samchain/econo-pairs-v1 huggingface dataset:
9  According to the Sveriges Riksbank Act, “[t]he objective for monetary policy is to maintain price stability”, According to Government Bill 1997/98:40, “[a]s an authority under the Riksdag, the Riksbank, without prejudice to the price stability market, should furthermore support the goals of general economic policy with a view to maintaining a sustainable rate of growth and high employment”. (My italics.) I interprete “high employment” as “highest sustainable employment”. 10  One exception is when average inflation deviates from average inflation expectations for a long period of time. Then average inflation below inflation expectations will increase average unemployment, see Svensson (2012a). 11  According to Englund’s (2011) article on the development of housing prices and explanations for this in the Riksbank’s inquiry into the risks in the housing markets, monetary policy plays no role here and real housing prices are explained by real quantities. In the general equilibrium model for housing prices calculated using Swedish data by Walentin and Sellin (2010) and which is also used by Claussen, Jonsson and Lagerwall (2011), monetary policy has no long-run effect on housing prices or household debt. 4  BIS central bankers’ speeches  economic costs. Examples of such measures include the loan-to-value cap, regulations on deductions for mortgage rates, taxes, capital adequacy requirements, risk weights and so on. Keeping an eye on risks related to household debt is a task for the policy area known as macroprudential policy. As yet, there is no fully-developed framework for macroprudential policy in Sweden.

Studies indicate that the probability of suffering a large fall in housing prices almost doubles if the saving ratio is unusually low.20 An important difference between Sweden and countries that have experienced severe falls in housing prices, such as Ireland, Spain and the United States, is that the latter have also had a construction boom (see Figure 4). This gradually led to an over-production of housing, which in turn contributed to housing prices falling even more once the market began to weaken. A construction boom appears to be an important – perhaps necessary – ingredient in the recipe for crisis in the property sector. 17  A “left-to-live-on” calculation estimates the difference between disposable income and housing and maintenance costs, possible alimony payments and a standard for households’ cost of living. The banks take into account the borrower’s whole loan situation and assume on average a mortgage rate of around 8 per cent when calculating interest costs and assume some amortisation will be made. Finansinspektionen (2012). 18  A stress test of housing prices in the report shows that a large price fall of 40 per cent and an increase in unemployment of 20 percentage points without unemployment benefit means that only 10 per cent of the new mortgage borrowers have a loan-to-value ratio of over 100 per cent and a deficit in a “left-to-live-on” calculation. (Finansinspektionen 2012, Figure 17). 19  Claussen, Jonsson and Lagerwall (2011).
Financial development has been important not only for firms but also for the country as a whole. A deeper and far-reaching financial system contributes to building financial and economic inclusion, and financial stability against external shocks. In this respect, the Chilean financial system shows better performance than other Latin American and Emerging economies, in dimensions like market capitalization, number of branches per inhabitant, use of derivatives, and participation in domestic credit to the private sector, to name a few. Nonetheless, increased development and complexity of financial markets also means that risks may be higher, and that a stronger and more sophisticated regulatory framework is required. Page 10 of 20  Central Bank of Chile September 2019  The Chilean financial crisis of the early eighties led not only to a radical bank regulation revision, but also to learning valuable lessons for the future. A deeper and properly regulated financial system contributes to financial stability, inclusion and increased welfare. Even though significant progress has been made in this regard, there are still challenges ahead that must be faced to further strengthen our financial system. Let me now address some of these regulatory challenges the CBC has been working on. Page 11 of 20  Central Bank of Chile September 2019  In order to have a deeper FX market and enhance resilience of the financial sector a number of measures are being taken by the Central Bank of Chile (CBC).

Among firms that report in pesos, the debt is mostly concentrated in those with a limited individual currency mismatch: firms with a mismatch Page 8 of 20  Central Bank of Chile September 2019  of over 10% of their assets hold just 3% of external debt, and represent about 10% of the total number of companies that use the Chilean peso as accounting currency. Local institutional investors’ participation in the local sovereign debt market, especially in the longer segments of the yield curve, is much higher in Chile than in most emerging economies, at 80 to 90%. Thus, the buy-and-hold strategy of these investors reduces the volatility of both local sovereign rates and domestic funding costs. By now, the Chilean financial sector is one of the most developed in the emerging world. It has transited from being largely dominated by traditional banking to being composed by several other market participants, including Pension Funds, General Fund Administrators and Insurance Companies; among others. Assets under management of these non-bank investors went from less than 1% of GDP in 1984, to Page 9 of 20  Central Bank of Chile September 2019  65% in 2000, and to almost 100% of GDP in 2018. This development has translated into improved access to alternative sources of funding by Chilean firms. Currently, around 85% of total corporate bonds are held by institutional investors, thus reliance on banking credit of these corporations has gone from 91% of financial debt in 1986 to around 25% in recent years.
Male life expectancy in London and the South East (at around 80 years) is 2 to 3 years longer than in these parts of the UK. 13  So this is a story of wide regional differences in incomes and well-being sourced, to a significant extent, in regional differences in firm-level productivity. Those differences are themselves rooted in differing levels of investment in machines and people, in technology and skills, in physical and human capital. We have red and blue firms hiring red and blue workers, resulting in red and blue car levels of income and productivity. Which is the North-East? Levels of GDP per head, wages and productivity in the North-East are, respectively 25%, 8% and 11% below the UK average. Levels of physical and human capital accumulation are also lower. Levels of unemployment are currently 1.3 percentage points higher and 4.4 percentage points higher for young people. North-Eastern households own half as many assets and fewer cars than South-Eastern households. Redcar is a Red Car region. The Role of Monetary Policy  These maps lay bare both some of the challenges, and the opportunities, facing the UK economy. 13  See ONS ‘Life Expectancy at Birth and at Age 65 by Local Areas in the United Kingdom’, available here. 7  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  7  The challenges include the fact that growth in income and productivity at an aggregate level has recently been slower than in the past - the economic pie has not risen rapidly.

It is clear that, at the same time as the long tail of companies have been stagnating, they have been sky-rocketing. Or put differently, the distribution of UK firm-level performance has itself been widening or bifurcating over time. This pattern of productivities goes some way towards explaining, at least in an arithmetic sense, the large and widening divergence between regional levels of productivity. High-productivity regions have more of the frontier firms, and fewer of the long tail, than low-productivity regions. Or, put differently, high-productivity regions have greater numbers of companies from sectors with high productivity – for example, high-valued added chemicals companies, like those in Teesside. Charts 18 and 19 plot the estimated distributions of labour productivity, measured as output per employee, at the firm level across different regions and different sectors using the ONS ARDx dataset. What is striking is that differences in productivity within-region and within-sector are far larger than the differences across-region and across-sector. Every region and every sector has a range of both high and low productivity firms, with huge overlaps across regions and across sectors. There are, of course, some regions, such as London, and some industries, such as Information & Communication and Professional & Scientific services, which have a larger number of frontier firms in the far right-hand side of the distribution. But the North-East clearly also has its own set of productivity pioneers. This underscores the value of the Mayfield Commission’s benchmarking work.
But there were also important secondary effects on the relationships between the major industrial countries’ currencies. The dollar and sterling - which have in fact been reasonably stable against each other since we came out of the Exchange Rate Mechanism - strengthened, notably against the euro, notwithstanding reductions in our relative interest rates, perhaps on the expectation that an earlier or stronger pick-up in domestic demand would keep our economies operating closer to capacity than in the Eurozone. And the yen, which had been notably weak on the back of Japanese recession, has subsequently picked up as the prospect of economic recovery there improved. It is the strength of sterling’s exchange rate which gives rise to the most vociferous complaints. I am only too well aware that for many of the internationally-exposed sectors of the UK economy most of agriculture, much of manufacturing industry, and some services sectors - these developments came as a series of hammer blows - of varying intensity depending on the particular international orientation of the business. Companies trading with, or competing against, much of East Asia, but also other emerging and transition economy markets, saw their markets collapse and prices fall dramatically given the massive falls in many partner-country exchange rates. Trade with the Eurozone - by far our largest trading partner - was also adversely affected, until recently, by sluggish domestic demand in the major Continental countries and by the weakness of the euro.

These trends, and the extraordinary efforts of UK businesses themselves to cope with the hostile international environment, are already resulting in a stronger net external trade performance. That in turn is contributing to the recovery, particularly in manufacturing output growth and to the more encouraging news in some recent surveys. To the extent that this improvement in external demand persists, it will help to ease the exceptional pressures on the most internationally-exposed sectors, and contribute to a better balance within the UK economy. But it needs, of course, to be accompanied by corresponding moderation of the growth of domestic demand - after the offsetting stimulus of a year ago - if we are to maintain overall stability. That essentially is why interest rates have had to rise since last autumn. Mr Chairman, most people, as I say, accept in principle that sustained monetary stability is good for the economy as a whole in the longer term - though it is accepted with varying degrees of enthusiasm by adversely affected sectors at any particular time. But there is, nevertheless plenty of room for debate about the operation of monetary policy in practice. Specifically at present the MPC is often accused of being overzealous - and it is suggested that we don’t in fact need to raise interest rates at this point in order to achieve the inflation target. That is a more technical question. Changes in interest rates take time to have their full effect, so our decisions have to be forward looking.
They are well within the reference limits that the IMF, for example, applies in classifying countries according to whether the use of foreign currencies is important for them or not. Accounting in foreign currencies is confined to a handful of companies with multinational operations and generally speaking the króna is overwhelmingly predominant. However, it is true that among the advanced economies, Iceland has one of the highest levels of external debt and exchangerate sensitivity. Bearing all this in mind, there is hardly any question about the solid position of the króna in the Icelandic economy. Nothing gives us any reason to expect that to change. As in other countries that earn considerable revenues from tourism, foreign currencies are always used to some extent, but this is probably a much more common practice in countries with long borders with other currency areas, such as Canada or Switzerland. It seems highly unlikely that the króna’s position as a trading currency would be so severely undermined that other currencies would be preferred in domestic transactions. Continual movements in the exchange rate of the króna would create a broad risk in using other currencies, unless all liabilities - and that includes wage settlements - were to be converted into the same foreign currency at virtually the same time.

•  One major process that left its mark on the 1990s is the breakthrough in technology, above all for computers and telecommunications. This had been on the way for a number of decades and began to flourish in many parts of the world as it became increasingly clear what the microchip had to offer. It can be likened to the development of the steam engine in the late 18th century or the combustion engine and the electric motor a century later. As we know, those earlier technical breakthroughs had far-reaching consequences for the development and transformation of our society. The process is not - either then or today - a simple progression. But the setbacks are manageable and pave the way for new advances. Many of the setbacks originate in faulty expectations of the new technology’s impact. •  The other major process has to do with the financial system’s deregulation in recent decades. As a result, we now have a world where capital markets and capital flows are about as free as they were before the outbreak of World War One. With the Great Depression and World War Two, the idea of returning to a less restricted financial system failed to catch on. It was not until the 1980s that deregulation reached Sweden, after starting somewhat earlier in many other industrialised countries, including the United States. A free financial system is needed in order to promote the development of new technology and a genuine social transformation.
A prolonged period of even lower interest rates would increase the risk that debt and asset prices will be driven up to levels that are unsustainable over time. We thus obtain a smoother interest rate path when we also give weight to the other two criteria. The criteria and loss function reflect the Bank’s reaction pattern in the period following the financial crisis. We are responding to new insight and lessons learned. The loss function is a mathematical illustration and must be regarded as a simplified representation of the more extensive assessments underlying interest rate decisions. Interest rate setting is based on the Executive Board’s assessment, not a model calculation. Mathematics and models can, however, clarify the alternatives. There is considerable uncertainty as to the effect of low interest rates over extended periods on risk-taking behaviour and the buildup of financial imbalances. 7 In this regard, we are in quite uncharted waters. How financial imbalances build up is not explicitly considered in the analytical apparatus. Work is in progress both in Norway and internationally to further develop the economic models used in monetary policy analysis. As we gain new insight and gather experience, our assessments of economic relationships may change. This will also influence the formulation of our models. 7  Monetary Policy Report 1/12, box on pages 15–16, Norges Bank, and “Norges Bank’s new monetary policy loss function – further discussion”, Snorre Evjen and Thea B. Kloster, Norges Bank Staff Memo 11/2012.

With firmly anchored inflation expectations, Norges Bank has also been able to give weight to economic stability when setting the key policy rate. Further light is being shed on the interaction between monetary policy and financial stability. Inflation targeting in Norway has become more flexible. At the same time, we cannot overburden monetary policy. In weighing the various considerations, we will in our  8  “Liquidity in the foreign exchange market for EUR/NOK”, Kathrine Lund, Norges Bank Economic Commentaries 3/2011. 8  BIS central bankers’ speeches  interest rate setting adhere to the primary objective of monetary policy – low and stable inflation. Thank you for your attention. BIS central bankers’ speeches  9  10  BIS central bankers’ speeches  BIS central bankers’ speeches  11  12  BIS central bankers’ speeches  BIS central bankers’ speeches  13  14  BIS central bankers’ speeches  BIS central bankers’ speeches  15  16  BIS central bankers’ speeches  BIS central bankers’ speeches  17  18  BIS central bankers’ speeches  BIS central bankers’ speeches  19  20  BIS central bankers’ speeches  BIS central bankers’ speeches  21  22  BIS central bankers’ speeches  BIS central bankers’ speeches  23  24  BIS central bankers’ speeches
Examples of how the option value to waiting can lead to significant increases in required rates of return are given in Dixit and Pindyck (1994). BIS Review 68/2002  9  Chart 6 Consumption and deflation in Japan, 1985-2002  Note: Inflation is measured using the consumer price index excluding foodstuffs. The overnight interest rate is the nominal overnight uncollateralised call rate. Source: Thomson Financial Datastream. (iii)  Aversion to long-term contracts and excessive resources devoted to hedging inflation risks. As we have seen, high inflation goes hand in hand with greater uncertainty about future inflation. Inflation is, therefore, associated with a positive risk premium to compensate investors for that uncertainty. The longer the time horizon, the greater the risk premium is likely to be. That discourages long-term contracts and interest rates in such contracts will often depend upon future spot interest rates. Floating-rate mortgages are a good example. With a floating-rate mortgage the borrower is exposed to the risk of sharp fluctuations in the proportion of income that is devoted to debt service, as many households in Britain still remember from the late 1980s when interest rates doubled to 15%. Fixed-rate mortgages eliminate that risk, but at the cost of introducing a new risk: the real value of the outstanding debt may change relative to the value of the house. John Campbell and João Cocco (2002) have suggested that a superior contract would be a fixed-rate mortgage where the principal was index-linked. That would reduce both income and capital risk.

For each (approximate) decade for which the data on 80 sub-components of the retail prices index are available, the chart shows the relationship between the standard deviation of those relative prices and the inflation rate in each month. At low inflation rates, say up to 4% a year, it appears that it is the absolute value of changes in relative prices that is linked to the inflation rate. This would be the case, as in Britain recently, where changes in relative prices, whether up or down, were largely responsible for short-term fluctuations in the inflation rate around a relatively stable long run level. Variability in relative prices might lead inflation to be either above or below the inflation target, but not systematically in one direction or the other. Increases in house prices move the inflation rate up and falls in oil prices move it down. In both cases, an increase in the variability of relative prices leads to movements of inflation away from the target, but not in a systematic direction. But at higher rates of inflation (or deflation) the deviation of inflation from zero is positively correlated with the variability of relative prices. Hence, outside a range close to price stability, the higher the inflation rate, the greater is the variability of relative prices.
A tricky, but crucial, ex ante question. We do not have a formal agreement as to how these principles are to be handled case by case: nor the circumstances under which emergency liquidity might be made available. Therein lies ambiguity. But equally there is an acknowledgement that the issue might arise, and the Standing Committee’s remit includes decision making and implementation in relation to any emergency liquidity as well as a clear statement of the roles of the parties. Internationally and globally the situation is more complex and diverse. In some countries the subject is still taboo - both process and policy decisions. This might be due to a lack of clarity of roles and powers. To my mind this transparency deficit is not conducive to systemic confidence, either within given jurisdictions or, on a global basis. But whilst there may be validity in a lack of transparency in relation to the actual policy decision certainly ex ante - there needs, in my view, to be less fear in relation to more transparency of the processes that surround it. There will of course always be varying views on when market or institutional failures should be allowed to play themselves out, and when all else has failed, intervention is justified. Prior clarity here might provoke market gaming to the detriment ultimately of  4  8  Charles Kindleberger, “Manias, Panics and Crashes: A History of Financial Crises”. John Wiley and Sons (2000). BIS Review 5/2004  the taxpayer.

How should we ensure the integrity of the advisers and avoid groupthink? I welcome more research on these and other issues related to the role of the staff. Good decisions require qualified people, an appropriate incentive structure, and a good decision-making process. In addition, good decisions become more effective if they are communicated well. Transparency generally improves both the quality of communication and the decision-making process. My ambitious goal is that Norges Bank shall be at the forefront in terms of communication and decision-making processes. Thank you for your attention. 8  BIS Review 132/2008  BIS Review 132/2008  9  10  BIS Review 132/2008  BIS Review 132/2008  11