samchain/econo-pairs-v1 huggingface dataset:
All else equal, we probably need to see not just stable prices of commodities and other tradable goods if we’re to meet the target over a reasonable horizon, but some further acceleration in domestic costs as well. While that’s what the central forecast in the February Inflation Report entails, the MPC will obviously have to be watchful, in the meantime, for signs that “good” deflation is turning into something worse. But we should not over-state the risks. The costs of deflation: income and interest rates matter too Something one hears quite often is that deflation is a problem “because it encourages people to postpone consumption”. Deflation – or more precisely the expectation that prices will fall – therefore weakens demand, it is said, and this can lead to a vicious circle in which prices are then depressed further. As far as it goes this has some truth to it. But it’s at best a partial description of the problem, at worst a bit misleading. It leaves out two important considerations. One is nominal income. Suppose you’re told that prices will fall over the next year but that the value of your income will remain unchanged. All else equal, the prospect of falling prices will give you an incentive to save more of your income (i.e. to postpone a bit of consumption). At the same time, the real value of that income will prospectively have risen.

“Core” inflation is still running at over 1% and, barring another steep decline in food and energy prices over the next year, headline inflation is likely to rise quite steeply in early 2016. I’m also struck by the rarity of persistent deflation in the past 15, particularly amongst countries with an independent monetary policy. As we’ve seen, long periods of falling prices were perfectly common during the Gold Standard. That’s inevitable under a commodity peg if, over any period of time, the commodity itself is in fixed supply. The same was true in other countries at the time and, infamously, during the Great Depression. It was only when Britain came off gold, in 1931, that its nominal income started to accelerate 16. And since the Second World War, and the abandonment of commodity standards, positive inflation has been the norm – so much so, in fact, that the commonly cited example of the Japanese deflation is almost unique. Chart 12a Deflation episodes are rare  Chart 12b Even rarer in countries with floating exchange rates  Source: Bordo and Eichengreen, IMF and OECD  Source: Bordo and Eichengreen, IMF and OECD  Note: Sample 1960-2010; 3300 observations  Note: Sample 1960-2010; 3300 observations. 15  A very recent paper by Claudio Borio and co-authors at the BIS makes the same point (Borio et al. (2015)); see also Broadbent et al (2010). 16  For more on the contractionary effect of the Gold Standard during the Great Depression, see Eichengreen (1996).
The problems and challenges that the new member states will face are not any different from those that are faced by the “old” member states, such as implementing the new Basle Capital Accord, implementing the IAS, increasing cross-border cooperation, monitoring activities of large complex financial groups, evaluating new complicated financial products, understanding risk transfer among different financial institutions. The transition will greatly benefit from the hard work that has been done during the economic transition and during the preparatory stages for the EU accession. It will be smooth and I do not expect any disruption of financial service in the new member states, or in the EU as a whole. It could be said that the financial sector is already in the European Union. Useful links • pavel.racocha@cnb.cz • www.cnb.cz Czech National Bank • www.nbp.pl Polish National Bank • www.nbs.sk Slovak National Bank • www.mnb.hu Hungarian National Bank • www.bis.org links to other national banks  26  10  BIS Review 53/2003

Paul Tucker: Developing an EU cross-border crisis management framework Remarks by Mr Paul Tucker, Deputy Governor for Financial Stability at the Bank of England, at the Eurofi Financial Forum, Brussels, 30 September 2010. *  *  *  Thank you very much for inviting me to join you here today. It is terrific that the EU, and the Commission in particular, have been taking resolution really seriously as part of the programme for reforming the financial system. This is a domestic issue, an EU-wide issue, and a global issue. In introducing this session of the conference I’ve got five points, and I’m going to try to be quite crisp on those five points once I have made an introductory comment about resolution regimes in general. It may be helpful to say a few words about what resolution is. Resolution is what happens when we are in the “last chance saloon”. That is to say when supervision, however enhanced, has not prevented distress. When higher capital and liquidity requirements have proved insufficient. When any Cocos or other instruments have been converted or written down but have proved insufficient to absorb the distressed firm’s losses, and so the institution is still teetering on the edge of failure. That is we are talking about the point at which all the usual remedies have been exhausted, and the authorities face a desperate choice between taxpayer bailout or chaotic liquidation unless special resolution tools are available. All those other, essential measures are about reducing the probability of distress.
Therefore we are not positioning ourselves as a market that can match the supply and demand of Islamic products from domestic angle. 2  BIS Review 59/2008  Our objective is to make Hong Kong a platform for international intermediation activities for Islamic finance. What can we offer to the Islamic investors? Hong Kong’s advantages lie in its strategic location, highly developed financial markets and infrastructure, and a business-friendly free-market environment. We are strategically located at the heart of Asia with a broad hinterland that gives investors unique access to virtually every market in the Asia Pacific time zone. Almost all Asian countries are within reach by a three-hour flight from Hong Kong. What makes Hong Kong a natural destination for Islamic funds is our deep and highly liquid capital markets. Almost all of the most actively traded financial instruments are available for exchange in Hong Kong, and this gives Islamic investors a much wider choice of where to place their funds. More importantly, when it comes to investing in China, Hong Kong is about the only natural choice. Hong Kong has the largest and deepest Chinese equity and debt markets outside Mainland China. We are the first and remain the only major international financial centre that has banking business and financial products related to the renminbi. The development of a local renminbi bond market which started in the middle of last year has firmly positioned Hong Kong as a pilot market for China’s continuing financial market liberalisation.

If more people take part in the labour force, wages and thereby inflation should be held back. Developments in the wage bargaining rounds so far do not indicate that the potential labour supply is holding back wage demands quite as much as we had earlier estimated. Abolition of property tax on housing One of the Government’s proposals that has received considerable attention is the proposal to abolish property tax on housing. A working group has been commissioned by the Government to investigate a model that would finance this tax cut in the housing sector. In this model, the tax is replaced by a municipal charge and higher tax on profits made when selling property. In theory, a fully-financed proposal should not involve any effects on general housing price levels. However, in practice there is reason to believe that house prices will increase at a slightly faster rate due to the tax changes. In those parts of the country with high property taxes, and where the difference between the municipal tax and the current property tax is substantial, there could be fairly large price increases. But this would probably be mainly a one-off effect that did not have any more long-term effect on the rate of price increase. Therefore, a fully-financed abolition of the property tax would not necessarily have any major direct impact on CPI inflation.
Well, you all well know that Milton Friedman was rather sceptical about our ability to avoid serious mistakes in this very area and that led him towards the formulation of a “simple rule” of constant growth of the money stock. In this framework no forecasting was required. Of course, he faced evidence of the failure of the large-scale econometric models that had been used in the 1950s to 1970s and that were later subject to strong criticism. The models were hit by a series of structural breaks, which made the previously observed relationships unreliable. Consequently, it was argued that these breaks were not a result of bad luck only, but also reflected a lack of microeconomic foundations in the models, neglect of forward-looking expectations and ad hoc econometric restrictions. The terms “Lucas critique” and “Goodhart law” have become standard warning signs for all macroeconomic modellers. The actual way in which forecasts are produced and used at central banks has, however, changed substantially over the past two decades. The changes have reflected developments both in the economic (and econometric) theory and in monetary policy regimes. Bearing in mind the failure of large-scale models, the profession has started to prefer smaller-scale models with a sounder microeconomic background, built in recent decades usually along the lines of New Keynesian Economics. As the first generation of these new models matured, though, the second generation started to become more detailed again.

Chart 6. NOK bonds issued outside Norway Total outstanding. In billions of NOK 100  100  80  80  60  60  40  40  20  20 0  0 2000  2001  2002  2003  Source: Norges Bank  This is reflected in the international market for bonds issued in NOK. Last year, such bond issues amounted to more than NOK 50 billion. Both foreign and Norwegian companies were issuers and a number of small and large foreign investors and Norwegian companies - primarily life insurance companies - were buyers. The relationships in the foreign exchange market are unstable. New shifts in the world economy may reduce interest in the krone. Chart 7. Relative labour costs Deviation from historical average. Per cent 20  20  31 January 2003  15  15  10  10  5  5  0  0 -5  -5  Common currency  -10  -10 -15  -15 1970  1975  1980  1985  1990  1995  2000  Sources: TRCIS/IMF, Ministry of Finance and Norges Bank  As a result of the strong krone and a high wage level, competitiveness in business and industry is close to 15 per cent weaker than the average for the past 30 years. Historically, following such substantial deviations, competitiveness has always returned to the average fairly rapidly.
5 I will not go in to it here, but merely note that a majority of us on the Executive Board has regarded the current repo rate as in practice being the lower bound. This zero interest rate problem received much attention in the academic world in connection with the Japanese central bank cutting its policy rate to zero as a result of the economic stagnation in the 1990s. One of the possible solutions if a central bank has cut its policy rate to its lower bound, and wants to cut it further, is to promise a policy rate around zero for a long time to come. Over time this would have a similar effect to cutting the interest rate to below zero and then raising it to above zero. The repo rate path facilitated communication During the financial crisis, lessons from this research became surprisingly topical for a number of countries in addition to Japan. The repo rate path fulfilled a central role here, as it enabled the Riksbank to make clear its intentions for monetary policy during an uncertain situation. When the Riksbank cut the repo rate to 0.25 per cent in July last year, the repo rate path signalled a low repo rate for a long period ahead. I believe this gave us an advantage over many other central banks, who tried to use purely verbal methods to signal that their policy rates would be low for a long time. Credibility plays an important role in monetary policy.

5 Richard H. Clarida, Vice Chair of the Board of Governors of the Federal Reserve System, The Federal Reserve’s  Review of Its Monetary Policy Strategy, Tools, and Communications Practices , speech delivered at the Federal Reserve Bank of Minneapolis, April 9, 2019. 3/3  BIS central bankers' speeches
Opposition to infrastructure reform by those firms that have in the past benefited from complexity and lack of transparency must be firmly overcome. At the same time, we need to keep in mind that central counterparties themselves can become single points of failure, with potentially devastating consequences. Central counterparties must therefore have sufficient financial resources to withstand the default of the largest participants. Operators and regulators should carefully evaluate the adequacy of the risk management models and financial resources of central counterparties. Only if central counterparties are financially sound can they play their critical role in preserving financial stability. Finally, as an ultimate resort, we cannot ignore the need to consider measures that address the size of banks, indirectly or directly. 13 Admittedly, there are some benefits from size. But the empirical evidence suggests that these benefits are rather limited. Economies of scale, whereby larger amounts can be produced at lower average cost, already appear to have been exhausted in the case of relatively small banks. 14 Obviously, banking systems made up of only small banks are not immune to crisis episodes. But let us not make the mistake of using another problem as an excuse to shy away from the severe moral hazard problem associated with the largest banks. It is also sometimes argued that interconnectedness matters more than size when it comes to systemic importance. It is evident that both size and interconnectedness matter. Recent empirical evidence, however, indicates that systemic importance increases more than proportionately with size.

Equally, the most prominent banks should invest their efforts, not in resisting fundamental change, but in genuinely supporting the work to bring it about, in the interests of a more longterm and less volatile global banking and, ultimately, economic growth model. If we fail to reform fundamentally the financial system and the position of the largest systemically relevant firms in that system, we will undermine one of the most basic mechanisms of any market economy, namely that of punishing failure. What is more, we will – to quote Mervyn King – bequeath to future generations a serious risk of enduring another crisis even worse than the one we have just experienced. 16 My biggest concern is that a future crisis on a larger scale could create such an immense regulatory and protectionist  16  Speech by Mervyn King to Scottish business organisations, Edinburgh, 20 October 2009. BIS Review 145/2009  7  backlash, that the very market-based system, on which so much of our current welfare is based, will be threatened. In that sense, it is in the long-term interest of banks themselves to support the far-reaching efforts to make the financial system more resilient. If our reform efforts falter, we risk having to look back one day at the vast and unprecedented stabilisation efforts undertaken by so many governments and central banks and conclude that they were short-sighted.
By the end of 2003 for example, the domestic banks’ assets amounted to over 277% of GDP, compared with a euro area average of 273%, while the ratio of domestic bank credit to GDP stood at 155%, as against 143% in the euro area. More significantly, spreads between short-term lending and deposit rates in Malta, at 2.41 percentage points in 2003, were even narrower than the euro area average of 3.48 points. This suggests that the local banks compare favourably in terms of efficiency with banks elsewhere in the European Union. Furthermore, despite the global economic slowdown and the recent weak performance of the Maltese economy, the profitability of banks in Malta, as evidenced by the return on assets, has been fairly stable at around 0.8%. This compares with an average return of 0.6% recorded by European banks in 2001. At the same time, bank liquidity remains very high, with the domestic banks’ holdings of liquid assets as a share of short-term liabilities, just under 50% at the end of 2003, consistently exceeding the 30% prudential requirement. Maltese banks are also strongly capitalized. Their aggregate capital adequacy ratio, defined as the ratio of own funds to risk-weighted assets, stood at 16.7%. On the other hand, the banks’ loan portfolio still tends to be concentrated on a few sectors, reflecting the structure and small size of the Maltese economy. Furthermore, they still rely too heavily on property as collateral.

In particular, the banks were unable to adjust lending rates according to the perceived creditworthiness of borrowers, and resorted instead to significant collateral requirements and to credit rationing. Furthermore, because the scarcity of land in Malta seemed to guarantee that its value would never go down, property has always been considered a safe investment, so that Maltese banks relied heavily on real estate as collateral, attaching insufficient importance to the viability of projects. As a result, many potential customers were denied access to credit. This, together with the absence of a capital market, meant that savings could not be channelled effectively into productive private investment and tended to flow instead either into inefficient Government-owned enterprises, into the property market or, despite exchange controls, into overseas assets. This situation created imbalances in bank balance sheets, which, when the economy was liberalised and exposed to market forces, came to represent a potential threat to financial stability. For example, the changes in relative prices that occurred in the wake of liberalisation tended, in some cases, to result in a deterioration in loan quality. Furthermore, bank balance sheets included a large number of Government-guaranteed loans to public corporations and utilities that were largely shielded from competition. Despite these distortions, however, no major bank collapse or financial crisis was experienced. A major change occurred in the late 1980s and early 1990s when a programme of financial liberalisation and privatisation fundamentally transformed the economic climate. For a start, the Government’s shareholding in the banks was reduced.
It is exactly by daring to move out into unfamiliar waters, with historically low interest rates right down to a few basis points, and with large unconventional measures, that the world’s central banks, including the Riksbank, have succeeded in preventing the major crisis from becoming the Great Depression mark two. It has also been claimed that the discussion on the lowest level of the repo rate was resolved at the monetary policy meeting in July 2009 and that there is no reason for a reassessment. In July, the majority of the Executive Board stated in a press release and in the Monetary Policy Report that “the Riksbank’s assessment is that, after cutting the repo rate to 0.25 per cent, it will have reached its lowest level in practice”. Firstly, as I expressed at the meeting in July, in my opinion, this statement was a mistake. It goes against the commonly accepted principle that the repo rate path is “a forecast, not a promise”. In practice, the statement is a promise not to lower the repo rate further. Furthermore, the statement implies that the repo rate path cannot normally be a mean forecast, as all risk is upside risk and the mean is then higher than the repo rate path.

In the absence of more detailed information on the effect that may be dominant, it does not seem unreasonable to assume that the effects of a reduction of the repo rate path will be of a normal scale. These figures and the estimated effects of a repo rate reduction are not the final word. Of course the future will bring further developments of Ramses and other models, more empirical estimates and new experience, which will lead to the revision of these figures. However, I would claim that these figures are the latest and best word on the basis of the information and knowledge currently available, and therefore provide the best basis for a decision right now. Similarly, the mean squared gaps are perhaps not the last word when it comes to measuring the Riksbank’s target achievement. However, it is fair to claim that is the best way we have found so far of me assuring target achievement, that is, the extent to which the Riksbank has succeeded stabilising both inflation around the inflation target and resource utilisation around a normal level. I consider Figure 1 very clarifying.
The Petroleum Fund 1996-2000, estimates 2001-2005. In billions of NOK 1200  1200  800  800  400  400  0  0 96  97 98  99  00 01  02  03  04  05  In the years ahead, the capital in the Petroleum Fund will increase as the surplus on the central government budget is transferred to the Fund. The chart shows the estimates for growth in the Petroleum Fund. The projections, as they should be, are based on prudent assumptions concerning oil and gas prices, the return on the Fund and the domestic use of oil revenues. The state’s direct financial interest in petroleum activities (SDFI) may be regarded as part of the tax system. The government would have had little possibility of ensuring that a sizeable share of the  8  BIS Review14?/2001  economic rent benefit society without such a field-specific instrument. It is doubtful whether the government can fully realise the value of the SDFI through its disposal. Buyers may have more knowledge about the holdings than the seller. Companies that buy SDFI stakes will also face some uncertainty as to the future tax system, which will have a negative effect on their willingness to pay. It is therefore understandable that only a smaller share of the SDFI is offered for sale. At the same time, the sale of the SDFI increases the need to remedy the substantial loopholes that have been found in the petroleum tax system.

The government’s five largest stakes in Norwegian companies can be roughly estimated at NOK 300 billion. In general, concentrated ownership requires a more strategic ownership approach and gives rise to higher risk than diversified ownership. 10  BIS Review14?/2001  Risk associated with state ownership NOK bn 300  The five largest state enterprises Petroleum Fund's bonds Petroleum Fund's equities  200  100  National Insurance Fund's private bonds  National Insurance Fund's equities  0 0  10  20  Return risk  This is illustrated further in the chart. The composition of government assets is broken down into equities and bonds in the Petroleum Fund and the National Insurance Fund and government ownership interests in the five largest companies. The horizontal axis provides a normal measure of risk, in other words the standard deviation of the return. The risk is estimated on the basis of the historical performance of the companies’ share prices. For unlisted companies, we have used share price performance for comparable international companies. Higher risk means that the assets are more exposed to fluctuations in return. As a whole, the return on the Petroleum Fund and the return on private bond holdings in the National Insurance Fund feature a moderate risk profile. The risk is higher for both the National Insurance Fund’s equities and the state’s ownership interests in the five largest companies. For a given expected return, the owner should aim at reducing risk because future income will then be more secure.