samchain/econo-pairs-v1 huggingface dataset:
Over the year, i.e. from the beginning of January 2003 to the corresponding period in 2004, inflation measured 2.4%. This is just below the target. Excluding changes in the price of public services, the rate of inflation was somewhat lower. Until the closing months of 2003, goods prices were somewhat lower than the previous year, and the increase in prices of services slowed down significantly. Substantial increases were seen in housing prices, however, and the housing component of the consumer price index rose by much more than the CPI as a whole. Housing inflation began to inch downwards in the course of the year and this development has continued so far this year. The Central Bank can thus feel satisfied with the rate of inflation in the recent term, and bearing in mind the long lag in the transmission mechanism, price developments indicate that monetary policy over the preceding period has had the intended effect. The Central Bank lowered its policy interest rate to 5.3% in the beginning of February 2003. Its inflation forecasts did not warrant any further changes in the policy rate by the Bank. The policy rate was broadly neutral during the year, i.e. it neither stimulated nor dampened demand. In real terms the policy rate was therefore not far from the estimated equilibrium real interest rate during the year. Output growth Iceland experienced robust output growth from 1996 until 2002, when it was marginally negative. Output growth recovered last year.

Because it is more economical for business transactions and liabilities to be denominated as far as possible in the same currency, a fundamental change in the position of the króna is unlikely, except directly by an act of government, or indirectly in the highly improbable event that economic policies were to collapse and erode all confidence in the króna, with accompanying hyperinflation, as has happened in some Latin American countries that have adopted the dollar or others that have been forced to adopt another currency. It has sometimes been claimed that the heavy level of external debt means that interest rate decisions by the European Central Bank possibly have even more impact in Iceland than domestic monetary policy. There is nothing new about the impact of foreign interest rate developments being felt in Iceland - and the same applies to other countries as well - although the scale of Iceland’s foreign debt leaves its economy more susceptible to foreign interest rate movements. It is worth remembering that while foreign interest rate developments mostly affect Iceland’s national income, economic cycle and current account balance, they can never have a crucial impact on the domestic rate of inflation. A heavy weight of foreign currency-denominated borrowing in domestic debt may complicate the transmission mechanism of monetary policy. In the long run, however, only domestic monetary policy measures can determine a deteriorating value of the domestic currency vis-à-vis goods and services or to put it plainly, inflation. Prospects Finally, I shall turn to economic and monetary prospects.
The bottom line is that we may yet encounter a few potholes on the way to the exit. But the good thing is that banks are better capitalised now than in the run-in to the crisis, leverage is lower, there is better visibility of counterparty exposures, and we are better placed to deal with financial institutions that get into trouble. So the risk of major financial problems crystallising in the advanced economies should be much lower. Those emerging economies that have financed large external deficits through the accumulation of foreign currency debt may be more vulnerable, however. Let me turn now to the impact of the crisis on the monetary policy framework itself. Before the crisis, the conventional wisdom in central banks was that monetary and financial stability were largely complementary in nature. The maintenance of price stability would help foster stable macroeconomic conditions more generally by anchoring expectations. And the consequent reduction in macroeconomic volatility should help reduce the likelihood of episodes of financial instability. All that was necessary was for banking supervisors to ensure that individual financial institutions followed responsible lending policies and all would be well. Today, there is a tendency to claim that the crisis revealed a fatal flaw in focussing on price stability as the primary object of monetary policy, namely a failure to recognise that it could in some circumstances actually be detrimental to financial stability.

IS is an aggregate demand schedule, with demand a decreasing function of both the policy rate, R, and a macroprudential instrument, K. PC is an expectations-augmented Phillips curve, in which inflation expectations are assumed to be anchored at the inflation target. 6 For any given set of shocks to aggregate demand and supply, the inflation target can be achieved by the set of pairs of R and K along the downward sloping schedule PS (for Price Stability) in the righthand diagram. An increase in demand resulting from, say, an increase in the propensity to invest, would shift this schedule out to the right. 6  6  In the literature, credit frictions and macroprudential policies can also affect potential output; see for instance Vasco Cúrdia and Michael Woodford (2010), “Credit spreads and monetary policy.” Journal of Money, Credit and Banking 42(S1), pp3–35. For simplicity of exposition, I abstract from such effects here. BIS central bankers’ speeches  Turn now to the credit market. Conventional macroeconomic analyses of the market for loanable funds tend to focus on the flow of funds from saving households to businesses undertaking capital expenditures. But, as Chart 9 makes clear, such lending constitutes only a small fraction of the assets held by UK banks. The vast majority of loans are instead provided to finance the acquisition of existing assets, especially real estate. This should be borne in mind when contemplating the factors behind the demand and supply of credit, shown in the left-hand panel of Chart 10 as CD and CS respectively.
The composite output Purchasing Managers’ Index – which has a high correlation with growth in the euro area – remains above its long-term average and is close to six-year highs. Overall, survey data continue to point to growth in the quarters ahead. Moreover, Eurostat’s Economic Sentiment Indicator is near a ten-year high. The ongoing recovery has led to solid employment gains. The number of people employed in the euro area has increased by almost 7 million since hitting a trough in mid-2013. This means that all of the employment losses recorded during the crisis have been offset. Additionally, the unemployment rate is now at its lowest level in eight years and continues to decline, notwithstanding an increase in labour force participation. Employment growth, together with the gradual increase in employee compensation, supports households’ disposable income and is underpinning solid consumption dynamics. Robust consumer spending is driven by buoyant sentiment, favourable bank lending conditions and the notable progress achieved with respect to deleveraging. The investment outlook is also positive, supported not only by a need to modernise the capital stock after years of subdued investment and an improving outlook for profitability, but also by easy financing conditions as our policy measures have passed through financial markets to affect the borrowing conditions of businesses and their customers. Since the announcement of our policy measures in June 2014, bank lending rates for euro area non-financial corporations have fallen by around 120 basis points and those for households by around 100 basis points.

While unlikely, an extreme scenario would see the entrenchment of disinflationary developments initiate a downward drift in the Phillips curve and unmoor inflation expectations. Empirically disentangling these factors is extremely difficult, so we need to be mindful of such considerations when discussing the relationship between economic slack and inflation developments, especially in an environment of uncertainty over the anchoring of inflation expectations. Our primary task as a central bank is to ensure that the reconnection of the real and the nominal sides of the economy – what I referred to before as the Phillips curve regularity eventually reasserting itself – occurs at a steady state rate of inflation that is consistent with our medium-term aim. We have not yet accomplished our mission, and so we must remain patient and persistent. In 2/3  BIS central bankers' speeches  light of this, the October monetary policy decisions were taken to preserve the favourable financing conditions that are still needed for a sustained return of inflation rates towards levels that are below, but close to, 2%. In particular, the recalibration of our asset purchases reflects growing confidence in the gradual convergence of inflation rates towards our inflation aim. 1 See, for example, the European Commission’s “European Economic Forecast – Autumn 2017”. 2 For more details, see the box entitled “The targeted longer-term refinancing operations: an overview of the take-  up and their impact on bank intermediation”, Economic Bulletin, Issue 3, ECB, 2017.
Moreover, the delays in the restructuring or privatisation of state-owned companies paved the way for high levels of arrears. Acting as surrogate money, they undermined monetary policy restrictiveness and fuelled inflation. In addition, the disequilibria manifest at the level of the current account could be adjusted only by purposely resorting to the exchange rate, whose depreciation generated inflation as well. As a matter of fact, other countries which, during one transition stage or another, had slowed down the engines of economic restructuring were also faced with such issues, recording a more modest macroeconomic performance. Going back to the comparison with Poland, I deem it relevant that the output loss associated with the structural changes implied by the transition to a market economy was fully recovered in 1995 in Poland, whereas in Romania this occurred a hefty nine years later. Now, it is almost two decades since Romania – EU accession negotiations had been opened. Back then, in 2000, I served as prime-minister. In fact, I think I may say that my entire prime2/5  BIS central bankers' speeches  ministership in 2000 was dedicated to laying the groundwork for Romania’s accession to the European Union. And it is worth noting that, if Romania managed to join the EU on 1 January 2007, all the inherent stumbles notwithstanding, the preparation process started in 2000 was essential. And it would have been dramatic if this start had been missed.

As a consequence, products manufactured in these countries become more expensive and such countries loose competitiveness (e.g. Estrada, Lopez-Salido 2001). It is relatively difficult to foresee how the Polish economy will react to demand pressures once in the euro area. However, as in the case of asymmetric shocks, labor market flexibility is probably the best answer to the described phenomena. It allows a smooth and relatively painless adjustment if the economy looses competitiveness. Summing up, I have discussed selected aspects of the cost-benefit analysis of Poland’s adoption of the euro, with a special focus on issues which are less familiar to the general public. As I argued, some costs will materialize if asymmetric shocks hit the enlarged eurozone. We do not know the likelihood of such shocks though, so it is impossible to calculate the expected value of costs related to these events. We know, however, that the probability of asymmetric shocks declines with rising similarity or progressing real convergence of the EU economies. Let me also stress that the magnitude of costs depends crucially on domestic policy – prudent banking sector supervision, labor market reforms and sound fiscal policies to name a few. Adoption of proper policies reduces future potential costs related to euro-zone membership and, at the same time, enhances future benefits. In my view, given the evidence that reforms have been halted in many countries after entering the eurozone, these measures should be taken before the euro area accession. Thank you for your attention. References: 1. Borowski J. 2003.
This results in lower production costs. 6  BIS Review 47/2007  The strong growth in labour productivity does not seem to reflect an increase in the real capital behind each person-hour worked, but rather a considerable improvement in labour and capital efficiency. 2 Intensified competition in product markets may have contributed to the subdued rise in prices. New operators have entered markets that were previously fairly sheltered from competition, for example in the grocery trade, building materials, telecommunications, banking and insurance. With general confidence that inflation will be kept in check and that petroleum revenues are only gradually phased into the economy, low import prices, high prices and good market opportunities for our export goods, an ample supply of foreign labour and high productivity growth have made it possible to combine high growth with low inflation. It is possible that some of the driving forces that have boosted the growth potential of the Norwegian economy and restrained inflation may now diminish. Prices for imported goods are now falling at a slower pace. The shift towards imports from low-cost countries was less pronounced in 2006 than in previous years. The rise in prices for oil and other commodities over several years has resulted in a somewhat faster rate of increase in producer and export prices among our trading partners. Measured in foreign currency, prices for imported consumer goods rose in 2006.

Actually, one essential objective of macroprudential supervision may be to "regulate" (not in the legal sense, but economically) the aggregate level of risk appetite inside the financial system. This unavoidably involves some degree of discretionary judgement and intervention. Combining the two components of macrosupervision (systemic and macroeconomic) with the two approaches (automatic and discretionary) produces an interesting classification, which is presented in the table below:  BIS Review 37/2009  3  Purpose Systemic risk  Adjustment to macroconditions  Mechanisms • buffers (capital and/or liquidity) • Loan to Value ratios Automatic  • accounting framework • stress tests  Discretionary  • pillar II of Basel 2  • time varying ratios  capital  • dynamic provisioning  • discretionary adjustments to capital ratios, provisions or margin requirements  Institutional challenges The discretionary approach to macrosupervision raises important institutional issues. First, who makes the judgment? And should that body be independent or not? There is a good case for putting Central Banks in charge. If one takes an historical perspective, it is striking that the mandates and missions of Central Banks have taken major turns following financial crises. Central Banks have an informational advantage (or at least no disadvantage) in judging the cyclical position. They have an incentive to act, because macroprudential supervision alleviates the burden on monetary policy, and because they need monetary transmission mechanisms to work. So they clearly should have a pivotal role in the process. But they are not alone in caring about financial stability.
There was an inability to see through the veil of modern finance to the fact that the balance sheets of too many banks were an accident waiting to happen, with levels of leverage on a scale that could not resist even the slightest tremor to confidence about the uncertain value of bank assets. For all the clever innovation in the financial system, its Achilles heel was, and remains, simply the extraordinary – indeed absurd – levels of leverage represented by a heavy reliance on shortterm debt. Modern financiers are now invoking other dubious claims to resist reforms that might limit the public subsidies they have enjoyed in the past. No one should blame them for that – indeed, we should not expect anything else. They are responding to incentives. Some claim that reducing leverage and holding more equity capital would be expensive. But, as economists, such as my colleague David Miles (2010) and Anat Admati and her colleagues (Admati et. al., 2010), have argued, the cost of capital overall is much less sensitive to changes in the amount of debt in a bank’s balance sheet than many bankers claim – a proposition demonstrated forcefully by Professors Modigliani and Miller over fifty years ago (Modigliani and Miller, 1958). And the benefits to society, most obviously through greater financial stability, but also through factors such as higher tax revenue, are likely to swamp any change in the private costs faced by banks. What does reduce the cost of capital is the ability to borrow short to lend long.

Diamond and Dybvig’s analysis consciously omitted the fact that, in reality, banks’ assets are risky. And not only are banks’ assets risky, but banks are highly leveraged institutions. This leaves them heavily exposed – with very high debt-equity ratios, small movements in asset valuations are enough to wipe out their equity and leave banks insolvent. That means the distinction between illiquidity and solvency can be difficult in practice – the difference in timing might be just a few days. If a crisis is in fact one of insolvency, brought on by excessive leverage and risk, then central bank liquidity provision cannot provide the answer. Central banks can offer liquidity insurance only to solvent institutions or as a bridge to a more permanent solution. It is this structure, in which risky long-term assets are funded by short-term deposits, that makes banks so hazardous. Yet many treat loans to banks as if they were riskless. In isolation, this would be akin to a belief in alchemy – risk-free deposits can never be supported by long-term risky investments in isolation. To work, financial alchemy requires the implicit support of the tax payer. When all the functions of the financial system are heavily interconnected, any problems that arise can end up playing havoc with services vital to the functioning of the economy – the payments system, the services of money and the provision of working capital to industry. If such services are materially threatened, governments will never be able to sit idly by.
All in all, the economy has been making progress in consolidating its convergence to the 3% target over the two-year horizon. As for activity and demand, both have generally performed as projected. The main difference is observed in a larger-than-expected drop in the durable component of private consumption such as, for example, automobiles and household appliances. By economic sectors side, mining posted the biggest difference. The central scenario projections that I will detail in a few moments show modest changes in magnitude. On the growth side, for this year, we project that GDP will grow between -0.5% and +0.25%. In 2024 it will grow between 1.25% and 2.25%, and in 2025 between 2% and 3%. On the inflation side, the CPI annual variation will end this year at 4.2%, slightly less than forecast in March, to meet the 3% target during the second half of next year. Core inflation, that is, the CPI minus its volatile items, will end 2023 with an annual increase of 6.5%, also reaching 3% during the second half of next year. On the external front, activity began the year with greater dynamism and less financial volatility. Nevertheless, a scenario of tight financial conditions continues to be projected, in an environment where uncertainty remains high and a more contractionary policy is expected in the main economies considering the challenge of lowering inflation.

And fiscal policy was expansive for too long – we created a dangerous entitlement economy in which the state was the rich uncle who helped with almost everything. When an economy such as this one (especially one with a huge surplus of money and incomplete price convergence) was hit by a strong supplyside shock after the lockdowns, the Czech Republic ended up with the highest core inflation in the EU (from November 2021 to October 2022). We address the causes of inflation in the Czech Republic in our blog article (Adam and Michl, 2022). Bullard (2023) also wrote an article on this topic last week. The central bank's large balance sheet can lead to changes in monetary policy transmission. This is also because when key interest rates are raised, monetary policymaking expenses increase. We pay interest to commercial banks for their excess liquidity deposits. To give you an idea, the CNB paid CZK 14.7 billion to the banks in interest on deposited liquidity in April 2023, which may amount to CZK 180 billion for 2023 as a whole. This can lead to a change in the behaviour of banks, i.e. how and to whom they provide loans, by how much they raise deposit rates. In a system with excess liquidity, banks easily buy government bonds and government debt is monetised. An important lesson for me is that we will try not to repeat 2017 at the CNB and conduct monetary policy in a conventional manner.
’9 ’9 7 1  1  0  0 -1  -1 94  95  96  97  98  99  00  01  S ource s: S ta tistics S we de n a n d P rospe ra R e se a rch Diagram 3  Com p on en ts of th e CPI percen tage 12-m on th ch an ge 9  9  I m p o r t ( 24 % )  6  6  D o m e s t i c ( 67 67% %)  3  3  0  0  -3  -3  -6  -6  Ho u s e m o r tg ag e i n t e r e s t c o s t ( 9%)  -9  -9  -12  -12  -15  -15 92  93  94  95  96  97  S o u r c es : S tati s ti c s S w ede n a n d th e R i k s ba n k  BIS Review 56/1997  -5-  Different indicators of underlying inflation also show a declining rate of increase, though the picture measured in this way is not quite as dramatic (Diagram 3). Excluding house mortgage interest costs, the current rate of inflation is about 1 percentage point higher than indicated by the CPI.

Under certain circumstances stock adjustments may trigger a more marked economic slowdown. This may happen, for instance, if effects of the adjustments either spread to private consumption or have a negative impact on the labour market and household confidence. The Riksbank was therefore alert to the risk of private consumption being weaker last spring and summer, which would have pointed to a further curb on inflation. In practice, however, private consumption went on rising in the summer and its growth became somewhat stronger in the autumn. Low inflation and interest rate reductions The rate of inflation decreased during 1996 and the rates that different economic agents expected in the future also moved down markedly (Diagram 2). This enabled the Riksbank to lower the repo rate from 8.91 to 4.10 per cent. As a result, the initial position for the ongoing growth phase in Sweden’s economy is more favourable than for many years. The drop in the rate of consumer price increases was appreciably accentuated by the Riksbank’s repo rate cuts in that these contributed to the reduction of mortgage interest costs. Under normal circumstances the tolerance interval around the price stability target should suffice BIS Review 56/1997  -4-  to absorb transitory effects on the price level. Last year, however, the fall in interest rates was very marked because many factors had a concerted effect that rapidly altered the picture of inflation. The magnitude of that interest rate fall is also largely responsible for the weak price trend to date in 1997.