samchain/econo-pairs-v1 huggingface dataset:
This indicates that traditional criteria used in determining credit rating and credit risk level may remain inadequate for accurately reflecting actual credit risk levels of countries at the times during which country specific characteristics come to the forefront. Figure 13: Relation Between CDS Rates and Credit Ratings  270  Hungary Indonesia Russia  Change in CDS (12 Sep 08 - 13 Apr 09)  220  170  S. Korea  Mexico Poland  120 Chile Czech Rep.  S. Africa  Colombia Brazil  70 Turkey 20 0  2  4 6 S&P Credit Ratings (1=A+, 9=BB-)  8  10  Source: Bloomberg, CBT. 8  BIS Review 67/2009  Countries that experienced a decline in their risk premia enjoyed room for policy rate cuts in the period of deepening financial crisis (Figure 14). In this period, contrary to many developing countries, the foreign exchange indebtedness of households in Turkey remained at low levels. This factor, accompanied by the resilience of the financial system and the restricted deterioration in risk premia during the global financial crisis, allowed the Central Bank of the Republic of Turkey to opt for policy rate cuts of large amounts.

Considering the important informational synergies between micro-prudential supervision and systemic risk analysis, bringing micro-supervision close to, if not under the same roof as, other central bank functions seems an attractive proposition. This should contribute to better management of overall economic stability. A concern has been expressed that an expanded role by central banks in this direction could compromise their independence that is so critical in defending their primary objective of price stability. That may indeed be a risk. But precisely because central banks are generally among the most independent institutions, they can strengthen the independence of the supervisory environment. The risk of political pressure delaying a needed tightening in credit conditions via macro-prudential tools, for example, can be minimised if the central bank has a key role. In my view, this benefit, together with the benefit of informational synergies, outweigh the risks. *** I close with a very old lesson for central banks: humility. This crisis was not just a once-in-ageneration crisis. It proved to be much worse. I hope subsequent relative calm allows our 22nd century counterparts to characterise this as a once-in-a-century event. But central banks must not let their guard down. The next crisis might well challenge the limits of our knowledge in new and as yet unknown ways. References Williams, John C. (2009) “The risk of deflation”, FRB San Francisco Economic Letter, 12, 27 March. BIS central bankers’ speeches  3  4  BIS central bankers’ speeches
Third, getting a handle on – and where necessary – regulating, the risks in the so called “shadow banking” system: the ecosystem of non-bank financial firms that perform a similar role in credit intermediation to that played by the banking sector. And fourth, and perhaps most important, making sure that no institution, no matter how large, how complex, how international in its activities or to put it simply, no matter how systemic, is “too big to be allowed to fail”. Because if financial institutions can make themselves too big to fail, if they can ensure that if and when they get into trouble the taxpayer will have no option but to bail them out if, as the economists put it, they can ensure that their profits and their pay are private but if it all goes wrong the losses are “socialised” then history teaches us that this is exactly what they will do. III. What has been achieved? So, in these four key areas, what has been achieved? The inputs have certainly been impressive. From a standing start in 2009 the Financial Stability Board has driven the regulatory reform programme. Under the FSB, around 25 groups have been set up to run around 15 major workstreams.

These, and a willingness to put the spotlight on those that do not comply, are a cornerstone of the mutual trust we require. The FSB has also already begun to play a role in helping jurisdictions that have implemented standards in different ways come to a shared view on mutual recognition. The key is agreeing to focus on the outcomes achieved in different jurisdictions rather than a line by line comparison of respective rulebooks. The FSB will need to be increasingly active in this area as the implementation of the international reform programme progresses. The IMF has a key role to play through its Financial Stability Action Programmes for individual countries and its Spillover Reports on how, within the global financial system, actions and developments in one jurisdiction can affect others. And for the thorniest issue of all – resolving global systemically important banks and ensuring they are international in death as well as life, mutual trust has to be built on common standards and rules to ensure banks have debt that can be safely bailed-in in the right amount and location. To return to where I started: If we don’t hang together most assuredly, one way or another, we will hang separately. Since that first G20 leaders’ summit in November 2008 we have made much greater progress than ever before on agreeing and implementing international financial regulatory reforms. We can break the back of that work at the G20 in Brisbane this November.
I believe many of those present here have a special interest in developments in the exchange rate, and will therefore discuss this in more depth towards the end of the address. The economic situation and the orientation of monetary policy The Norwegian economy is now in a cyclical upturn. Over the past three years, mainland GDP has grown by approximately 4½ per cent annually, and the strong growth has continued in 2007. In the first half of the year, annualised growth was close to 6 per cent, and even if GDP growth in the third and fourth quarters should be zero, annual growth will be well over 4 per cent. As the chart shows, there have not been four consecutive years with such strong growth since 1971. At the same time, productivity growth in the Norwegian economy has been strong, and the supply of labour has been ample. The growth capacity of the economy has therefore been high. Low interest rates, growth in public demand and in petroleum investment and vigorous international growth have resulted in high income growth in the household and business sectors. Moreover, low interest rates have made it more profitable to bring forward consumption. In addition to contributing to the increase in actual income, the sharp improvement in the terms of trade may have raised households’ income expectations. On balance, this has boosted demand for goods and services. So far, there are few signs of a slowdown in the Norwegian economy.

Disturbances to the economy may result in changes in the forecasts. Data revisions imply that the current economic situation is  BIS Review 97/2007  3  not fully known. Our ambition must be to reduce uncertainty with regard to our own response pattern. That actual interest rate developments will deviate somewhat from the Bank's forecast will probably be the rule rather than the exception. What Norges Bank’s Executive Board actually adopts is a monetary policy strategy that applies until the next Report. When Monetary Policy Report 2/07 was presented in June, the Executive Board decided that the key policy rate should be in the interval 4½-5½ per cent in the period to the publication of the next Report on 31 October. And even that is conditional on economic developments that are broadly in line with projections. Financial market turbulence Global economic developments are important for economic developments in Norway, and changes in the growth prospects for the world economy may influence our projections. The turbulence in international financial markets in recent weeks has heightened the uncertainty concerning developments ahead. The source of the turbulence can be found in the US housing market and particularly in the subprime mortgage market. This segment of the US credit market has expanded sharply in recent years. The loans often feature an interest-only period and low interest rates in the first years of the loan's term and higher interest rates thereafter.
Companies may lift the shutters and start to take the types of risks and entrepreneurial activities necessary for our long-run prosperity.8 Such improvements in the supply performance of our economy would greatly enhance the durability of the recovery. Diminished uncertainty may also bolster the impact from the past easing in monetary policy. The MPC has loosened monetary policy aggressively since the financial crisis, both by cutting Bank Rate to historically low levels and by the use of more unconventional tools, such  6  The costs associated with bankruptcy means that, in times of high uncertainty, a firm may opt to adopt a strategy which is most robust to their view about the world being proved wrong, sometimes referred to as “robust satisficing” (See Ben Haim (2010) for an overview). 7  My colleague David Miles (2013) made a similar point in a recent speech. 8  Bloom et al (2001), Bond and Lombardi (2004) and Gilchrist et al (2010) all discuss the constraining impact uncertainty can have on business investment. Reduced uncertainty may also make companies more willing to enter new markets. Disney, Haskel and Heden (2003) provide evidence that such activities are an important source of productivity growth. Lazear and Spletzer (2011) show that reduced uncertainty can prompt greater “churn” in the labour market leading to more efficient matching of skills to jobs. 4  BIS central bankers’ speeches  as Quantitative Easing and the Funding for Lending scheme.

Indeed, during the halcyon days of the so-called Great Moderation that preceded the financial crisis, it started to seem that Eddie’s ambition was no longer quite so demanding. But – as you all know – then came the crisis! That, combined with a commodity price boom and a sharp depreciation in sterling, meant that the days of GDP growth outstripping inflation quickly became a thing of the past. We’ve failed to live up to Eddie’s ambition for each of the past six years. The good news is that recent developments – on both growth and inflation – mean that we appear to be heading back towards an environment of which Eddie would have approved. Over the past six months, output has grown at an annualised rate of almost 3%, almost a quarter of a million new jobs have been created and indicators point to a continuation of strong growth. At the same time, inflation has fallen sharply and, at 2.2% in October, CPI inflation is as low as it’s been for four years. In terms of growth, the obvious question this raises is, why now? Why, after throwing everything bar the kitchen sink at the economy over the past few years, has the economy started to grow only now? Even more importantly, will the recovery last? Having seen a few false dawns over recent years, has the recovery really taken hold this time? And what does all this mean for monetary policy.
The ECB is ready to play its part and is already collaborating with other central banks and international authorities to that end. We are also reviewing our oversight framework to capture innovative payment solutions, including stablecoin arrangements. In doing so, we are following a risk-based and proportionate approach. Looking ahead, the ECB will continue to act as a catalyst for change. We will go on engaging with European stakeholders to actively contribute to a pan-European payment solution. We also play our part, in full independence, in assessing the value of central bank digital currencies for European citizens and the broader economy. A central bank digital currency would allow citizens to use central bank money directly in their daily transactions. However, depending on its design, a central bank digital currency could pose risks. For instance, they could alter the way in which monetary policy is conducted and transmitted to the real economy. They could also carry implications for the functioning of the global financial system and its stability. The question of central bank digital currencies and their optimal design therefore warrants further analysis. Our ultimate goal is to foster safer, innovative and integrated payments in euro. This will in turn benefit everyone in the euro area and strengthen the euro internationally. Conclusion Madam Chair, honourable members, The last European Parliament elections highlighted that people expect ambitious responses from Europe.

This implies that we will continue to exert downward pressure on the yield curve by keeping our stock of asset holdings at a high level for a prolonged period of time, and we could specify it in our communication. 2/ Perhaps the most unconventional policy tool is the use of negative interest rates. Negative interest rates have their limitations; I have already stressed them in the past.vii And at our Governing Council’s meeting in Tallinn last June, we clarified these limitations in our forward guidance stating that we do not intend to lower our deposit facility rate below its current level of -0.40%. But slightly negative interest rates have their virtues. First, by removing the zero lower bound constraint on expectations of future short-term interest rates, they contribute to easing financial conditions by lowering rates along the curve, with a positive impact on the demand for credit by firms. Second, the negative deposit facility rate (DFR) positively interacts with asset purchases. Indeed, the portfolio rebalancing effect of QE is reinforced by the negative DFR, as banks with excess liquidity holdings have a stronger incentive to put their reserves to work. And, so far, we have not seen significantly detrimental effects of negative rates on the profitability of banks, notably thanks to the favourable fact that the slope of the yield curve has remained positive. 3/ Our forward guidance provides further indications as to the future path of our monetary policy; and by steering expectations, it has an impact on the yield curve.
What businesses banks chose to be involved in, and what business entities chose to own a bank, would be matters for themselves to decide. Over time, banks with the right configuration and mix of activities would succeed, while those without would fail or be eliminated by the competition. But regulators cannot leave it entirely to the market to sort out such matters, especially where the banks involved are not peripheral players but perform key roles in deposit taking and the payments system. Strong banks are important to the health of the financial system and to the entire process of credit intermediation. Regulators cannot guarantee that individual banks will never fail, but they have a duty to minimise the chances of a mishap and to maintain the integrity and overall stability of the financial system. A clear source of potential problems in this regard is the commingling of financial and non-financial activities within the same corporate group. Many regulators regard it as good banking and sound supervisory practice to require clear separation of the two. Firstly, separation will limit the risk of contagion from non-banking businesses to the bank. Banks with significant interests in non-banking activities are exposed not just to credit and market risks which are the primary risks of their business, and which the banks should assess and manage as part of their core competence. These banks will also be taking on the business risks of their non-financial activities.

2/5  BIS central bankers' speeches  Stage 2: Normalization The second stage of normalization followed lift-off and has involved two processes: 1) raising the federal funds target closer to more normal levels, reflecting the ongoing improvement in the economy, and 2) gradually reducing the Fed’s balance sheet as we work to unwind the asset purchase policies put in place during the crisis. Let’s start with interest rate normalization. Since lift-off, we’ve raised interest rates as the economy moved toward maximum employment and our 2 percent longer-run inflation objective. We continued this process with our most recent rate increase this week.4 Throughout, we’ve repeatedly stressed that we foresaw this to be a process of gradual normalization, reflecting the balancing of risks to reaching our goals. In particular, downside risks to the achievement of our employment and inflation goals amid very low interest rates were compelling arguments for a cautious and relatively predictable approach to policy. This approach proved its worth: The economy continued to expand at a healthy pace even as the Fed raised rates numerous times. I’ll now turn briefly to the normalization of the balance sheet. We began this process about a year ago.
Just how sustained this pick-up proves to be will become evident in the coming months when the extraordinary fiscal and monetary stimuli weaken. Foreign exchange markets Fluctuations in the US dollar dominated the foreign exchange markets. After having lost considerable ground during the first half of the year, the greenback rebounded slightly by October amid growing signs of an acceleration of growth. Recently, the focus of market participants returned to the sustainability of the US recovery and the continued rise in America’s current account deficit. As a result, the dollar weakened again (see graph 2). Since the middle of the year, the Swiss franc has moved sideways against the euro. Heavier fluctuations were recorded vis-à-vis the dollar. With positive economic data emanating in the US from June onwards, the franc initially weakened before firming again as part of the general dollar consolidation witnessed since September. On the whole, the Swiss franc hardly registered any independent movements. It depreciated strongly during the first half of the year after our interest rate decision and has remained stable since the summer. In relation both to Switzerland’s 24 major trading partners and to the euro zone, the real exchange rate index of the Swiss franc is now slightly below its level at the beginning of 1999, i.e. at the time of the euro launch. Gold market Owing to the more favourable economic situation, raw material prices continued the rise which had started in 2001.

So I’d like to begin by taking an opinion poll! I’d like to put to you two questions. The first is how many of you agree that monetary policy should have the control of inflation as its overriding objective? May I ask all those of you who agree that monetary policy should have control of inflation as its overriding objective, please, to raise a hand. Now please would those who disagree that monetary policy should have control of inflation as its overriding objective please raise a hand. Now let me ask you a second question - and I’m afraid that only those who voted in favour in response to the first question are entitled to vote this time - I don’t want a biased result. Given the objective of control of inflation - the 2½% inflation target - please would those of you who think interest rates should be higher than they are at present raise a hand? Please raise a hand now if you think interest rates are at the right level? And will those of you who think that interest rates should be lower than they are at present now please raise a hand - but remember you can only vote if you agreed that monetary policy should be directed to controlling inflation! Welcome to your first meeting of the Monetary Policy Committee! Your votes will all be individually recorded by the Chairman and published with the minutes in a fortnight’s time!
From those assumptions are derived equations of motion for the behaviour of  4  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  4  consumers and firms – which, rather revealingly, are often called the Euler conditions. Then, and only then, are these first-order conditions for behaviour taken to the data to be tested. These models, so derived, predictably exhibit the same damped harmonic motion as Newton’s pendulum. Let me give a couple of examples of this approach in mainstream practice in economics and finance. The most famous equation in finance is probably this one:  Figure 1: The Black-Scholes Formula  Source: Black and Scholes (1973). This is the Black-Scholes options pricing formula (Black and Scholes (1973)). Under a (relatively) small set of assumptions, it provides a (relatively) simple analytical description of how to price a financial option. It cannot rival Einstein for its simplicity and aesthetic beauty. But it nonetheless has many of the trademark characteristics of theoretical physics. That should come as no surprise because this equation was itself drawn from theoretical physics. In seeking a solution to their option-pricing problem, Fisher Black, Myron Scholes and Robert Merton drew an explicit link between their contingent-claims pricing problem and the heat transfer equation in physics (Churchill (1963)). If not quite a lift and shift from theoretical physics, the Black-Scholes formula was certainly a genetic mutation.

Does that imply that consumers would shrug off a downturn in the housing market? Not necessarily. The rise in house prices has meant that households have taken on a lot of debt, and higher interest rates will mean they have less money to spend on other things. While there are few signs of obvious financial stress at current interest rates, given the strength of the current jobs market and the current housing market, this could change, especially if several of these factors weakened at the same time and the economic climate deteriorated sharply. That’s a long way from our central forecast, but uncertainty about how consumers might react to higher interest rates has been an important reason for tightening policy gradually since last November. We have also avoided springing surprises. I think that’s important: people are more likely to believe what we say, if our behaviour is reasonably predictable. But we wouldn’t be doing our job if we didn’t constantly revise our views in the light of new information and new research. That is why every month has to be a fresh decision. And why I can honestly say that I don’t know, any more than anyone else, where rates will be in a year’s time. Compared with a year ago, interest rates have risen from 3.5% to 4.5%. But the international outlook is clearly stronger now, the domestic economy is buoyant, and inflation remains low.