samchain/econo-pairs-v1 huggingface dataset:
Bank research suggests that the spillover from tightening in US monetary policy to foreign GDP is now twice its 1990-2004 average, despite the US’s rapidly declining share of global GDP. Financial instability in advanced economies also causes capital to retrench from EMEs to ‘safe havens’, as it did during the 2008 financial crisis and the 2011 euro-area crisis (Chart 6). Connally’s dictum “our dollar, your problem” has broadened to “any of our problems is your problem”. Moreover, the structure of the global financial system – or the “pipes” – is increasingly amplifying capital outflows from EMEs when these push shocks occur. For EMEs, market-based finance has accounted for all the increase in foreign lending since the crisis, as bank lending has declined and FDI has stayed fairly constant (Chart 7).21 While this shift has brought welcome diversity to the financial system, it also reduces the sustainability of capital flows, as market-based flows are particularly sensitive to changes in global risk appetite and financial conditions. Investment fund flows are particularly flighty (Chart 8), especially under stress. The increasing role of “push” factors and the “pipes” of the system means fast-reforming EMEs could soon be running to stand still in their quest for more sustainable capital flows (Chart 9). Bank researchers estimate that the growing shares of FX-denominated debt and market-based finance have increased the sensitivity of “Capital Flows-at-Risk” to push factors by 50% since the crisis, largely using up the selfinsurance purchased by EMEs.

The matters of economic policy that are up for EU discussions are also more specific than before. How is economic policy to be formulated? How can the labour market be made to function better? At the European Central Bank we have missed the train on which the participating central banks designed their monetary policy strategy and decided how the functions of the system of central banks are to be performed. If we join the monetary union in the future, influencing the procedures of the ECB and the formation of monetary policy will be more difficult. In the economic domain the European Union is also increasingly tending to establish joint European positions, for example on such matters as the crises in Russia and Brazil, the role of the IMF, etc. Here, too, I consider we are in a formative phase. Guidelines are now being drawn up for how Europe is to be represented on international bodies and in the work of developing a new international financial structure. The questions include the future status of the G7, G10, G33 and other informal groups. In these contexts we are now becoming rather isolated. Conclusion Now for a brief summary and some conclusions. EMU is a part of the effort that has been in progress for more than five decades to bring the countries of Europe closer together. Today the monetary union is perhaps the most important EU project and as a member of the Community we cannot disregard it.
Implicit in these observations are strong forces pulling in different directions in the monetary and financial system on the Mainland, all with implications for monetary and financial stability, not just on the Mainland, but also for Hong Kong, being so close to and so integrated with the Mainland. There is great emphasis on controllability, gradualism and the ability to take initiatives in the reform and liberalisation of the Mainland, all in the context of the building of a socialist, market economy. I have no doubt that the Mainland authorities will be able to steer the right course through this potent scenario on the monetary and financial fronts, and avoid mishaps. One can therefore be optimistic about Hong Kong, as the international financial centre of the country, continuing to benefit from monetary and financial developments on the Mainland, although we should not forget that in the capitalist, free market environment that we are in, there is a possibility of market volatility or adjustment being magnified. The task is for all concerned to ensure that they are in a position to cope  4  BIS Review 139/2007  with magnified volatility, in other words, manage market risks that may be greater than what they have seen in the past. The linked exchange rate system Let me turn to the THIRD and last issue that I wish to cover this evening. This concerns our own exchange rate system.

It would probably not relieve pressures for currency appreciation, rising inflation and buoyant asset prices. Seventh, on the so-called reverse double play: the scope is limited. The reverse double play aims at profiting from a long position in Hong Kong stocks by engineering a capital inflow large enough to trigger passive exchange market intervention on our part, which would push interest rates to very low levels and asset prices higher. But interest rate adjustments when the exchange rate hits the strong side of the band are bounded by the floor of 0%, while they might be a lot more dramatic at the weak side, and the sensitivity of stock prices to these different adjustments differs. Herd reaction, which is what most speculative plays aim at, is a lot easier to instigate through the fear factor, when interest rates rocket up, risking a stampede to exit from the market, but a lot more difficult through the greed factor, when interest rates fall, and the rush to buy does not necessarily materialise. Conclusion I hope these answers are clear and the high degree of confidence in and credibility of the linked exchange rate system built up over the past quarter of a century is sustained. This would obviate the need for the type of interest rate adjustments seen earlier in the month and dampen volatility in Hong Kong dollar interest rates around those of the US dollar. Indeed, monetary and financial stability is dependent to a large extent on confidence in and credibility of monetary and financial policies.
The IMF may lend large amounts, create moral hazard in doing so, and still not be able to ward off the threat of financial crises. And faced with a run on their currency or banking system, countries may be forced to take unilateral action to suspend payments. So what to do? 4. The middle way  Given that neither purist approach is on the agenda, the international community has been trying to take some practical steps forward. The aim is to reduce the frequency and severity of financial crises. Some might describe this as muddling through. I prefer to call it the “middle way”. The difference is that the middle way is based on the principle that if the emergency services will be slow to arrive then whichever form of transport you care to think of, borrowing countries should drive slowly. How to encourage and enforce careful driving has been the subject of innumerable international meetings. Initially, the discussion took place in the G10, which, as you know, comprises eleven countries. Then last year the discussion was taken up by the G22. By the spring of this year that group had become the G33. Can you complete the sequence by guessing which international forum will take the lead next year? Suffice it to say that at the original Bretton Woods conference there were forty-four countries and it took place fifty-five years ago. In terms of practical steps forward, it is useful to distinguish between the prevention and resolution of crises.

If we cannot find a way to reconcile free movement of capital with prevention of financial crises, then many countries may draw the lesson that they are better off with capital controls – either explicit or implicit – than without. Over the past decade, the two-year swing in the current account among G7 countries has been of the order of 1-2% of GDP. The largest swing was less than 4% (3.7% for Italy over the period 1992-94). These are small compared with the swing of 17% for Korea, in 1996-98. 1  Stiglitz, J E, Financial Times, 25 March 1998. 2  Sakakibara, E (1999), “Reform of the International Financial System”, speech to the Manila Framework Meeting in Melbourne on 26 March 1999. BIS Review 95/1999  2  Two dimensions of the reversal of capital flows have been evident in recent experience. First, their intensity and scale. Second, the rapid contagion from one emerging market to other previously unaffected countries. Both phenomena are a product of the nature of the capital flows concerned. The problems arise from short-term flows of debt finance, not long-term equity flows or direct investment. Equity investment has a self-stabilising mechanism. When an investor wishes to withdraw from the equity market he or she has to find a buyer before they can head for the exit. The market price adjusts in order to attract a buyer to replace the seller. The physical investments financed by equity flows remain in place, even if their value on the market has fallen.
We also use per-counterparty caps, and can use an aggregate cap. Evidence to date on control Now, let’s discuss what the data tell us about how well the framework performed. The distribution of traded rates in the federal funds market, shown in Figure 1, essentially made a parallel shift higher after liftoff. These data are drawn from the new FR 2420 data collection I discussed earlier, and they show an average over all days from liftoff to this past Wednesday, leaving out December 31. Nearly all trading occurred within the new range – it’s normal for there to be a little bit above the range – suggesting that our framework was broadly effective in moving traded rates upward. Because traded rates moved upward in this way, we have so far achieved an excellent level of control over the federal funds rate. Since December 17, the day after the FOMC meeting, the effective federal funds rate, calculated under its current methodology as a volume-weighted mean, has traded within the FOMC’s new 25-to-50-basis-point range on all but one day, which I’ll come back to. This is shown in Figure 2. The rate has averaged around 36 basis points, about 25 basis points above its average level over the analogous year-ago period, when the target range was zero to 25 basis points. Let’s consider the calculation of the effective rate for a moment.

Accordingly, the interest rate on the pool was slightly below overnight Treasury repo rates in the market.47 To ease the Desk’s job in the daily forecasting of autonomous factors, tight limits were imposed on customers’ ability to rapidly vary the size of their investment in the pool. Since the crisis, the New York Fed has continued to provide the pool as a service. Investments in the pool continue to be paid the market-based rate I mentioned. Figure 16 contains some statistics on this rate relative to a measure of the broad market rate. We do not use the foreign pool as a means for implementing monetary policy, and the change in the composition of Federal Reserve liabilities it can generate has little to no impact in unsecured markets because of the large amount of reserves in the system. Recall that the current operating framework is not based on reserves scarcity. Use of the foreign pool has grown over the last year and a half, from a bit under $ billion in mid-2014 to about $ billion on February 17. This growth isn’t associated with liftoff, and it isn’t because we have changed the way in which the interest rate is calculated.
While our responsibility is for the UK’s system, the pivotal position of London as a major international financial centre means that we have to take a wider view of global developments and can share that perspective with colleagues abroad. One way of reducing the probability and impact of the risks to the UK financial system is by helping the private sector to improve their identification and management of risks. We contribute to that by talking to market participants about their businesses and drawing those threads together with our economic analysis of financial markets and trends. This enables us to feed back to market participants the broader picture to inform their understanding and management of their own risks. 3  1  Thornton, H (1802), An enquiry into the nature and effects of paper credit of Great Britain (Chapter 7), page 121. 2  Allen, F & D Gale (2000), Comparing financial systems, MIT Press. 3  Bernanke (2006) also highlights risk management lapses by the private sector as a key source of crisis and stresses the vital role of market discipline in preventing such lapses from recurring. See Bernanke, B (2006), Hedge funds and systemic risk, remarks at the Federal Reserve Bank of Atlanta Financial Markets Conference, Sea Island, Georgia, 16 May. BIS Review 70/2006  1  In the latest edition of the Bank’s Financial Stability Report, we have sought to improve the way that we present our assessment of risks.

As more instruments that transfer risk are added to the balance sheets of financial institutions, so leverage and connectivity  2  BIS Review 70/2006  grow. While some of these connections might constitute a "perfect hedge", they can leave the system more vulnerable to both counterparty risk and the liquidity of these markets. The precise extent to which market participants are now connected through interlocking obligations is difficult to gauge, but the UK interbank market provides some clues. Over 70% of the total lending in the market is accounted for by 15 institutions. And the major UK banks’ large exposures to the main foreign-owned LCFIs are almost two-thirds of Tier 1 capital. The rising correlation between the share prices of major UK banks and foreign-owned LCFIs also provides a hint of the growing interconnections (Chart 4). At the same time, rapid innovation in new financial instruments poses challenges within the financial system. As I have already discussed, these developments are likely to be positive in the long run, allowing market participants greater scope to diversify and manage risk. But in the short run, newer products, such as structured credit derivatives, do pose challenges. We simply do not have experience of how they behave in the full range of market conditions. The models that have been built by banks and other players in the market to value and hedge positions in these instruments are more sophisticated than ever before, but they are not proven in adversity.
I am also referring to the geographical mix, with a large showing from Asia, in addition to delegates from Europe. This is a testament to the rapid growth of the green bond market in region. 4. Indeed, over the past few years, the green bond market has grown exponentially, including the green bond market in Hong Kong, and we are very pleased about this development. For many years, the HKMA has been working to promote the development of the Hong Kong bond market. Today, Hong Kong is the third largest bond issuer in Asia ex-Japan, behind only the Mainland of China and South Korea. 5. The HKMA plays more than just the promoter role in green finance. As many of you may know, the HKMA is the investment manager of the Exchange Fund. With assets under management over USD500 billion at the end of last year, we are one of the world’s largest asset owners. The HKMA has been very supportive of responsible investment, and has incorporated environmental, social and governance, or ESG, principles into our investment processes. Our disclosure rules would not allow me to give too many details. Suffice to say that items from green bonds to renewable energy projects such as wind farms feature in our portfolio. 6. As a long term investor, the HKMA considers risk and return over a long horizon. We believe looking at an investment proposal through the ESG lens would complement our normal riskreturn analysis, and help unveil the long-term value and risk of an investment. 7.

Of course the foreign exchange costs in the eurozone were limited right from the start of the EMU in 1999, but they will now disappear completely. For the economy as a whole, however, this exchange of cash has involved a relatively small cost, which is nevertheless symbolically important. A somewhat larger cost has arisen from the handling charges the companies have been forced to bear to hedge against undesirable fluctuations in exchange rates. This cost disappeared as early as 1999 within the eurozone, but it is not particularly large in relation to our GDP – perhaps a few tenths of a percentage point. A single currency will promote competition within the EU and benefit the consumers, who will experience lower prices and thereby have more money in their pockets. When everyone uses the same unit of currency, it is easier to compare prices between countries. It will also be an advantage for the national economy as a whole, since competition facilitates the work on holding down inflation. Some differences in prices are unavoidable and arise from transport and information costs, but not all of the differences can be attributed to these costs. Despite the fact that we now have a common market with free trade for goods and services throughout the entire EU, there are still large differences in prices between different countries within the union.
Indeed, as we sit here worrying about it, there are people out there who are busy exploiting niches and opportunities which will mould the future structure of the economy. We can try to facilitate that process, or even to guide particular aspects which we reasonably expect to be important (eg the cyberport), but there will always be surprises. In any analysis of competitiveness there is inevitably scope for argument about the appropriateness of the statistics one is using. I believe that in the current Hong Kong conjuncture the popular measures such as the real exchange rate may have been lagging somewhat behind the recovery of competitiveness that may have actually occurred. Business decisions are influenced more by marginal prices and expectations of future prices, than by prevailing average prices; yet the measure of rentals which enters the CPI is typically based on an average of outstanding contracts and not the price at which new contracts are being struck which have over the past year or so fallen much more steeply. Thus, when thinking of business decisions, even assuming that residential rentals are a satisfactory proxy for rental costs affecting business, some adjustment for the marginal/average discrepancy may be needed at times when that discrepancy is significant - as it certainly is when one is at or near turning points in the rental cycle.

On top of that, the marginal/average adjustment for rentals to which I referred earlier would have tended to raise the realised real rate even further, because the prices influencing business decisions probably fell by more than the CPI. In sum, what started as a headline real rate of 3.3% ended up as a rate well in excess of 10½%. Businesses would have been affected by the factors responsible for the difference between these figures, but would not have been able to anticipate all of them. If we move on to April this year, the position is rather different. The backward-looking real rate, which tends to be the one which most people take as their guide when clamouring about oppressive monetary policy, is indeed high at 8.9% - again taking 12-month HIBOR as the base. But because expectations are that prices are now going to move up rather than down, the forward-looking measure, based on consensus forecasts (from the private sector) of what the published CPI will show, yields much less, 5.6%. In addition, the marginal/average adjustment may now have turned the corner, since business decision-takers may be facing prices that will rise by more than the recorded CPI, in which case real interest rates will now be perceived as lower than 5.6%. Perceptions may still be of a figure which is above the 3-4% range, which is often regarded as a global norm; but perceptions vary, and there may be some who visualise a lower figure.
Leaving aside differences across countries, a long and challenging process of economic transformation brought countries in the region significant improvements in incomes and living standards. Full membership of the EU – or the prospects of accession – provided an important stimulus for the process of transformation as well as an anchor of stability. In Western Europe, completion of the three stages of EMU led to the establishment of the European Central Bank (ECB) and the introduction of the euro in January 1999. Having started originally with 11 participating countries, the euro area has since expanded to include 17 EU Member States including some previous transition economies, namely Estonia, Slovenia and Slovakia. The changes Europe has seen over these past 20 years are enormous. Equally enormous have been the challenges along the way, not least of course due to the global financial crisis. But there have also been enormous achievements. In my remarks today, I would like to take stock of some of those achievements and focus on three main aspects of the process of economic convergence in Central and Eastern Europe. BIS central bankers’ speeches  1  Three main aspects of the process of economic convergence 1. Nominal and real convergence: what has been achieved? The first aspect of convergence relates to developments in terms of nominal and real convergence between the countries of Central and Eastern Europe and the euro area.

Looking at the region as a whole, after some very difficult years, inflation has come down dramatically from very high levels at the beginning of transition to single-digit levels today. Long-term interest rates have also fallen substantially, reflecting the gradual anchoring of inflation expectations. The countries of the region have also made remarkable progress in terms of institutional and structural convergence. In particular, we have witnessed the building of appropriate institutions, increased trade integration with the euro area and improvements in the business environment. Naturally, this progress has been reflected in per capita income convergence. Over the last 20 years, per capita income has risen to an average of 63% of the EU average if adjusted in terms of Purchasing Power Parity (PPP). But combining low inflation with real convergence has posed a serious challenge in many countries. Let me elaborate on this. The very process of real convergence entails upward pressures on prices, which can be hard to avoid in terms of both relative prices and the overall price level. Among other things, these pressures stem from high productivity growth as well as the processes of price liberalization and tax harmonization. Price increases related to productivity growth are usually referred to as the BalassaSamuelson effect. But most studies have found this effect to be relatively limited.1 Convergence in price levels, which stood on average at two thirds of the EU average in 2010, seems to have surpassed convergence in income levels in all countries of the region.