samchain/econo-pairs-v1 huggingface dataset:
Moreover, even these estimates may overstate the future path of interest rates implied by financial markets. Market interest rates are probability-weighted averages of different possible interest rate paths – they are a mean. Model estimates of the modal – or most likely – path for interest rates are lower still (Chart 3). Estimates of the modal path of interest rates are drawn from estimated models, so are no more than illustrative. Nonetheless, the modal interest rate three years ahead in the US is  1  Expected lift-off here refers to a 25 basis point increase. 2  The path of forward interest rates will also be affected by term premia. See Shafik (2015). BIS central bankers’ speeches  1  only 1.1%. In the UK it is 0.8%, little changed from current levels. According to these estimates, the glue holding interest rates to the floor looks stronger still. There is an old English aphorism, due to Walter Bagehot in the 19th century: “John Bull can stand many things, but he cannot stand 2%”. Prior to 2009, the Bank of England had been careful to avoid the wrath of Mr Bull: Bank rate had never been below 2% in its then-315 year history. For the past six years the MPC has been testing the patience of Mr Bull, with the 2% threshold consistently breached. If financial markets are to be believed, Mr Bull, Mrs Bull, and their children are set to have their patience tested further: UK rates are not expected to reach 2% until 2019.

The world has in the past experienced lengthy periods of continuously positive annual growth: in the UK, for a remarkable 26 years after the Second World War and for 16 years during the Great Moderation starting in the late 1990s. As Chart 12 shows, however, these are extreme outliers in the distribution of expansions. The probability of an expansion lasting for longer than 10 years is, on past evidence, less than 10%. 5  Assuming these probabilities evolve according to a Bernoulli distribution – that is to say, the probability of a recession triggering shock occurring in one year is independent of the probability of a shock occurring in another year. This probability is calculated by looking at data on the frequency of negative annual growth rates. The cumulative probability is the probability that there will be at least one such shock over a given horizon. 6  Using conditional probabilities – for example, on starting in recession or expansion – does not dramatically alter these cumulative probabilities. BIS central bankers’ speeches  5  If a recession were to strike in the period ahead, a relevant question for monetary policy is how much room for manoeuvre might be necessary to cushion its effects. History can again offer some guide. Table 1 looks at loosening cycles in the UK, US, Germany and Japan in the period since 1970 and in the period since 1994. There has been considerable variation in the scale and duration of loosening cycles over time and across countries.
52 For example, Dauth, Findeisen, Südekum and Woßner (2017). 53 IMF (2017). 49  13  All speeches are available online at www.bankofengland.co.uk/speeches  13  technology than their positive longer-term effects on pay, productivity and the demand for new goods and jobs. It is the balance of these two effects, each large in gross terms, which will ultimately determine where unemployment will settle. 54  No one could say with confidence today the long-run net effect will be. What can be said with confidence is that the scale of gross displacement may be larger than ever-previously. This means that, if technological unemployment is to be avoided, positive effects on productivity, goods and jobs will also have to be commensurately larger. That has led some to argue that technological unemployment is more likely this time around. 55  Even if it is avoided, the societal costs of transition could well be larger, in terms of rising wage inequality, a falling labour share and damage to social cohesion. And if that recessionary impact of technological change on individuals and societies is sufficiently large, it could well call into question the merits of having pursued the creative course in the first place. Or that, at least, is the lesson of history. What experience since the Industrial Revolution has taught us is that this risk can be mitigated by an appropriate institutional response.

Since at th  least the middle of the 19 century, the Bank of England has become one of the key institutional safeguards against recession risk and financial crisis. 41  Indeed, today, those roles are defined in statute. Non-state institutions have also played an important role in protecting those facing the adverse side-effects of economic change. This included many religious, philanthropic and charitable organisations and citizen th  movements that emerged from the 18 century onwards, often as a direct response to hardship brought about by technological change. These institutions offered, and many continue to offer, a combination of financial, housing, training and emotional support to those in need. 39  Clark (2009). Figures refer to government command of output as a percentage of GNP in England. Other 19th century legal changes that supported individuals from adverse side-effects of economic change included recognition of limited liability companies and constraints on the ability of courts to sentence debtors to prison. 41 Anson et al (2017), for example, discuss the emergence of the Bank of England as lender of last resort. 40  11  All speeches are available online at www.bankofengland.co.uk/speeches  11  To mention one, the Young Men’s Christian Association (YMCA) was founded in 1844, at around the time of Engels’ pause. It was established explicitly to meet the housing and social needs of young men who had moved from rural towns and villages to find work in factories in the cities.
A regime which inadequately evaluated trading book risks was, therefore, fundamental to RBS’s failure. This inadequacy was particularly significant for RBS, given that the purchase of ABN AMRO significantly increased RBS’s trading book assets. RBS was allowed by the existing regulations massively to increase its trading risk exposure counterbalanced only by a small increase in capital buffers available to absorb loss.” The Basel Committee recognised that across internationally active banks, Basel II would likely lead to an overall reduction in the required capital compared with that required under Basel I and that the reduction in required capital would be larger for banks adopting the more advanced modelling options for credit risk.2 In other words, other things equal reported capital ratios would tend to be higher under Basel II than Basel I. Our own work suggests that Basel I would have required major UK banks to hold approximately £ more capital than Basel II against the credit and counterparty credit risks in their end-2013 balance sheets. This amounts to a decrease of about 25% under Basel II compared with Basel I. Another way of looking at this is to examine the pattern of average risk weights. For a set of 17 major international banks (designated as G-SIBs)3 average risk weights fell almost continuously from 70% in 1993 to below 40% in 2012. But this fall in average risk weights did not represent a systematic reduction in risk within the banking system.

In another case, the supervisor could withdraw permission for whole types of models, as the FSA/PRA did for the commercial property models of UK Banks by requiring a substitute “simple slotting approach” to be used – which is still a model, but a very simple one. Then I think the debate becomes more around whether the relevant risks can be modelled, how easy it is for supervisors and firms to observe the performance of models, and the ability of supervisors to police the performance of models. None of this is easy. There is also a very good question around whether supervisors should supplement the use of firms’ models by developing their own models. In the US, the Federal Reserve has gone down this road, and in doing so advanced their use of stress testing. So far, we have gone down the road of pushing banks to improve their models, and to be more realistic about what the models can and cannot do. My guess is that we may eventually end up with greater international convergence of supervisory approaches on the use of models, and that would be a good thing in terms of more efficient supervision and use of our scarce resources. But I would note that today I have an open mind as to where that convergence will lead to in terms of the capital adequacy regime. Much of this speech has been about the incentives in the regime of capital adequacy for banks. I want to end with a few words on transparency.
We know that because labour’s share of the national income pie is similar today to 1750. th  Of course, it is not ideas and innovation from the 18 century that has sustained growth over the subsequent period. Although the innovation process is continuous, historians often point to three distinct waves – three th  Industrial Revolutions. The second came in the latter part of the 19 century with the emergence of GPTs  11 12 13  For example, Romer (1990) describes a theoretical model of growth based around innovation. Bresnahan and Trajtenberg (1995). For example, Mokyr (2011) discusses Britain during the Industrial Revolution. 4  All speeches are available online at www.bankofengland.co.uk/speeches  4  such as electricity, the internal combustion engine and sanitation. The third came in the middle of the th  20 century with new GPTs such as computing, digitisation and the internet. 14  Yet in each case the playbook was familiar from the first Industrial Revolution. The emergence of a new strain of GPTs resulted in an outward shift in the production possibility frontier and capital-deepening. With higher levels of investment in physical and human capital, the productivity of companies, the wages of workers and the living standards of societies continued their Northerly ascent. The Golden Era continued. Some people are now discussing the next innovation wave, a so-called Fourth Industrial Revolution. The GPTs driving this are likely to include Artificial Intelligence (AI), Big Data, automation, robotics, 3D-printing and nano-technology.

Each year, they engage in between 6,000-8,000 projects, large and small, with companies. The Fraunhofer have been found to play a vital role as both innovation hubs and diffusion spokes, boosting productivity in the German economy. 76  Since they first become operational in 2011, the UK now has around 10 Catapult centres, modelled on the German Fraunhofer. These are smaller in number and scale than their German counterparts and have far less project experience. Their focus, to date, has primarily been on acting as innovation hubs rather than diffusion spokes. This means the UK does not currently have the diffusion infrastructure for its companies enjoyed by Germany. This is not unimportant in explaining its longer lower tail of firms. The UK’s university network, repurposed, could potentially provide that diffusion infrastructure. Conclusion The story of growth is a story with two “i”s – ideas and institutions. The Fourth Industrial Revolution will expand the range of ideas, perhaps more than any of its predecessors. It may also expand the range of  75 76  https://www.fraunhofer.de/en/about-fraunhofer/profile-structure/facts-and-figures.html Comin, Trumbull and Yang (2011). 21  All speeches are available online at www.bankofengland.co.uk/speeches  21  workers who suffer its side-effects, perhaps more so than any of its predecessors. In the past, new institutions have emerged to cushion this painful transition, limiting the recessionary hit to societies. Historically, doing so appears to have held the key to sustainable growth.
Norway has not experienced a pronounced economic downturn since the crisis around 1990, when a cost crisis, an employment crisis with a sharp increase in unemployment and a decline in output, a currency crisis, a fall in property prices and a banking crisis all occurred around the same time. A long upturn followed in the period from 1992 to 2008. National income rose by an annual 5.4 per cent in this period, far higher than the rate of output growth in the mainland economy. Income growth has been higher than in the 1950s and 1960s. 4  BIS Review 15/2010  Behind these favourable developments were the major structural reforms of the 1980s and 1990s that resulted in higher production capacity in the Norwegian economy. The Norwegian business sector experienced a long period of high productivity growth. Shifting forces have otherwise driven the economy – during the crisis around 1990, labour costs decreased to a low level compared with Norway’s trading partners and wage settlements were moderate. In 1995, the cost level was 10–12 per cent below Norway’s average for the oil age from 1970 to today. In addition, real interest rates in Norway fell markedly through the 1990s from high levels. This was because the fixed krone exchange rate regime maintained through the crisis period managed to bring down inflation and inflation expectations. BIS Review 15/2010  5  Moreover, growth in public spending was rapidly reduced once business sector activity had recovered. Norway experienced an economic shift in the 2000s.

We have been able to draw lessons from both positive and negative outcomes of  14  BIS Review 15/2010  such a policy in the 1970s and around 1990. There may be material here for a “handbook” of effective Keynesian use of instruments. First, when demand for goods and services and inflation prospects fall, the interest rate is lowered. At the same time, the automatic stabilisers in the budgets will work when tax revenues fall and benefit payments increase. When the fall in demand for goods and services is so steep that an interest rate close to zero is not sufficient, tax rates are reduced or government measures are applied. The measures should not influence long-term public sector priorities such as the size of the welfare state or the permanent tax level. When the economy turns, as it now has in Norway, the rule is that fiscal policy should be tightened fairly rapidly. This provides room for growth in the business sector. When public expenditure has been reduced, the key rate can then be increased to a normal level. According to the fiscal policy guidelines, petroleum revenues should be phased in gradually into the economy, approximately in pace with the expected real return on the Government Pension Fund Global, which is estimated at 4 per cent. In periods of high or rapidly rising unemployment, petroleum revenue spending can be increased, and inversely fiscal retrenchment is needed during periods of high economic activity and resource shortages.
Many of those present agreed that greater disclosures would be helpful. However, there was skepticism that a standardized disclosure format would be effective in eliciting meaningful information for a wide class of financial firms, given the complexity and variety of Y2K issues facing these firms worldwide. It was also noted that disclosure which relies primarily on a firm’s own subjective assessments of its Y2K problems inevitably will suffer from an optimistic bias. In addition, most Y2K efforts will not reach the serious testing phase until 1999. The purpose of the testing will be to uncover areas where additional work is required, so that the first round of tests can be expected to encounter problems. In this environment, it may be difficult for firms themselves to assess the true state of their Y2K preparations. Also, firms who believe they are going to be ready will be directed by legal counsel not to make too strong a statement to avoid liability claims in case of unforeseen problems. On the other hand, firms that do not believe they can get ready in time will seek to avoid stating this clearly to protect their activities during 1999. For all of these reasons, I am doubtful that specific, reliable information on the state of Y2K preparations by individual firms worldwide will become publicly available. Finally, in the area of improving preparedness, I have saved the most important topic for last -- namely, testing.

In the next portion of my remarks, I would like to address each of these roles in turn. Efforts to Promote Awareness The Joint Year 2000 Council is undertaking a series of initiatives that may be described under the heading of promoting awareness. By this term, I do not mean to include only those initiatives aimed at raising general awareness, although that too is still needed in some cases. I mean to include efforts to promote better awareness of the many efforts currently under way to BIS Review 56/1998  -5-  tackle the Y2K problem. I have found that, while many organizations are working hard on various aspects of the Y2K challenge, in many cases these efforts would be enhanced by a greater degree of information sharing with others. For example, at the Federal Reserve Bank of New York, we have been holding quarterly Y2K forums with a diverse set of financial organizations in the area. Participants have requested that we continue to hold these meetings -- in fact, to hold them even more frequently -- because they believe that the contacts and the exchange of views are broadly beneficial. We hope to use the Joint Year 2000 Council to achieve similar goals. Each of the members of the Joint Year 2000 Council has committed to help play a leading role in promoting awareness of Y2K initiatives within their region.
BIS central bankers’ speeches  5

The other scant quantitative indicators that are still available for the quarter, such as new car registrations or the retail trade index, on the demand side, and the industrial production index, on the supply side, tend to confirm the loss of momentum in activity. Among the confidence indicators, the August PMIs show signs of moderation in both services and manufacturing. Manufacturing, in particular, evidences the decline in new (both internal and external) orders. Industrial activity has continued to be weighed down by global supply problems (which are affecting the automotive sector above all) and by the escalation of input prices since 2021 H2 (which have affected a very high number of products). Economic projections have been revised down notably for growth and up for inflation The latest ECB projections for the euro area, in contrast to those published in June, include, in particular, new developments in the gas market. First, gas prices were revised up in accordance with developments in the gas futures markets. Second, and for the first time, a degree of gas supply rationing, albeit moderate, is assumed. This would be more significant in the countries that are more heavily dependent on Russian imports, which could even see some production cuts in the winter. By contrast, demand for gas is expected to decline. Euro area economic activity is expected to slow in the coming quarters, as a result of the loss of purchasing power stemming from higher-than-expected inflation, the decline in confidence and, in general, greater uncertainty.
Structural improvements in the labour market are, however, unlikely to explain the full improvement in the stability of inflation and output. They cannot explain the low and stable level of inflation expectations. Changes in the yields on government bonds indicate that investors’ expectations of inflation over the medium-term – and the premium they require to compensate them for the risk of future inflation – have also fallen significantly. Chart 5 shows the sharp fall in expected inflation that resulted from the actual announcement of independence for the Bank of England in 1997. It seems to me likely that the new framework for monetary policy has been a key, though not the only, driver in moving the frontier inwards. By eliminating uncertainty about the inflation target and ensuring that the objective of low and stable inflation is well understood and credible, the change in the framework in 1997 helped to anchor expectations of inflation in the medium term. By doing so, it has made it possible for the MPC to keep inflation closer to target with smaller changes in monetary policy, and hence fluctuations in output, than would otherwise have been the case. The anchoring of inflation expectations has changed the way businesses respond to unexpected shocks. Faced with changes in their costs stemming from, for example, changes in import or energy prices, businesses can respond in two ways, each consistent with the necessary change in employees’ real take-home pay. They can pass those cost changes forwards to prices or backwards to money wages.

These are important function with regard to cash management in the economy. At the end of the 1990s, the Riksbank began work on achieving greater efficiency in cash management. We observed in the surveys made then that there were deficiencies in the system. This was partly due to the way the Riksbank organised its work. By offering a service to the banks without charging in full for it, the Riksbank had contributed to the preservation of an outdated cash management structure and inefficient methods of working, which included extensive cash-in-transit transports to and from the Riksbank for the sole purpose of avoiding interest costs overnight. This system was very costly, while it led to unnecessary risks for cash-in-transit companies. The Riksbank therefore wanted to make the cost of cash management more visible and allow the banks and other participants to bear the costs, which would give them a clear motive to make operations more efficient. The aim was to stimulate greater competition and increased product development for services all along the cash management chain, even outside of the banks. However, there were not merely economic reasons for reviewing the cash management system. The Riksbank’s own office network, its depots and working methods were considered too costly, for instance having overly large premises and surplus capacity. By allowing the banks to take greater responsibility for cash depots, for instance, the Riksbank can focus on its own core activities: maintaining low and stable inflation and promoting a safe and efficient payment system.