samchain/econo-pairs-v1 huggingface dataset:
Professor John Taylor, currently a Treasury under-secretary in the Bush Administration, has formulated a simple rule for interest setting that has come to be named after him and been widely recognised. With the Taylor rule, the instrumental rate varies around an equilibrium rate with a correction for actual inflation’s relationship to targeted inflation and resource utilisation (GDP growth’s divergence from an estimated trend). Given that the economy is in equilibrium, inflation is 2 per cent and the output gap is zero, in Taylor’s version of the rule for the United States the nominal instrumental rate is 4 per cent. Divergences in resource utilisation or inflation prompt the central bank to raise or lower the instrumental rate, depending on the size and direction of the deviations. The Taylor rule is popular for several reasons; besides being relatively simple, it seems to give a relatively good account of monetary policy in many different countries. In that way it has contributed to a better understanding of how monetary policy is conducted. To date, however, no central bank has explicitly stated that it has chosen to base its monetary policy on the type of rule John Taylor advocates. BIS Review 24/2002  3  One result that a money supply target and the Taylor rule have in common is that monetary policy’s responses to the various shocks to which an economy is constantly being exposed are systematic and predictable.

Enlarged participation in the SSM is a great opportunity for setting a level playing field in supervisory practices across the EU. At the same time, a series of conceptual questions need to be addressed. For one, it is hard to imagine that countries not participating in the European Stability Mechanism (ESM) might act as a financial safety net for troubled but solvent banks, in the event that a privately financed resolution fund is not yet adequately funded. The next steps The establishment of the SSM represents a great opportunity for financial integration in Europe. Let me now turn to the next steps in the establishment of the SSM. First, the swift adoption of the SSM Regulation is essential. Definite plans are crucial in order to uphold the current momentum of the stabilisation of the euro. The general expectation is  4  BIS central bankers’ speeches  that the SSM will be established early this year, with an effective operational start 12 months later. Second, the design of a supervisory model, including the allocation of tasks between centre and periphery is critical for the success of the SSM. In this regard, work is already under way by the ECB in cooperation with national competent authorities – subject to the final legal wording. Third, the SSM will need to carry out a comprehensive review of the banks that fall under the direct supervision of the ECB.
What is clear however is that we have to overhaul our traditional ways of measuring, assessing and reacting to productivity and welfare indicators. Socially, uncertainty will weigh heavily on people’s shoulders in the years to come amid these structural changes. How should policymakers react? The fact that our established gauges have lost their assumed precision does not mean that we have become clueless. In spite of the elevated uncertainty, it is still possible to grasp the obvious. Potential output may not the most reliable benchmark in the current environment. Moreover, perhaps it misses the broader structural changes, which are of paramount importance in the longer run pursuit of improvements in standards of living. So it is crucial that policy makers pay heed to broad and thorough analyses, coupled with an understanding of the limitations to our understanding we face at this time. In this way, modest judgment and prudent action will provide the indispensable preconditions for policymakers to live up to their responsibilities. 6  BIS central bankers’ speeches

Stefan Ingves: Financial crises in an international perspective Speech by Mr Stefan Ingves, Governor of the Sveriges Riksbank, at the Danish Financial Supervisory Authority, Copenhagen, 12 September 2006. *  *  *  Thank you for inviting me here today. It is easy to forget what a financial crisis entails, now that a number of years have passed since we last experienced one and it is therefore important that we remind ourselves. Although we cannot yet see any immediate threats, we must look ahead to prevent potential crises. During my twenty minutes or so today I intend to talk about the following: •  the fact that most of the various crises in different countries during the 1980s and 1990s have had a number of common causes,  •  the fact that it is important to invest in preventing and managing crises,  •  the fact that risks and potential vulnerabilities in the financial system are now changing rapidly as the differences between banks and other financial institutions decline and crossborder integration intensifies,  •  the fact that the cooperation between authorities within and between countries must be developed further, both with regard to regular monitoring and crisis management. In particular, it is necessary to discuss how the responsibilities and costs should be divided up in the event of a crisis. Many of the experiences I describe refer to crises and countries outside of Scandinavia, even outside of Europe, which does not prevent them from being relevant to our discussion.
Woodford, M. 2001. “Imperfect Common Knowledge and the Effects of Monetary Policy”, National Bureau of Economic Research working paper, no. w8673. 12  BIS central bankers’ speeches

But as it normally takes a while before an upturn in economic activity has an impact on employment, it is very possible that the Riksbank will need to raise the repo rate in a situation where unemployment is still high. This is also something we are assuming in our most recent forecast. There is then a risk that unreasonable requirements will be made of monetary policy. It will then be important to bear in mind that the primary objective of monetary policy is to create good long-term conditions for all participants in the economy. It is important that we have an active discussion of the Riksbank’s policy. But for the discussion to be fruitful it must be based on realistic expectations of what monetary policy can and cannot achieve. Sweden is a small, export-dependent economy and when economic activity abroad suddenly falls, monetary policy cannot prevent negative effects from this on our economy. But we can alleviate these effects. As the financial markets are integrated, we cannot prevent an international financial crisis having effects here, too. Then we must use other tools, parallel to our interest rate policy, to make the financial system function in the best possible way given the circumstances. This is what we have done throughout the autumn and we will continue to do this as long as is necessary. BIS Review 38/2009  7
Since all other demand components were falling, the manufacturing sector was able to attract resources and expand. We have not had a current account deficit since 1993. Why 2 per cent inflation and a floating exchange rate? That two per cent is the optimal inflation target has no scientific basis. However, this level gives a reasonable trade-off between the negative consequences of high inflation and the problems entailed by deflation. Furthermore, two per cent is a common target internationally. It is necessary, you see, to have a certain margin from zero inflation if price and wage formation are to work well. Separate prices and wages have to be able to grow at different rates if it is to be possible to allocate resources such as labour to their correct use. Since it is difficult to cut nominal wages, some inflation creates the possibility for relative changes in wages without having to reduce the nominal level for any group. The scope for wage increases given the inflation target is around 4 per cent. (2 per cent + 2 per cent: Inflation plus productivity growth, at a given profit share. )1 This holds if we, like the National Institute of Economic Research, assume that average productivity growth is around 2 per cent for the whole economy in the long term. If one occupational group gets 5 per cent in order to attract labour, another group has to get less than the average increase.

History demonstrates that shifts in the quantity of money have often been driven – or at least accompanied – by shifts in the demand for deposits (i.e. what the private sector would like to hold for a given level of spending). Following the financial liberalisation earlier that decade, banks began during the 1980s to pay interest on standard deposit accounts. This increased their attractiveness, relative to other “stores of wealth” – they were not the precursor to higher spending and inflation – and broad growth remained stubbornly high even as inflation declined sharply (at least until the boom at the end of the decade). For similar reasons broad money growth was extremely strong throughout the first fifteen years of inflation targeting (1992-2007). Nor is there a tight correspondence between “narrow” and “broad” money. QE involves the creation of central bank reserves to buy financial assets (usually government debt). So in the decade or so that passed between the first use of the policy in 2009 and the onset of the pandemic, reserves grew extremely rapidly. Yet broad money growth was significantly slower than it had been before the crisis (Chart 1). And, in both periods, average inflation was close to 2% (Chart 2). Page 4  Chart 1: Reserve creation neither necessary nor sufficient for strong growth of broad money  Sources: ONS, Bank of England and Bank calculations. Unless stated otherwise “broad money” refers to M4 excluding intermediate other financial corporations (M4ex).
BIS central bankers’ speeches  1  In this presentation I will try to explain why I think this is so. I will also speak about what is still lacking and the regulatory challenges we face ahead. Why we shouldn’t back-track on regulation There are several reasons why I don’t think the regulatory agenda has gone too far. First of all, my experience is that important regulatory and structural reforms are all too often hindered by myopia. People tend to focus on costs and pains in the short run, leaving aside the longer term gains that reforms aim to achieve. The perceived short-term costs are simply much easier to sell politically, compared to the abstract benefits of lowering the risk of crises. This is especially so, since the benefits may accrue only to future generations – a group that has difficulties making its voice heard in today’s policy debate. This time has been no exception: for years, people shied away from necessary actions to strengthen the financial system. When the crisis hit, perceptions changed, providing a window of opportunity for regulatory reforms that were long overdue. However, we mustn’t begin to close this window and lose sight of why we are undertaking these reforms. Let me start with a reminder of the regulatory framework before the crisis. Both Basel I and II included a risk-weighted capital adequacy framework. However, for the last 20 years banks’ balance sheets ballooned, while their equity failed to take off.

The results showed that banks’ risk-weighted assets differ to an extent that goes well beyond what can be explained by business models and historical experiences. If we just take the banking-book results, two banks with exactly the same assets could report capital ratios that differ by as much as 4 percentage points. The potential for differences this wide, particularly as they are derived from only a part of a bank’s business, weakens confidence in the measurement of bank capital. Of course, this was not a total surprise. It was a reflection of what I mentioned earlier; that internallymodelled risk weights lead to capital not keeping pace with asset expansion. This has undermined the confidence in banks and in the credibility of the whole concept of banks’ internally-modelled risk weights. Ensuring consistency in the implementation of risk-based capital standards will therefore be a key factor in restoring confidence in banks. The Committee is thus assessing bank capital ratios with a view to ensuring that they appropriately reflect the risks that banks face. There should be “truth in advertising” for the regulatory ratios that banks present. To achieve this, the regulatory framework needs to deliver readily comprehensible and comparable outcomes. In my view, these assessments, both the jurisdictional and the thematic that compares risk-weighted assets, are absolutely vital for achieving our goals. This will be an important focus for the Committee in the coming years. I would now like to take a step further and focus on the link between implementation and how the system should be calibrated.
This kind of flexibility is explicitly provided for in the new SFBC capital regulation. The orders already issued by the SFBC relating to the reform of the capital regulation state that the big banks will not be required to comply with the higher risk-weighted capital ratio and the leverage ratio until 2013. However, if the situation on the capital markets or the individual earnings position of the big banks make it impossible to achieve the objectives by 2013, it may be possible to defer this date. The long time period allowed for implementation is crucial. It will prevent the new regulation from having a procyclical effect. In the short term, priority will clearly be devoted to managing the crisis. In the area of liquidity, the SFBC and the SNB are in the process of drawing up a new regulation. The basic objective is to obtain higher liquidity buffers that better reflect the great complexity of liquidity risks. When calculating liquidity requirements for various crisis scenarios, the authorities use internal model calculations by the banks. In order to ensure the comparability and transparency of the internal calculations, the new regime foresees certain standardisations. The conclusion of the project is scheduled for early 2009. Both regulatory measures – capital regulation and liquidity regulation – are in line with proposals made by the Financial Stability Forum and the G20 action plan. The reforms are also compatible with the strategy of the Basel Committee on Banking Supervision for implementing the lessons from the crisis.

Ambitious, of course, as it involves countries making explicit commitments on measures to be taken and discussing the outcomes with their peers, as part of what is known in G-20 jargon as the Mutual Assessment Process (MAP). Under the Korean presidency, whose efficacy and vision I would like to praise, an initial exercise resulted, in late 2010 in Seoul, in the adoption of a detailed country-by-country action plan and the commitment to tackle more specifically the global imbalances identified by the indicative guidelines. Far from me the idea of underplaying the difficulty of the exercise but the progress made so far is not inconsiderable and in this regard I am happy that the Ministers and Governors meeting in February in Paris resulted in agreement on a set of benchmark indicators. The second component concerns financial regulation. It is very clear that, in this area, we are past the stage of proposals and are now mainly concerned with consolidating the agreements approved by the Heads of State and Government in Seoul, especially the Basel III framework. The agreement that we achieved in 2010 made it possible to reconcile the need for far-reaching reforms with the need to reduce uncertainty relating to regulatory changes. Implementing these reforms in a harmonised framework capable of ensuring a genuine level playing field is now the crucial challenge, both from the point of view of our collective credibility and the overall effectiveness of the new mechanism.
It would have been tempting to take somewhat greater short-term risk with the exchange rate and direct monetary policy more toward domestic economic conditions and the inflation outlook, but the enormous damage that even a short-lived additional depreciation would have done to private sector balance sheets precluded such an approach. Under conventional circumstances, inflation-targeting monetary policy can be described, albeit in an oversimplified way, as entailing a policy interest rate that takes into account three factors: 1) the desired policy rate when inflation is at target and GDP is at potential; 2) the output gap; and 3) the deviation of inflation from target. In the case of Iceland, the exchange rate must be added to this list, and with a heavy weight. But the weight of the other items is not zero, and the importance of the exchange rate should diminish as the financial crisis relinquishes its grip and we reduce the weight of foreign debt in private sector balance sheets, thereby reducing the impact of the exchange rate on domestic liabilities. One of the Monetary Policy Committee’s many tasks at present is to assess how these various weights should evolve as circumstances change. Indicators presented at the most recent Monetary Policy Committee meeting suggest that foreign-denominated debt may weigh less heavily in corporate sector debt than was previously believed, and that it is currently diminishing in importance for both households and businesses. Before the banks collapsed, an average of 70% of corporate sector debt was denominated in foreign currency. But the distribution is quite skewed.

If we do that, then we might profit on the whole arrangement. I expect this spurs questions about whether we need all of the loans that we have negotiated as a part of the IMF programme. In my opinion, this is an eminently justifiable question. First of all, we need the loans in order to ensure that we have sufficient foreign exchange at all times to enable us to pay amortisation and interest on the foreign debt of the Treasury and Treasury-guaranteed entities. As far as the Treasury is concerned, there will be little activity until late in 2011, when a loan of one billion euros, taken in 2006 to reinforce the foreign exchange reserves, will mature. But we can also use the loans to buy the bonds from this series and others offered in the secondary market at low prices, thereby easing the debt service burden and profiting on the whole arrangement. Furthermore, we will need reserves in order to engage in moderate foreign exchange market intervention, with the aim of supporting the króna and reducing volatility. And last – but certainly not least – we need reserves in order to create confidence in the króna and fend off those who would attack it. But such an arsenal, which is only to be used in an emergency, is extremely expensive because it is impossible to invest the reserves at rates comparable to those on the loans themselves without taking an unacceptable amount of risk.
Discussions continue, as part of the review initiated by the Financial Secretary, and I look forward to more of the technical scrutiny of ideas which can be quite enjoyable and revealing. 19. Meanwhile, elsewhere in the region, the full doses of the medicine prescribed by the IMF for a number of the Asian economies are being dutifully and courageously taken. If they persevere, they stand a good chance of coming out of this financial turmoil quickly and the damaging contagion that has spread across the world would be effectively contained. And for the longer term, I am hopeful that the new framework for enhanced Asian regional cooperation to promote financial stability, agreed upon at the Manila meeting of Asian finance and central bank deputies, and subsequently endorsed by APEC economic leaders at the Vancouver meeting, would play an effective role. 20. The framework, which recognizes the central role of the IMF in the international monetary system, includes important initiatives: first, there will be established a mechanism for regional surveillance to complement global surveillance by the IMF; second, there will be enhanced economic and technical cooperation particularly in strengthening domestic financial systems and regulatory capacities; third, there will be measures to strengthen the IMF’s capacity to respond to financial crisis; and BIS Review 115/1997  -5-  fourth, there will be a cooperative financial arrangement that would supplement IMF resources on a case by case, contingent basis. 21.

It has also been suggested that  2  BIS central bankers’ speeches  monetary policy should respond directly to capital flows and exchange rate for example. Can a single policy interest rate target all these objectives simultaneously? Of course, in fortunate coincidences where these objectives do not conflict, there is no dilemma. More often than not, however, the policy choices will involve a trade-off between different objectives. Policymakers will have to weigh carefully the costs and benefits of a policy decision. Given multiple macroeconomic objectives, there is a need for supplementary tools to truly minimize the costs of these tradeoffs. As the first example, what policy instruments can be employed to address risks to external stability? In many emerging market economies, one often finds problems of exchange rate dominance, namely the risk that exchange rate considerations dominate the conduct of monetary policy and distract central banks from the main goal of price stability. The simplest way to address this problem would be to allow for exchange rate flexibility as the first line of defense. Of course, this does not and should not rule out interventions to limit excessive exchange rate volatility. That is the next line of defense. Should the situation warrant, some type of capital flow management measures can be deployed in exceptional circumstances of sustained and substantial exchange rate overvaluation.