samchain/econo-pairs-v1 huggingface dataset:
Overall, in recent weeks, market expectations have raised the projections of short-term inflation. In addition, in the short term, inflation is affected by supply shocks that can have significant effects. Developments in the international oil market do not help the outlook for domestic inflation. Recent geopolitical tensions in the Middle East, which, among other consequences, led to an embargo on Iranian exports, and a harsh winter in the Northern Hemisphere have made the actual and expected oil price to escalate. The Brent price has risen more than 15% during the current year, while projections taken from futures contracts have also risen and point to an average price for oil of near $ per barrel during 2012. The persistence of a high price always raises worldwide concern because of its implications on inflation and growth. Concerns regarding inflation deal with the direct impact of fuel and energy inflation, and also with the secondary effects that they cause, which could be accentuated in an environment with a narrow output gap. Final thoughts Before I end my presentation, I would like to share some thoughts on monetary policy. As mentioned at the beginning of this presentation, our task as economic policymakers is made more difficult in a more uncertain environment. We make our best decisions based on whatever information is available at the moment. Currently, decision making relies on certain elements that point to opposite directions. On one hand, the international scenario is very complex, even though when compared to a few months back, the tensions seem somewhat smaller.

Monetary stimulus is more effective if, in a deflationary environment, other policies can also give households and firms the confidence that global reflation is in prospect. And structural reforms can boost long-run wealth allowing monetary policy to bring forward spending from future incomes that are real and not ephemeral. All must recognise the imperative of avoiding the global liquidity trap. Not to beggar-thyself via beggar-thy-neighbour. Not to obsess over process at the expense of productivity. But by building resilient domestic demand and sustainable cross border capital flows, we in the G20 can redeem an unforgiving world. BIS central bankers’ speeches  15  Annex  Chart A1 Secular drivers of lower real rates – quantification  Source: Taken from Rachel and Smith (ibid.). 16  BIS central bankers’ speeches
But as we know, in the crisis, a sizeable proportion of these assets turned out to be complex, opaque and exposed to tail risk – so under stress, these markets broke down catastrophically and have yet to fully recover. This has prompted the regulatory authorities to develop new criteria around securitisation that, among other things, may bolster their liquidity in the future. 2. ETFs are another form of financial engineering that have grown rapidly over the past decade or so – from a small base in the early 2000s to more than $ trillion today. Equity funds still comprise the majority of ETFs. But the share of fixed income ETFs, in which the underlying assets are much less liquid, has grown substantially – in Europe, from around 5% in the early 2000s to around 25% today. ETFs are exchange traded, they offer investors liquidity. Prices of ETFs are usually kept in line with the assets they track by market participants being willing and able to transact in the shares they issue and the underlying securities. But in times of stress not only can their liquidity characteristics revert back to that of their underlying assets, they can also trade at a discount to the value of these assets. We saw some of this effect in the market turmoil last summer. We need to understand better why these effects happened and the circumstances in which they could reoccur. 3. And market making itself is another example.

It is to illustrate how far we are into the implementation phase of that reform programme, what remains to be done and, from the vantage point of a macroprudential regulator, how I view the future now that we are eight years on from the financial crisis and memories are beginning to fade. On the first point, the implementation phase, it is illuminating in itself that from a macroprudential point of view I have also chosen to talk about something else today. That is not to say that there is nothing that remains to be done. There is a vast amount of complex and difficult implementation that still needs to happen. My colleague, Andrew Bailey, will set out in a speech tonight the progress we’ve made so far on prudential regulation and three big areas of implementation left to complete: the Senior Managers Regimes, structural reform and competition. But as I have said before, the contours of the reformed regulatory framework for banks are clear – the Basel 3 capital and liquidity regime for banks, the reforms that address too big to fail, especially the regime for loss absorbing capacity in resolution that needs to be held by global systemic banks – which goes by the unlovely acronyms of TLAC and MREL and which is on course to be agreed by the G20 in Antalya this November. And the changes to derivatives and securities financing designed to increase transparency and reduce risk. There are, it is true, some material components of the reforms still under construction.
If the banks providing loans suddenly no longer wish to continue lending, the banks that have borrowed money can face problems. And, if they are not affected before, the other banks will be impacted when one or more banks rapidly need to sell their assets, pushing down the prices. To this can be added the vicious circle of negative effects for the real, public and financial economies that I have already discussed. To continue these generalisations, it could also be said that previously we usually believed that market discipline was enough to ensure that business incentives would correspond to socio-economic efficiency. Following the crisis, we know that this is not the case. Private economic incentives for decision-makers in the banks can be so strong that market discipline is not always enough to achieve transparency or effective risk management (to take two examples). The observation that US subprime loans were often sold with the same credit rating as Swedish sovereign bonds should be a good enough example of this. The private benefits – or corporate profits, if you prefer – of debt-financing relative to equity lead to moral hazard. Risks can be passed on to lenders and taxpayers. The management of the banks have been rewarded according to return on equity. By using their own risk models, the banks  9  Akerlof, G (1970): “Market for ‘lemons’: quality uncertainty and the market mechanism”, Quarterly Journal of Economics.

Then I made the remark that a separated responsibility for monetary and macroprudential policy, without any coordination, could result in a game between authorities, which could lead to an outcome not desired by any of the authorities. In the United Kingdom, sole responsibility has been given to the central bank. A Financial Policy Committee is to be set up alongside the existing Monetary Policy Committee. Such a solution of course means that the coordination between these two almost parallel committees, although each with a different focus, becomes an important issue. In the EU, the European Systemic Risk Board (ESRB) has been set up at the ECB in Frankfurt. Central banks and supervisory authorities are represented on the ESRB, but the central banks have the majority of the votes when decisions are made. In Sweden, Finansinspektionen and we at the Riksbank set up the Council for Cooperation on Macroprudential Policy in January this year. This council will discuss the assessment of risks in the financial system as a whole and discuss appropriate risk-prevention measures. The Council will also discuss analyses and the development of tools and methods in the area of macroprudential policy. The Council is a temporary solution while awaiting a more permanent distribution of the responsibility for macroprudential policy. At present, the Financial Crisis Commission is working with this issue. The recently appointed inquiry on capital adequacy regulations will focus specifically on responsibility for the future counter-cyclical capital buffer.
BIS central bankers’ speeches  1  Chart 2  Four years after the financial crisis engulfed the world, a European version has now emerged. Both market participants and the authorities failed in their assessments after the introduction of a single currency. Prior to the introduction of the Economic and Monetary Union, there were wide differences between interest rates facing different European countries, which primarily reflected different inflation expectations across countries. But through the 1990s, long-term interest rates drifted down to German levels. Over the next 10 years, sovereign interest rates were fairly similar – and very low – for all euro area countries despite wide differences in debt levels, budget deficits and growth rates. Market participants did not take into account differences in sovereign creditworthiness. Sovereign debt was treated as virtually risk-free, both in the markets and by the authorities. The period contrasts with the recent two to three years during which interest rates on sovereign debt have widened sharply. For many countries, interest rates have reached very high levels. In retrospect, we see that market participants failed in their risk assessment through the ten years following the introduction of the euro. Economic policy also failed. EU rules relating to budget deficits and public debt were disregarded early on when Germany and France exceeded the limits they had so eagerly advocated when the European Monetary Union was established. Other countries followed their example. Low interest rates made it easy to finance deficits by issuing new debt.

But why choose a target of 2 per cent? The reason why the inflation target in most countries has been set at 2 per cent or close to this is more the result of chance and circumstances than science. When an inflation target was introduced in Sweden, the Riksbank assessed that underlying inflation was at that time 2 per cent. Several other industrial nations had already chosen 2 per cent. The aim in Sweden then became to keep inflation at around this level. BIS central bankers’ speeches  1  Most central banks probably considered, quite simply, that an inflation rate of 2 per cent was a reasonable level to strive for – sufficiently low for people not to worry about when making financial decisions, but not too low. There are three important reasons why the target is higher than zero. •  The first concerns statistical measures of inflation being assumed to overestimate actual price increases. This is partly because it is difficult to distinguish price increases due to better quality from price increases per se. If one has an inflation target of zero, and the inflation rate measured is zero in accordance with the target, there is thus a risk that inflation will actually be below zero because the quality improvements have been underestimated and thus the prices have fallen in relation to the level of the quality.
As public servants they contribute every day to delivering our mission to promote the good of the people of the United Kingdom by maintaining monetary and financial stability. The changes we are making public today will ensure they can continue to do that important work effectively. 7. Open about our business  The Bank’s balance sheet has been at the heart of the financial system for over 300 years, and remains our most important policy tool. The innovations and adaptations in recent years have meant that it has been central to the flexible and effective response to all of the major policy challenges faced by the Bank since the onset of the financial crisis. And I am sure it will be a vital part of everything we do in future. Over that period, we have re-learnt one of Bagehot’s lessons – that ambiguity is rarely constructive. Policy is at its most effective when it is clearly communicated. We have taken major steps to improve communications around our monetary policy decisions, the framework we use to provide liquidity to the financial system, and the way we use Market Intelligence. Those changes show that the Bank of England is not just “open for business,” we are also “open about our business.”  11  http://www.bankofengland.co.uk/markets/Pages/mireview.aspx.

The conundrum for consumers is a simple one: if consumer spending growth is to exceed 2 percent annualized on a sustained basis at a time when real disposable income growth is below 2 percent then this would require the household saving rate to decline persistently. But there is little reason to expect such a decline given that the current saving rate is at a level consistent with current level of household wealth relative to income. We have a chicken-egg problem. If the saving rate remains stable, then stronger consumption growth will require a pickup in income growth. But for income to rise, demand must increase. This suggests that there may need to be an impetus to growth from other sectors of the economy to generate a boost in consumer spending growth. One possible source is the housing sector. As noted earlier, housing starts are still quite low relative to what the country’s demographics should support in the long run. But there are two difficulties here. First, the strength of the housing recovery may be blunted by the recent rise in mortgage rates. For example, before last week’s partial reversal, the 30-year fixed mortgage rate had risen by about 120 basis points since May to more than 4½ percent.
They exist to manage and reduce the risks faced by their members – to ensure financial contracts are reliably and transparently margined and collateralised. The main prudential risks CCPs face is from the failure and consequently inability of clearing members to meet their obligations to the CCP. The steps that have been taken since the financial crisis to increase the resilience and resolvability of their bank clearing members are therefore a key protection for CCPs. But CCPs also need the backstop of a credible resolution regime. The principal challenge here is not solvency per se but rather the ability of a CCP to restore itself to a matched book if members default, and to do so in a way that does not undermine the stability of the system. CCP rule books provide for very substantial mutualised resources and a comprehensive series of recovery actions. These include, as a last resort, the cancellation or ‘tear up’ of contracts and the end of the clearing service. However, waiting until the mutualised resources of a CCP are exhausted and subjecting participants to the unpredictability of a full tear-up may well pose unacceptable risks to financial stability. Resolution allows the resolution authority to intervene, if necessary, to tear-up a subset of contracts earlier in the process than would be possible in CCP recovery, and before the mutualised resources in the CCP have run out. The losses can then be spread across the membership in the order set out in the rule-book.

Furthermore, in some cases housing prices did go up high, with clear indications that there was a bubble. However, their financial systems made it through and remained stable and,  1  A flexible inflation targeting regime balances the cost of output fluctuations with those of inflation instability, and the result should be a decline in both, output and inflation volatility. For an exposition of this framework and how it relates to the definition of the inflation target parameters see De Gregorio (2009a). BIS Review 113/2009  1  despite the current difficulties, have avoided acute financial crises. This is the case of, for example, Australia and Spain. Naturally, when facing disproportionate increases in housing prices, both the increase in credit and the boom in construction are symptoms that the downturn will be severe. Still, this need not result in a systemic financial meltdown. In any case, monetary policy can and does help in the creation of bubbles, although not so much by the level of the interest rate but by the monetary policy strategy with which financial turmoil is dealt with. In the United States, the strategy of turning a blind eye to the period of soaring asset prices and then, when the bubble burst, reducing aggressively interest rates used to be the Fed’s strategy (the “mop-up strategy” according to Blinder and Reis, 2005). This approach was first used on the “Black Monday” of October 1987, then with the breakdown of Long-Term Capital Management (LTCM) and later with the bursting of the high-tech bubble.
The diagnosis is the same in the short-term derivatives market, whose integration, standardisation and depth have increased. This is reflected, for instance, in the scale of daily transactions and the huge expansion of the euro interest-rate swap market. These structural changes in the euro area money market have generated significant moves by market participants, who have concentrated within the euro area their euro cash management activity and have benefited from better liquidity on the secondary market. Of course, such integration has to be brought to fruition in the other segments of the money market, i.e. the repo market and the short-term securities market. Further integration will enhance the efficiency of the euro area financial markets and will be beneficial to borrowers and investors alike. –  With regard to the capital markets, progress towards integration has been significant, both on the euro-denominated bond market and the equity market. The gross issuance of long-term debt securities denominated in euro amounted to 791 billion euro in 1999, against the equivalent of 902 billion euro for debt securities denominated in US dollars. The pace of euro-denominated issues remained brisk in the first three quarters of 2000 at 498 billion euros. According to the Bank for International Settlements, euro-area private sector borrowers have issued about three quarters of their debt in euros since 1 January 1999, compared with an average of 50% in the predecessor currencies since during the 1990s.

Similarly, private borrowers residing outside the euro area issued more than a fifth of their international debt in euros from the beginning of 1999, roughly a twofold increase over the total share of the legacy currencies before the introduction of the euro. And, according to recent statistics, the euro could have been the first currency for bond issuance before the US dollar during the first quarter of 2001, with 46% of international bond issuance against 44% for US dollar. Furthermore, European investors have substantially diversified their bond portfolios since the introduction of the euro, encouraged by the removal of the exchange rate risk. This enables them to achieve higher rates of return for a given level of portfolio risk. Additionally, let me recall recent trends towards mergers or close co-operation between stock exchanges, securities settlement systems and clearing houses, and so forth. Had the euro not been created, would it have been thinkable that the Paris, Brussels and Amsterdam exchanges would merge, creating EURONEXT? It is evident that the introduction of the euro is fostering very large-scale market restructuring throughout Europe. The total stock market capitalisation of euro-area equity markets stood at more than 5.5 trillion euros at the end of 1999, compared with a market capitalisation of 3.6 trillion euros at the end of 1998. This figure reflects the powerful drive towards securitisation of private companies throughout Europe and, in particular, the take off of the “new markets” network. There are still some barriers to further integration of EU capital markets.
vii The share of high skilled adults in the population in the Netherlands, or in Finland, is more than twice that of France (17% and 19%, respectively, against 8% in France). viii Treasury Department, Annexe au projet de loi de finances pour 2022, Rapport économique, social et financier, October 2021. ix Banque de France monthly business survey. x DARES, Les emplois vacants. xi Unemployment in the ILO sense. xii Unemployment in the ILO sense. xiii Eurostat data for 2005. xiv Eurostat data for 2021. xv DARES, « Tableau de bord des politiques de l’emploi », 2021.

15 The Fed’s FR 2420 data on bank borrowing activity show that after each increase in the ON RRP offering rate, the distribution of fed funds trades shifted toward higher rates, with the vast majority of trades being executed at rates at or above the offering rate (Figure 3). The same patterns were observed in detailed data on brokered fed funds and Eurodollar trades, the latter of which encompasses a larger volume and wider set of lenders than fed funds, and also in secured markets. Examining in particular individual repo trades where money market funds and GSEs supply cash to counterparties over the tri-party platform, we saw repo rates shift higher and nearly all trading volume occur at or above the ON RRP rate. Thus, the rate on the ON RRP facility performed as a floor for nearly all overnight money market transactions, exactly as theory would predict for even small and temporary rate changes in the offering rate. After subsequently lowering the ON RRP offering rate back to its exercise baseline of 5 basis points in mid-December, secured rates declined. Interestingly however, average unsecured rates remained at somewhat elevated levels, even as a portion of the activity returned to lower rate levels (Figures 4 and 5). 16 The drivers of this dynamic remain unclear and illustrate the complexity of money markets, but may partly reflect some lenders in unsecured markets gaining information about their relative bargaining power as a result of the ON RRP tests.