samchain/econo-pairs-v1 huggingface dataset:
Those that had doubts about the importance of the innovation or the persistence of the gain in asset prices lose confidence in their opinions as they underperform and lose business and market share. Those who believed that the large gains in asset prices were justified by the innovation and who benefited from those beliefs become more dominant. Casual investors see the large rise in prices and jump in. This shift is important because, in markets, prices are driven by the marginal investor. As new and often less well-informed investors plunge in to participate in the boom, they can overwhelm the so-called “smart money” that gets frustrated after having lost repeatedly trying to take the other side. In this respect, a bias toward optimism may also play an important role. Studies have found that most people believe that they are above average in terms of their acumen, be it as investors, car drivers or in other activities. 5 This overconfidence may cause some people to keep investing in the asset, even when they are skeptical about its valuation because they are overly confident that they will anticipate the end of the bubble and be able to get out in time. Fifth, asset bubbles occur more easily when it is difficult to short the assets.

Despite the fact that it is hard to discern bubbles, especially in their early stages, I conclude that uncertainty is not grounds for inaction. Instead, the decision whether to act depends on whether appropriate tools can be deployed to limit the size of a bubble and whether the benefits of acting and deploying such tools are likely to exceed the costs. That cost-benefit calculus, in turn, depends crucially on the tools we can deploy to limit the growth of bubbles and the consequences when they burst. In this respect, I will argue that, in most cases, use of the bully pulpit and macroprudential tools, such as rules limiting loan-tovalue ratios or leverage, are likely to prove superior to monetary policy. Turning to the first issue of whether there are asset bubbles, I am going to be a bit of a heretic and argue that there is little doubt that asset bubbles exist and that they occur fairly frequently. By an asset bubble, I mean price increases (or declines) that become unmoored from fundamental valuations. I want to be clear that I am distinguishing this from price movements that are tied to changes in fundamentals. I know this runs afoul of the efficient markets hypothesis – which in this context would argue that if a bubble were obvious, then people would take the other side and the bubble would not occur in the first place. There are several reasons why this argument does not hold in practice.
Put in another way, the relationship between the two systems within the country is a multi-dimensional one. While the governance relationship at the political level is of crucial importance, the relationships on other dimensions also require close attention. One important question that needs to be answered is whether, on any one of these other dimensions, the two systems have a working relationship that maximises the mutual benefits of the two jurisdictions and therefore is in the best interests of the country. 1  The phrase "One Country, Two Systems" was first used in public by Deng Xiaoping when he received industry and business leaders from Hong Kong on 22-23 June 1984. BIS Review 98/2006  1  As Monetary Authority, I have certain responsibilities for the financial system of Hong Kong. These derive from the laws of Hong Kong and are clearly set out in a formal and transparent exchange of letters between the Financial Secretary and the Monetary Authority of June 2003 2 . I believe therefore that it would not be inappropriate for me to contribute to answering that important question, insofar as the working relationship between the two financial systems in the country is concerned. Let me do so first by making a brief comparison between the two financial systems in the country.

To maintain the social compact, a balance needs to be struck between pushing through needed changes without delay, and spacing them out to reduce the political pain. Thus the Meiji reformers' slogan was fukoku kyohei, meaning "rich country, strong military". Their objective was not just better lives for individual Japanese, but a strong Japan taking its rightful place among the nations of the world. This assertion of Japan's role in world affairs led to the Pacific War. Margaret Thatcher believed in a strong Britain too, but hers was a very different model. She famously declared that "there is no such thing as society", only individuals, and that people must look to themselves rather than the government. But she went too far down this path. When she persisted in implementing the poll tax in 1990, the people revolted, and even her own party turned against her. The Iron Lady was out. In Singapore, consensus building is especially important as the remaking is to lead to an economy more reliant on private enterprise and individual effort. This can only work if Singaporeans feel that the system is fair to all, and benefits everybody over the long run. Hence we have worked hard to strengthen the social and political consensus in support of our remaking plans. We involved and consulted Singaporeans as widely as possible. We worked in partnership with both the employers and the trade unions in policy deliberations.
While this new decade beckons the prospect of immense opportunities in Islamic finance, our ability to realize this potential will be determined by the ability to recognize the shared responsibility it demands and to collectively advance forward the agenda of financial stability and resilience to achieve our ultimate goal of a shared prosperity. BIS central bankers’ speeches  5

In this respect, flexible wage setting, resulting in particular in sufficient wage differentiation, is crucial in order to strengthen or at least maintain competitiveness and improve employment opportunities, in particular for less-skilled workers. •  Furthermore, many studies point to the potential that competition has to increase employment and to boost productivity trends by improving production efficiency and by enhancing the incentive to invest and innovate 1. In the European Union, significant progress has been made in strengthening competition and increasing economic integration over the last two decades. The single market has already brought sizable benefits for the European economy. 2 However, much remains to be done, in particular in some market services sectors. The extension and deepening of the internal market remains a priority as regards further financial market integration, the pursuit of effective  1  See the ECB Occasional Paper Series No 44 “Competition, productivity and prices in the euro area services sector”, by the Task Force of the Monetary Policy Committee of the ESCB, April 2006. 2  The European Commission recently estimated that the single market has brought about an increase of 2.75 million extra jobs and an extra increase in welfare of € per head in 2006, corresponding to a 2.15% increase of the EU’s GDP over the period 1992-2006 (See European Commission, “The single market: review of achievements”, November 2007). 2  BIS Review 31/2008  competition in the energy market, and the implementation of the Services Directive.
Growth in the Norwegian economy remains strong and is stronger than projected earlier. Capacity utilisation is high. Wage growth is on the rise and there are prospects of higher inflation. At the same time, the krone had appreciated markedly and there are prospects that somewhat weaker growth in the world economy will contribute to curbing inflation and growth in output and employment in Norway. Reference was also made to the analyses in Monetary Policy Report 3/07, which indicate that the key policy rate should be raised further, but to a lesser extent than envisaged in June. In addition, the Executive Board pointed out that the projections are uncertain. New information may reveal aspects of economic developments indicating that the Norwegian economy is moving on a different path than projected. On the one hand, high capacity utilisation and higher cost inflation may lead to higher-than-projected inflation. On the other hand, the risk of slower growth in the world economy has increased. If global economic developments are weaker or if the krone appreciates more than we have assumed, inflation may be lower than projected at present. It was the view of the Executive Board that the key policy rate should be in the interval 4¾5¾ per cent in the period to the publication of the next Report on 13 March 2008, unless the Norwegian economy is exposed to unexpectedly severe shocks. Thank you for your attention.

Svein Gjedrem: Interest rate developments Speech by Mr Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), at the annual conference hosted by the Norwegian Federation of State Employees’ Unions, Oslo, 28 November 2007. The text below may differ slightly from the actual presentation. The address is based on the assessments presented at Norges Bank’s press conference following the Executive Board’s monetary policy meeting on 31 October and in Monetary Policy Report 3/07. *  *  *  Introduction Good morning. First of all, I would like to thank you for inviting me to this conference. As the title suggests, my speech today will focus on the interest rate and monetary policy. What is monetary policy’s role? Over the past 100 years, there have been four periods of very high inflation in Norway: during the two World Wars, during the Korean War and in a 15-year period from the first half of the 1970s to the second half of the 1980s. The last of these three periods was different from the preceding periods. In the 1970s and 1980s, inflation accelerated gradually. Inflation did not reach the same level as it did during the two world wars, but it took longer to fall. Substantial economic losses and financial instability followed in the wake of high inflation. Inflation was very costly. History shows that there is no long-term trade-off between lower unemployment or stronger economic growth and higher inflation.
Rather, its implementation has been motivated by the perception that the dynamics of some financial prices or ratios are indications of vulnerabilities in all or part of the financial system that could create problems upon the occurrence of one or more shocks. Therefore, many of the tools used are intended to directly restrict or limit the growth of certain financial ratios or aggregates. I will next review these tools in more detail. 2. Macroprudential tools and their use  As I mentioned earlier, in its quest to reduce the vulnerabilities of the financial system, macroprudential policy has made use of multiple tools in different countries. After several years in place, it has provided some evidence on its frequency of use and its effectiveness. A host of different macroprudential policies have been identified across countries. A possible classification of them (based on Claessens et al., 2013) identifies four groups, according to the nature of their objectives. One group considers measures aimed at reducing vulnerability of borrowers, with caps to Loan-to-value and Debt-to-income chief among them. A second group covers measures that reduce –directly or indirectly – credit growth, where the instruments here are Caps on Credit Growth, Reserve Requirements, Dynamic Loan Loss Provisioning, and Countercyclical Capital Requirements. A third type of policy aims to limit foreign currency risks via Limits to Foreign Currency Lending; while a fourth type considers measures aimed at improving bank buffers, with the policy of Restrictions on Profit Redistribution being implemented in different latitudes.

Thus, such provisions should act as a countercyclical mechanism for accumulating additional provisions when conditions are good and releasing or allocating specific provisions when the times turn bad.” The regulations on required credit risk provisions also introduce some macroprudential aspects as they establish that these must be forward-looking and based on the expected probability of future repayment, not the current level of default or delay, and consider the sensitivity to the cycle of the industry where the debtor operates. In addition, regulations establish a minimum level of provisions that does not vary with the cycle and prevents them from falling excessively during favorable cycles of payment behavior. Finally, after the crises that hit emerging economies in the late 1990s, the law ruled that banks, when assessing the financial situation of the debtors, must consider their currency, term, and interest rate mismatches. The Central Bank’s legal framework also includes a number of powers that can be used to mitigate excessive credit cycles if deemed necessary. For one, the Central Bank Board has the authority to establish reserve requirements over foreign exchange operations. This tool was used in the past (1990s) to control capital inflows to Chile and their impact on macro balances. However, our practical experience with the use of this tool in the 1990s taught us that its success in taming capital inflows is limited because it is always possible to find ways to circumvent the restrictions.
In this sense, the recent creation of a Financial Stability Committee in Chile should improve coordination among regulators and have a view on financial stability and risks. Over time, and as learning takes place, some legislation should be introduced in order to enhance the effectiveness of the Committee. In the Central Bank, evaluation of financial vulnerabilities and strengths is performed bi-annually in our Financial Stability Report. Finally, regarding the interactions between macroprudential policies and monetary policy, I would like to make some comments.4 The traditional view has been influenced by the Tinbergen principle, by which there should exist as many instruments as policy targets. This view is reinforced by the fact that, as I argued above, the interest rate is too blunt of an instrument to deal with asset price bubbles and financial dislocations. Therefore, we can think of a separation between the interest rate – the monetary policy instrument to achieve the inflation target – and macroprudential tools to deal with financial stability. 4  See also Bernanke (2011) for discussion on these issues. BIS central bankers’ speeches  5  However, and perhaps unfortunately, the separation is not that clear. As I discussed before, actions of monetary policy, such as the Greenspan put, may create financial instability. The financial crisis also showed that it has effects on the business cycle and, hence, it has implications on monetary policy. Moreover, the transmission channels of monetary policy could be broken down during a crisis.

Thus, the central bank’s inflation forecast at the policy horizon becomes the intermediate target.2 In the case of Chile, our inflation target is three percent, and the time horizon is two years. As long as this target is credible, monetary policy will not only achieve inflation stability, but will also reduce the volatility of the business cycle. Analytically, the FIT regime is based on the idea that the policymaker minimizes a loss function that penalizes both inflation deviations from the target and deviations of output from full employment. Therefore, what the FIT does is to optimize the tradeoff between output  1  A predecessor was Taylor (1998) who called this period the “long boom.”  2  In order to avoid indeterminacy or multiple equilibria, the forecast must be the central bank’s forecast and not that of the market (Bernanke and Woodford, 1997). 2  BIS central bankers’ speeches  volatility and inflation volatility. The time horizon is what makes this scheme “flexible.” The target is not achieved in the short run since it also takes the output costs of achieving the target into account. A rigid inflation target is one in which the central bank only cares about inflation, and hence the horizon would be the shortest possible, enough for monetary policy to affect output. The longer the time horizon, the higher the weight of output volatility in the loss function (De Gregorio, 2007).
A mere six quarters could therefore simply be too short a time horizon to allow for money to begin transmitting in any significant way its impact on inflation. The Fischer et al. paper will prove to be particularly valuable if it encourages further research to investigate the relevance and stability of its findings under different inflation regimes, in different economies and over longer time horizons. In this context, let me now briefly turn to the Swiss experience with money and monetary policy. 3. SNB experience using information from monetary aggregates  With the collapse of the Bretton Woods system, the SNB had to search for a new policy framework. 1 From 1974 until the end of the 1990s the SNB announced monetary targets; first for M1, and eventually for the monetary base. In 1978, the SNB abandoned its monetary target for a short period in favor of a nominal exchange rate target. 2 During the second half of the 1990s, the monetary base became instable. The SNB faced increasing difficulty using a money target for MO, let alone to communicate through them. Finally, the SNB decided to adopt an altogether new monetary framework in an effort to increase the clarity, transparency, and flexibility of the conduct of its monetary policy. The new concept, introduced in January 2000, is based on three elements: an explicit definition of price stability, an inflation forecast as the main indicator for policy decisions, and a range for the 3-month LIBOR as the operative target.

8  McKinsey (2005, 2006)  9  King (2006)  BIS Review 107/2006  3  case of the SNB, the flexible nature of the policy framework and the importance attached to money and credit variables means that in an effort to avoid potential long-term financial distortions from emerging, the Governing Board could conceivably tighten monetary policy even if our inflation forecast signals no imminent inflation threat. 5. References  Baltensperger, Ernst, Thomas J. Jordan and Marcel Savioz, 2001. The Demand for M3 and Inflation Forecasts: an Empirical Analysis for Switzerland. Weltwirtschaftliches Archiv, vol.137 n.2, pp.244-272. Fischer B., M. Lenza, H. Pill and L. Reichlin (2006). Money and monetary policy: The ECB experience 1999-2006. Friedman, Milton, 2005. A natural experiment in monetary policy covering three episodes of growth and decline in the economy and the stock market. Journal of Economic Perspectives, vol.19 n.4, pp.145-150. Issing, Ottmar, 2002. Monetary Policy in a Changing Environment. Contribution to the Jackson Hole Symposium on "Rethinking Stabilization Policy", Federal Reserve Bank of Kansas City. Jordan, Thomas J., Michel Peytrignet, and Georg Rich, 2001. The role of M3 in the policy analysis of the Swiss National Bank. In: Klöckers, H.-J., and C. Willeke, eds., Monetary Analysis: Tools and Applications, European Central Bank, pp.47-62. Jordan, Thomas, und Marcel Savioz, 2003. Sind Kombinationen von Prognosen aus VAR-Modellen sinnvoll? Eine empirische Analyse mit Inflationsprognosen für die Schweiz. Quartalsheft der SNB, 4, Dezember 2003. King, Mervyn, 2006. Speech at the Dinner for Kent Business Contacts, Ashford, Kent, United Kingdom. McKinsey & Company.
In the first three quarters of  4  BIS Review 20/2008  2007, the Gross National Product (GNP) increased by merely 4 percent, remaining at a level lower than previous years. Sorting out the underlying dynamics of growth developments is critical in shaping monetary policy decisions. It should be emphasized that while the limited GDP growth compared to previous years can be attributed essentially to the impact of monetary tightening; the marked contraction in the agricultural sector also had a significant influence, especially on the reduced growth rate in the third quarter. In other words, the slowdown in growth resulted partially from the supply shock. As I have emphasized at the beginning of my speech, the contraction in the agricultural sector did not only affect the growth unfavorably, but it also pushed inflation up for a temporary period in 2007. Figure 6: Private Final Consumption (Real, quarterly, seasonally adjusted)  Monetary Tightening  26000 25000 24000 23000 22000  2007-III  2007-II  2007-I  2006-IV  2006-III  2006-II  2005-IV  2005-III  2005-II  2005-I  20000  2006-I  21000  Source: TURKSTAT, CBRT. Figure 7: Contributions to Annual GDP Growth (Percentage Points)  20  Final Domestic Demand Net Exports  15  GDP  10 5 0  2007-III  2007-II  2007-I  2006-IV  2006-III  2006-II  2006-I  2005-IV  2005-III  2005-II  2005-I  -5  Source: TURKSTAT, CBRT.

For another, the sharp increase in loan volumes – especially for mortgages – against a backdrop of persistent economic uncertainty and the substantial rise in real estate prices points to higher credit risk. In addition, for first mortgages on residential properties, banks are required to have less capital backing under Basel II than they did under Basel I – before 2007 (i.e. under Basel I), a mortgage had to be backed with 4.0% capital; since then (i.e. under Basel II), that figure is only 2.8%. This not only gives banks an incentive to grant more mortgages, but also enables them to reduce the capital buffer used to absorb loan losses. In view of the increased interest rate and credit risk, we urge the domestically focused banks to be prudent. They must be prepared for interest rates to rise. Besides the direct effect on the interest rate margin, particular attention also needs to be given to the indirect effect of an interest rate increase, namely that if loans are granted without sufficient attention being paid to borrowers’ financial situations, a rise in the interest rate will inevitably result in higher loan losses. As I have mentioned, the domestically focused banks are well capitalised by historical standards. But in view of the risks and uncertainty, they will also need to maintain a large capital buffer.