitional body” which will continue to exist while there are EU Member States which have not adopted the euro. Its functions include the monitoring of progress achieved in convergence by EU Member States which have not yet adopted the euro, advice on the necessary preparations for irrevocably fixing their exchange rates, supervising the operation of Exchange Rate Mechanism II, acting as a forum for the coordination of EU exchange rate and monetary policies, and assisting with certain activities, such as the advisory functions of the ECB. 2 Single Supervisory Mechanism: distribution of responsibilities between the ECB and the national competent authorities and decision-making processes As from 4 November 2014, the prudential supervision of credit institutions in euro area countries was transferred to the Single Supervisory Mechanism (SSM), which other EU countries that have not yet adopted the euro may also join.5 This mechanism is structured as an integrated system, led by the ECB and involving the national competent authorities (NCAs), i.e. the supervisors of the participating countries.
GDP in the USA USD billion, fixed prices 14000  14000 Earlier GDP  13500  13500 Revised GDP  13000  13000  12500  12500  12000  12000  11500  11500  11000  11000 00  01  02  03  04  05  06  07  08  09  10  11  12  Source: Bureau of Economic Analysis  10. Forward-looking indicators Economic tendency indicator: index, average = 100, standard deviation = 10 Purchasing managers’ index: seasonally-adjusted index 140  140 Economic Tendency Survey  120  120  Purchasing managers’ index  100  100  80  80  60  60  40  40  20  20  0  0 00  01  02  03  04  05  06  07  08  09  10  11  12  Note. The broken line represents the average 2000–2011. Sources: National Institute of Economic Research and Swedbank  12  BIS central bankers’ speeches  11.

Government bond yields 10 year maturity, per cent 20  20 Germany  18  Greece  18  16  Ireland  16  Italy  14  14  Spain  12  12  Portugal  10  10  8  8  6  6  4  4  2  2  0  0 06  07  08  09  10  11  Source: Reuters  12. Government bond yields 10 year maturity, per cent 6.0  6.0  5.5  5.5  5.0  5.0  4.5  4.5  4.0  4.0  3.5  3.5  3.0  3.0  2.5  2.5  USA  2.0  2.0 1.5  Germany  1.5  1.0  Sweden  1.0 0.5  0.5  0.0  0.0 06  07  08  09  10  11  Source: Reuters  BIS central bankers’ speeches  13  13. Stock market developments Index, 1 January 2006 =100 180  180 Sweden (OMXS) Euro area (Euro Stoxx) USA (S& P 500) Emerging markets (MSCI)  160  160  140  140  120  120  100  100  80  80  60  60  40  40 04  05  06  07  08  09  10  11  Source: Reuters  14.
But what is important is to realise that the deficit generated over these two years has a significant structural component, given that current primary public spending has maintained a high growth rate and the sizeable extraordinary revenue linked to the real estate sector has been lost for good. The deterioration in the fiscal position is manifest in a strong increase in public debt. As our own experience shows, the dynamic of rising indebtedness can prove difficult to break, especially when it is inconceivable that we can count in the future on some of the factors that significantly helped reduce debt in the past, such as interest-rate cuts and high economic growth over a very lengthy period. Overall, all these factors increase the risk that, in the absence of corrective measures, the fiscal position will continue to worsen. Further, they lead to the conclusion that the room for budgetary policy to expand has been completely exhausted, and that it is vital that a credible strategy of budgetary consolidation be adopted for the medium term. If not, the increase in public debt and its influence on the net borrowing costs of our economy, and even on the very soundness of the financial system and its capacity to properly channel resources, may become a very heavy weight holding back our possibilities of recovery. Given the fiscal imbalance that has built up, the scale of adjustment needed is most sizeable and will therefore require the adoption of highly ambitious measures on all budgetary fronts.

This has led to the built-up of imbalances which increase the risk of a substantial price corrections and of loan losses (charts 13 and 14).6 A second, related, danger is that low rates may induce excessive risk-taking in financial markets – as opposed to reviving productive risk-taking, which is one of the objectives of low policy rates. Here, the economic literature stresses two channels: investors who are unable or unwilling to accept low returns are liable to take higher risks and increase leverage to reach their return objective, a phenomenon known as “search for yield” (chart 15).7 In addition, by pushing up asset prices and dampening price volatility, low interest rates reduce  5  This view is also reflected in market expectations. For instance, 10 year inflation expectations for the US, derived from the yield differential of inflation-linked government bonds and nominal government bonds, stood slightly below 2.25% in August 2013. 6  Empirical evidence suggest that a simultaneous built-up of imbalances in real estate and credit markets is a key leading indicator of subsequent financial instability. Cf., for instance, Schularick and Taylor (2012) and Borio (2012). 7  Cf. Borio and Zhu (2008) and Gambacorta (2009). 4  BIS central bankers’ speeches  measured risk and may lead investors to misjudge the true risk of a given investment.8 A long period of low rates, for example, may lead borrowers and lenders to overestimate debt affordability and underestimate the risk of higher debt servicing costs in the future.
David Rule: PRA Solvency II Conference – countdown to implementation Speech by Mr David Rule, Executive Director for Prudential Policy of the Bank of England, at the PRA Solvency II Conference, London, 17 October 2014. *  *  *  I would also like to extend my welcome and thanks to you for taking the time to attend this conference today. I want to take this opportunity to formally introduce myself. I was appointed Executive Director of Prudential Policy at the Bank of England in June having held a variety of different roles across the Bank and FSA, most recently as a supervisor of large UK banks. This conference is entitled “countdown to implementation”. We have reached a level of stability in the policy making process for Solvency II, and the purpose of today is to share our thinking and provide clarity where possible on those last remaining issues ahead of implementation. You’ll be hearing from experts across the technical areas and Victoria Saporta, Director of Financial Policy will give you an overview of the policy areas where work is still being finalised along with the timeline for completion. I would like to take a step back from this and reflect more widely on what Solvency II is about for the Bank.

We have come a long way from the uncertainty that has seemingly dominated the past few years. But we need to remain conscious of the new challenges and opportunities that are on our horizon. Alongside the European process the wheels have been turning in the international space. A common set of global standards for systemically important insurers are being worked on as we speak. Throughout the development of these standards, the Bank of England will continue with its strong history of international engagement. We have made great strides in Europe with Solvency II and we aim to ensure the complementarity of upcoming global standards with what we have achieved with Solvency II. Continued interaction with the industry is an essential part of good policy making so I’d like to again thank you for your participation today. I hope that we can continue to work together towards achieving a policy outcome at all levels that fulfils our objectives and in turn ensures the stability, resilience and ultimately the prosperity of the insurance sector in the UK. BIS central bankers’ speeches  3
4  BIS Review 103/2009  Figure 7: Special CPI Aggregates I and I* (Annual Percentage Change) 9 8 7 6 5 4 3 SCA-I  2  SCA-I*  1 0609  0409  0209  1208  1008  0808  0608  0408  0208  1207  1007  0807  0607  0  I*: Tax adjustments corrected SCA-I. Source: ISE, CBT. Parallel to these developments, while the fall in near-term inflation expectations became more pronounced, medium-term expectations have posted a limited decline and the expectations curve has flattened over the last three months (Figure 8 and 9). Currently, expectations for end-2009 are anchored at 6.09 percent, well below the target. On the other hand, end-2010 inflation expectations, calculated by averaging inflation expectations for 12and 24-months ahead remain consistent with the target at 6.5 percent. Figure 8: 12- and 24-Month Ahead CPI Figure 9: Inflation Expectations Curve* Expectations * (Annual Percentage Change) (Annual Percentage Change) 10  8.0  9  7.5  8  July April Inflation Target  7.0 6.59  7 6  6.40  5.5  12 month 24 month  *CBT Business Tendency Survey results from the second survey period Source: CBT.

However, when the maturity composition of borrowing, the level of interest rates and the depth of financial markets are taken into account, it is observed that the fiscal space is not broad enough for countercyclical fiscal policies. Therefore, backing up the short-term increase in budget deficit with a medium-term program ensuring the sustainability of debt dynamics is crucial for maintaining our risk premium at relatively low levels. Accordingly, domestic perceptions regarding public finance are very important for the monetary policy strategy to be implemented in the medium-term, especially after 2011. The global crisis has raised awareness as to the resilience of our financial system and helped risk indicators to perform better compared to other developing countries and enabled a fast ratecut cycle. Thus, single-digits were finally achieved in short-term interest rates after many years. Meanwhile, the level of medium and long-term market interest rates still remain elevated. The present conjuncture offers an important opportunity to achieve and maintain single digits in market interest rates throughout the forecast horizon of three years. Achieving and maintaining single digits in medium and long-term market interest rates will depend on establishing fiscal discipline. The introduction of a satisfactory perspective for fiscal discipline in the upcoming period would not only decrease the risk premium but would also help to  18  BIS Review 103/2009  keep policy rates at low levels for an extended period of time.
A point worth noting is that, if they continue, today’s higher market interest rates will have a direct impact on inflation from household interest expenditure, just as the recent years’ steeply falling interest rates had a sharp downward effect on inflation. In that case, the higher interest expenditure would pull CPI inflation upwards fairly rapidly towards the targeted rate and above inflation’s underlying rate (UNDIX). Monetary policy would then face the same situation, albeit in reverse, as on so many occasions in the recent past. An attempt to counter the tendency by tightening the monetary stance would accentuate the direct impact and add to the increase in CPI inflation. That is why it is inflation excluding transitory factors that is the focal point for monetary policy. Central issues for monetary policy in an upward phase About a fortnight ago the Executive Board of the Riksbank confirmed that the stronger growth can lead to increased price pressure. Monetary policy may accordingly need to be conducted in a less expansionary direction in the future. But the Board also emphasised that the Swedish economy is not yet in such a situation. The trade-off between inflation and growth is uncertain and earlier relationships therefore have to be tested in the light of new information. I consider that this conclusion still holds. When the Riksbank begins to talk of a less expansionary monetary stance, I can imagine it raises a number of questions. I should like to take this opportunity of discussing some of them.

We have also made very real progress on the liquidity framework for banks, though I do not propose to go into that today. But as we have reinforced regulatory standards for the regulated banking sector, there is considerable concern that we have simply moved the risks beyond the regulatory perimeter. In short, that bank-like activities, carrying bank-like risks are taking place without bank-like regulation and supervision. Many of these concerns find expression in the term “shadow banking”. I think “shadow banking”, like “backstops” and “frontstops”, is an unhelpful and misleading description. To be clear, we want to see more diversity in the way credit is provided in the economy – more players in the banking sector and more non-bank market-based finance. Because another lesson of the crisis for many countries was that the risks from a credit “banking monoculture” could be very serious – when banks were badly damaged, it led to a credit crunch that left the economy without other forms of credit intermediation. I suspect one of the reasons the US recovered more quickly from the crisis was because it had greater diversity of credit channels in the economy. It is for this reason that the Bank is working with the ECB and others to encourage the revival of a robust, simple and transparent securitisation market in Europe. But – and this is an important “but” – it is important that bank-like activity does not migrate outside of the regular banking system in an uncontrolled manner that presents equally important systemic risks.