samchain/econo-pairs-v1 huggingface dataset:
These are the type of issues we should discuss now that we actually have a system where stabilisation policy no longer contributes to creating severe economic fluctuations – as it did in the 1970s and 1980s – but instead seems to actually have a stabilising function. How should roles be allocated between fiscal policy and monetary policy? The change in regime in the 1990s involved the introduction of a distinct allocation of roles in Swedish economic policy. The exchange rate remained variable and monetary policy was given the main task of trying to keep inflation at a low, stable level. Fiscal policy, which had often resulted in large deficits under the previous regime of a fixed exchange rate, would now instead be targeted at achieving long-term stability and sustainability in public finances. Corresponding changes in economic policy had been made in many other parts of the world. It is often said in the economic debate that one consequence of the change in system was that “the Riksbank was given responsibility for stabilisation policy”. As it is not always clear what is meant by this exactly – the interpretations appear to vary depending on whom is asked – it may be worth providing a brief summary of the inflation-targeting policy we conduct. The Riksbank’s primary objective is to maintain price stability. This task often goes hand in hand with a stabilisation of the real economy; if demand in the economy develops in line with the long-term potential, it will often contribute to a stable development in inflation.

Approximation with best EU central bank standards and practices is a crucial process for a central bank not only for the effective discharge of the duties, but also for the efficient and stable functioning of the financial system, and benefit of the economy, overall. I am confident that the implementation of this project will be characterised by the cooperative spirit between the Bank of Albania and central banks in the region, on the one hand, and the European Central Bank and Eurosystem, on the other. I would like to conclude with a heart-felt appreciation and gratitude for all the stakeholders having an active role in the launching of this project: •  the European Central Bank for coordinating all the activities;  •  member central banks for providing a large number of experts to assist us with the project implementation;  •  Delegation of the European Union in Tirana for funding it. 2  BIS central bankers’ speeches  We highly appreciate the Commission’s assistance with regard to adopting the implementation of the European Union legislation and are seriously committed to continuing with the successful cooperation, established with the Delegation in the last twinning project. In this context, I would like to reiterate my message that the road to European Union integration passes through regional integration. The financial system and central banks spearhead this process. We expect that public and private economic agents will determinedly follow this step we are taking.
Then comes monetary policy; policy makers are therefore assumed to be able to react to movements in the real economy and in credit markets within the quarter, which does not seem unreasonable. House prices come last. For the United States, the variables in the vector auto-regression are: CPI inflation; GDP growth; the effective Federal Funds rate; the difference between the Merrill Lynch corporate BAA and 10-year Treasury yields; the growth in total private credit market debt outstanding deflated by CPI; the rate of change of house prices (the National Association of Realtors existing homes price index to 1975 linked to the Federal Housing Finance Agency thereafter) deflated by CPI; and the macroeconomic volatility index. For the United Kingdom, the equivalent variables are: CPI inflation; GDP growth; Bank Rate; the difference between the investment-grade corporate bond and 10-year government bond yields; the growth in M4 lending (excluding securitisations and loans to intermediate OFCs) deflated by CPI; the rate of change of house prices (the Nationwide house price index to 1983 linked to the Halifax measure thereafter) deflated by CPI; and the macroeconomic volatility index. The data are quarterly, there are two lags of each variable, and the sample runs from 1966 Q3 to 2010 Q1. A good case can be made for employing only more recent data, on the grounds that monetary policy reaction functions have evolved during this time. But the cost of that is reduced precision and estimates over just the latter part of the period turn out to be rather less well defined.

Indeed in subsequent work (Cúrdia and Woodford, 2010), Woodford himself explores some of the ways that asset purchases might have traction, while Andrés, LópezSalido and Nelson (2004) provide a particular model that embeds imperfect substitutability arising from limited participation within a DSGE framework. Both the Federal Reserve and the Bank of England have bought longer-dated government and private assets, though with different emphases. 6 The Federal Reserve has purchased $ trillion (10 per cent of GDP) worth of Government Sponsored Enterprise debt and mortgage-backed securities guaranteed by them. In addition, the Federal Reserve has purchased $ billion (2 per cent of GDP) worth of US Treasuries. The Bank of England has bought nearly £ billion (14 per cent of GDP) of UK government bonds, together with a small quantity of corporate bonds. The Bank of Japan has also bought around ¥ trillion (3 per cent of GDP) of Japanese government bonds since the crisis deepened in late 2008; that is to be compared with ¥ trillion of purchases during their 2001–6 quantitative easing period. It is worth stressing that neither the Federal Reserve nor the Bank of England has assigned a key role to the expansion of central bank liabilities in the transmission mechanism associated with these asset purchases. In current circumstances, it is plausible to believe that commercial banks would be willing to hold the extra claims on the central bank as liquid assets at, or near, the existing vector of interest rates, rather than lending them on and driving down loan rates.
54  Hidalgo and Hausmann (2009) for international comparisons and Mealy, Farmer and Teytelboym (2019) for regional comparisons. 39  All speeches are available online at www.bankofengland.co.uk/speeches  39  Chart 24: Local authority-level ECIs and hourly earnings Hourly earnings, £ per hour  35  R² = 0.4466 30  25  20  15  -0.1  -0.05  0  0.05  0.1  0.15  0.2  10 0.25  ECI Sources: ONS Annual Survey of Hours and Earnings (ASHE), ONS Business Register and Employment Survey (BRES) and Bank calculations. Notes: Data available for Great Britain only (i.e. excluding Northern Ireland). Mean hourly earnings excluding overtime against economic complexity indices calculated using BRES. Chart 25 plots a cartogram of local authority level ECIs for the UK, at the NUTS 3 level. It shows a remarkable degree of difference across areas of the UK. This matches regional differences in income and pay. These metrics could help when designing the Local Industrial Strategies currently being developed by Local Enterprise Partnerships (LEPs) and the devolved nations in Scotland, Wales and Northern Ireland. Table 1: Top 10 local authorities by ECI City of London  Camden  Tower Hamlets  Hammersmith & Fulham  Southwark  Kensington & Chelsea  Westminster  Hackney  Islington  Cambridge  Sources: ONS Business Register and Employment Survey (BRES) and Bank calculations.

Patterns in these systems often self-replicate at different resolutions; they are “fractal”. 7 One interesting question is whether economic systems also exhibit self-replicating patterns. If so, this has implications for how we understand and model them. We consider these questions using a sequence of maps. Many of these maps are not new. For example, Philip McCann from the University’s Productivity Insights Network (PIN) has published an excellent book setting out a range of fascinating regional facts and maps. So too have others.8 These maps provide useful context when testing the Tip O’Neill hypothesis and when modelling and managing the economy. To provide the clearest visual guide, these maps are scaled by economic rather than geographic size – so-called cartograms.9 Each region is initially scaled to have the same geographic area and then rescaled in line with economic differences. This means some areas shrink (such as Scotland) while others expand (such as London) even without differences between them. This helps when visualising local differences. (a)  Differences between regions  To fix ideas, Charts 1a and 1b plot a map and an accompanying cartogram of population by region in the UK and, by way of comparison, Germany. It uses a resolution one-level below the national – administrative “regions” in England and each of Scotland, Wales and Northern Ireland. Comparing the map and cartogram suggests the UK has a significant demographic skew towards London and the South-East.
The task of the capital markets is to channel capital to investment projects with a high return. If financial investors assess the return on investments in a particular country to be higher than in other countries, there is reason for the exchange rate to strengthen. One cannot rule out the possibility that this is exactly what happened in the USA. Whether the level of indebtedness, the deficit on the current account and the strong USD exchange rate comprise a significant risk of large fluctuations in growth and a threat to global financial stability in the near future depends to a great extent on whether the long-term growth in the US economy will develop much more weakly than was expected when decisions on loans and investment were made. And, as I mentioned earlier, the shaping of economic policy and improvements in regulatory frameworks and risk management systems should have reduced the uncertainty in investment and savings decisions and thereby also the risk of a build-up of large financial imbalances. However, it remains to be seen whether globalisation, IT and telecommunications technology and perhaps also more efficient financial markets have really created the potential for higher growth that lay behind the expectations that pushed up economic activity. So far, the economies have reacted fairly moderately to the shocks they have faced over the past year.

To do so it takes as its starting point the banks’ end-year balance sheets from the previous year. It defines a baseline macroeconomic scenario, which coincides with the Banco de España projections available at the time the exercise is performed, and another, stressed scenario, which attempts to reflect the effect of the previously identified risks materialising. The difference between the two scenarios reflects the degree of stress of the exercise, which is slightly greater than last year, in step with the increase in perceived risks. 27/29  The results obtained in the latest stress test performed by the Banco de España – published in the Autumn 2019 Financial Stability Report – are generally positive. However, earnings-generating capacity under the baseline scenario does not reflect the effect of the downward revision in the macroeconomic projections made in the Banco de España’s September forecasting exercise. In the baseline scenario, banks generate modest earnings; these do, however, provide for an increase in solvency ratios of almost 1 pp in three years if the dividend distribution pattern observed in the preceding years holds. This would not be enough to abandon the bottom rung of the European solvency ranking, which is why improving profitability and a prudent shareholder remuneration policy are so important. Under the adverse scenario a portion of capital is consumed, but moderately so at the aggregate level, although there is substantial heterogeneity across banks.
4  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  4  To provide stimulus, central banks have taken policy rates to the effective lower bound and beyond by using forward guidance, new lending facilities and asset purchase programmes. In parallel, monetary policy communications have been transformed. Committee decisions are now explained more fully, in a more timely and targeted way. Given greater supply uncertainty, more details are provided about the assumptions underpinning forecasts. And in the face of large downside tail risks, more facets of the reaction function are being spelt out. While there have been many innovations, given the time available today, I will focus on two: communications including forward guidance; and central bank facilities. Communications including forward guidance For both the euro area and UK, the past decade has been marked by increased transparency and more focused communications. The ECB has followed each monetary policy decision with a statement and press conference at each meeting since its creation in 1999 and these were supplemented a year later with macroeconomic projections. In 2015, it dropped the frequency of meetings from twelve to eight to allow for a fuller passage of time between decisions, and supplemented the statement with a fuller account of its monetary policy deliberations, published four weeks after policy announcements. Twenty years ago, the Bank of England was publishing minutes of its monthly policy meetings and quarterly economic forecasts in its Inflation Reports. It didn’t however always issue statements following decisions. Following the Warsh Report in 2015, we overhauled our communications.

Average MPC vote includes both decisions on Bank Rate and QE, with every extra £ of asset purchases (gilts and corporate bonds) treated as equivalent to a 25bp cut in Bank Rate (see Joyce, Tong and Woods, 2011). Six years ago, the MPC recognised that past should not be prologue. The MPC was pretty certain there was a large amount of slack, although it had questions over how much productive capacity had been destroyed following the crisis; how quickly productivity growth would recover; and whether labour supply would change in the wake of reforms and a heavy burden of household debt. Such uncertainties about supply meant that knowing what was happening to demand was no longer sufficient for gauging the appropriate policy response. That is why the Committee provided forward guidance that explicitly linked any potential change in interest rates to the unemployment rate – a clear and widely understood indicator of the degree of slack. The message the Committee gave UK households and businesses was simple: the MPC would not even think about tightening policy at least until the unemployment rate had fallen below 7%, consistent with the creation of around three quarter of a million jobs. What we – and others – learnt as the recovery progressed was that the UK economy had substantially more spare capacity than previously thought. The MPC could be patient.
The BIS Review 7/1999  –3–  exaggeratedly strong exchange rate against the core European currencies – reflecting inter alia market misperceptions about the prospective strength, or rather weakness, of the euro – was itself moderating external demand, especially for manufacturing output, while at the same time exerting a restraining price effect on domestic inflation. But domestic demand growth – including demand for services – continued to accelerate through 1997, and that was the background to the tightening of monetary policy in 1997. We could not avoid that tightening, despite the uncomfortable sectoral imbalance within the economy. To have done so would, as I have said elsewhere, have put the whole of the economy – including the internationally exposed sectors we would have been trying to shelter – at risk of accelerating inflation, so it would not have helped even those sectors in anything other than the short term. Meanwhile, in the euro-zone things were very different. Demand and output growth in the major continental economies remained generally fairly sluggish for much of the period, only really starting to pick up towards the end – helped by relatively weak exchange rates. Unemployment, which is much the most urgent and important issue confronting Europe, actually increased; and, despite some improvement over the past year or so, it remains at or close to double digit rates in all the largest euro-zone countries. Inflation against this background remained low, tending lower – as did interest rates.

The financial soundness of a central bank, the usual lender of last resort in a country, is an important firewall for trouble in the financial system. While a central bank may count with the help of the sovereign, this channel may be a source of concern when sovereign themselves are facing problems, and it also raises some worries about the ability of the central bank to maintain its independence. There are also those who argue that, since the liabilities of central banks can be arbitrarily created, the financial position of a central bank shouldn’t matter. But this argument forgets that doing so may endanger the achievement of the inflation targets that many central banks have taken as their operational goals, affecting their reputation and independence. 2  4  Céspedes et al. 2012. BIS central bankers’ speeches  In 1982, as the debt crisis spread through Latin America, the Chilean financial system, which had channeled substantial foreign-currency-denominated syndicated loans, became largely insolvent. Under these conditions, the government engineered a massive rescue operation through the central bank where several of the most important banks became nationalized and others disappeared, after their assets were absorbed by other institutions. This intervention prevented an even larger collapse of activity than the one we ended up experiencing. The manner in which it was implemented, where shareholder equity was fully diluted and institutions assumed a subordinated debt to the central bank that took a long time to repay, helped maintain the rescue’s moral hazard concerns at bay.
The industry trends underlying the pick-up in trade are encouraging. The global electronics sector is on a strong upswing. Semiconductor exports surged by 20% in 2017. This reflects both a cyclical upturn as well as a structural uptrend, as products ranging from smartphones to automobiles and home electronics become increasingly chip-intensive. The broad-based, geographical spread of the current economic expansion is perhaps the strongest basis for its durability. The rising tide is lifting most boats. The advanced economies are leading the charge. The US economy is expected to grow at or above trend, driven by strength in consumption, a healthy labour market, and better prospects for business fixed investment with the enactment of the tax reform package. 1/7  BIS central bankers' speeches  The Eurozone economy was probably the most pleasant surprise of 2017, with a strong recovery in household spending and private investment. There is still slack in the economy, suggesting that the growth momentum is likely to be sustained. The Japanese economy has recorded the longest growth streak in 16 years, with a resurgence in exports and investment. Emerging market economies – especially in Asia – are benefitting from the positive spill-overs from the advanced economies as well as healthier macro fundamentals. Emerging Asia is benefiting from the pick-up in the global electronics cycle, recovery in commodity prices, steady domestic demand, and benign financial conditions. China is likely to see a moderation in growth this year but not cool off sharply.

For investors, inflation is the biggest bear to watch because monetary policy could tighten at a quicker pace than expected by the markets. Markets are currently pricing in only about three Fed rate hikes to end-2019, so it may not take much to unsettle the markets. Equities, whose valuations are premised on low discount rates, could sell off in a hurry. “Mama Bear” - Protectionism Let me now turn to “mama bear” protectionism. And let us not take a hibernating bear for a dead one. This is a bear that may not wake up for a very long time, maybe never. But if it does, it could be ferocious. Protectionism was the biggest fear this time last year. There were populist backlashes against globalisation, represented most vividly by the results of the Brexit referendum in the UK and presidential elections in the US. The great relief of 2017 was that this risk did not materialise sufficiently to threaten the global economy or financial markets. But globalisation continues to face challenges. The WTO ministerial meeting last month ended inconclusively. 4/7  BIS central bankers' speeches  The US pulled out of the Trans-Pacific Partnership (TPP) early last year and has threatened to leave NAFTA. In Europe, the risk of a hard Brexit is not trivial. If negotiations break down, both the UK and EU will bear high disruption costs. Protectionism can do much harm to the global economy because its reach extends beyond the flow of goods and services, to the flow of capital and technology.
The policy consensus that has emerged from this experience has a more cautious view of the benefits of financial integration, a greater awareness of the damage caused by creating incentives that distort the composition of flows and a greater appreciation of the importance of having in place a strong set of institutions, in the financial system in particular. It has also fostered a greater skepticism within governments of their ability to sustain and adjust a set of limited controls on capital flows, once an economy has passed a certain point of relative openness. Money tends to move around these controls with progressive ease, and it becomes more difficult over time to counteract this force with acceptable costs to other objectives. For this basic reason, many emerging market governments that were early proponents of selective controls have moved to eliminate them. Faced with the challenges of managing policy in an increasingly integrated world economy, the dominant instinct of officials is often to try to shield the economy from volatility. But the crises of the 1990s helped demonstrate why this approach can be both futile and counterproductive. As economies become more open to capital flows, policies designed to insulate an economy from external shocks, whether they be fixed exchange rate regimes or selective capital controls and restrictions on international transactions, rarely offer durable stability, and they bring additional risks. These risks come in the form of additional distortions that might undermine future growth or magnify vulnerability to future financial volatility.

This clearly indicates restored confidence in the system. Besides, the banking system is about to end the year with excellent capital adequacy and liquidity indicators. I say the banking system, meaning all banks, excluding KTB and CB Victoria. As at September, the total capital adequacy ratio stood at 22.16%, and only Tier 1 capital ratio was 19.91% (just to remind you that the EU provisions in the New Basel Capital Accord, also known as “Basel III”, require 8% total capital adequacy and 6% tier 1 capital ratio, respectively). The liquid assets-to-liabilities ratio in the banking system as at October reached 29.75%. In 2014 the share of non-performing exposures past-due for more than 90 days has continued to stabilise. At the end of October this year, at system level, their book value was 10.62% of the system’s loan portfolio book value (i.e. practically the same as at the end of 2013 when their share was 10.28%). The balance-sheet share of non-performing exposures reflects the already provisioned risk through the impairments already made. The provisioning level itself is high, with a total of BGN 5–6 billion provisions in the form of impairments allocated by the banking sector under IFRS until October. The banking system continues to generate profit, which is a source of additional capitalisation and is thus a reserve for maintaining stability. We expect the sector to end 2014 at a positive financial result of circa BGN 700 million (i.e. above last year’s result).