samchain/econo-pairs-v1 huggingface dataset:
Supervision, by contrast, is the dynamic pursuit of the relevant authority’s statutory objectives, through oversight of firms’ activities. To do this effectively, you of course need regulation – but one without the other in financial services would, in my view, be futile. At the PRA, we have committed ourselves to a judgement-based, forward-looking supervisory approach. This means that we proactively take action to meet our objectives and we evolve our methods to reflect emerging developments. It also means that we rely heavily on the judgement of supervisors and get them to unearth and scrutinise the top risks at any given firm. This is delivered by a keen supervisory focus on business models and the prudential health of firms rather than a sole preoccupation with firms’ compliance with regulation, important though that is. And because we rely heavily on judgements, the PRA has a central spine of decision-making committees, with the most important supervisory decisions reserved for the Prudential Regulation Committee (PRC). But where did this approach come from? Most comparisons between the PRA’s current supervision model and those that preceded it focus heavily on the differences between the PRA’s approach and that taken by the FSA before the global financial crisis. But the truth is that the practice of supervision in the U.K. has evolved slowly over time; indeed, the roots of supervision lie much deeper and can be traced back over the past 100 years or so.

But the crisis revealed something about the relationship between the state and industry at the end of the nineteenth century. Indeed, the institutional set-up explains quite a lot about the approach taken towards the oversight of financial institutions at this time. The Bank of England was still a private entity. The leading partners from each trading house sat on the Bank’s Court of Directors. This was a world of gentlemen’s agreements and moral suasion, or “what a later 6  generation would know by shorthand as the Governor of the day raising his eyebrows” . One reason the Bank developed a supervisory interest in the clearing banks was to protect its balance sheet given its role as banker to the banks but it was, at most, primus inter pares, and banks were largely self-regulating. Indeed, the crisis at Barings was ultimately one of solvency not liquidity and so the Bank would not devote its own resources to a recapitalisation. Instead, the rescue of Barings Bank relied on the collective action of its industry peers and some co-ordination by the Bank rather than any formal supervisory role. This is in contrast to later crises of liquidity during which, in line with Bagehot’s theory, the Bank extended credit at a penal rate to solvent but illiquid banks and became lender of last resort.
Central bank liquidity provision This brings me to the second factor, namely central bank liquidity provision, which influences the effective pass-through of monetary policy decisions to money market rates and financing conditions more broadly. The relation between excess liquidity and overnight money market rate dispersion has also changed since the global financial crisis. Prior to 2015, higher levels of excess liquidity tended to lower the dispersion of money market rates (Slide 6). After 2015, increases in dispersion also occurred in periods of ample and rising excess liquidity. https://www.ecb.europa.eu/press/key/date/2020/html/ecb.sp201123~8d9573b1b1.en.html  3/7  24/11/2020  Shifting tides in euro area money markets: from the global financial crisis to the COVID-19 pandemic  There are several reasons for this changing relationship. Prior to 2015, central bank liquidity provision and the associated Eurosystem balance sheet expansion were driven by the need to restore an impaired monetary policy transmission mechanism, caused by heightened market stress during the financial and sovereign debt crises. During the global financial crisis, when the unsecured interbank market came under stress, banks turned to the central bank to obtain liquidity. The Eurosystem essentially assumed the liquidity-providing role of the private market. During the sovereign debt crisis in the euro area, banks once again increased their demand for central bank liquidity. The provision of central bank liquidity also stimulated the supply of liquidity in the private market, especially to banks located in the periphery. [16] The optimal design of central bank liquidity policies is an important research question, which is examined in the conference paper by Robatto (2020).

However, given how truly badly we are doing in meeting our employment mandate, I argue that the Fed should seriously consider actions that would add very significant amounts of policy accommodation. Such further policy accommodation does increase the risk that inflation could rise temporarily above our long-term goal of 2%. But I do not think that a temporary period of inflation above 2% is something to regard with horror. I do not see our 2% goal as a cap on inflation. Rather, it is a goal for the average rate of inflation over some period of time. To average 2%, inflation could be above 2% in some periods and below 2% in others. If a 2% goal was meant to be a cap on inflation, then policy would result in inflation averaging below 2% over time. I do not think this would be a good implementation of a 2% goal.1 With this in mind, I want to discuss the nature of policy-making under a dual mandate when we are far from our goals. What’s a central banker to do? (Warning: math ahead) Normally, the deviations of the real economy and inflation from our objectives are small enough that any conflicts are minor. And the well-known Taylor Rule captures normal policy adjustments well, appropriately weighting output gaps and inflation deviations in the setting of our policy rate.
The reform initiatives have also focused on enhancing capital and liquidity standards, reinforced by moves to strengthen the macro-prudential orientation of regulation to complement micro-prudential supervision to manage the risks arising from the interdependencies within the financial system. Whilst the breadth of regulatory changes being considered collectively endeavor to strengthen financial system resilience, the key challenge for policymakers and regulators going forward is also to achieve inclusive and more sustainable growth, whilst ensuring financial stability. Whilst Islamic finance has benefited from a well-developed, more competitive and well regulated eco-system, it needs to build on and reinforce the solid foundations that has been achieved in this decade. As the industry transitions into a new era of growth and development in this post-crisis world, the competitive financial landscape is being redrawn by the evolving international regulatory reforms, changing operating models, rising consumer expectations and increased competition. In this more challenging environment, the success of sustaining the momentum of Islamic finance as a transformative agent for the economy, will hinge on the ability to keep raising the bar in the pursuit of an effective functioning and sound Islamic financial system. Post-crisis, the increased emphasis for inclusive and sustainable products as well as responsible corporate behavior provides clear potential for Islamic financial players to demonstrate leadership by capitalizing on core value propositions of Islamic financial intermediation.

Interestingly, I find evidence in the early (pre-1988) sample that suggests that inflation was, if anything, more sensitive to the unemployment gap when unemployment was high, rather than low. Although these estimates are imprecise, this pattern is the opposite of the claim by HMS, which relies on full-sample estimates to draw conclusions. This also runs counter to HMS’s historical narrative about the 1960s and the dangers of a red-hot labor market. I will not dwell on this further, but it is a reminder that findings of nonlinearities in Phillips curves are often not robust. The apparent breakdown in this simple price Phillips curve in the past 30 years reflects a number of structural changes in the U.S. economy. The Federal Reserve’s success in re-anchoring inflation expectations at a low level can explain the decline in inflation persistence seen in the data.1 However, the role of well-anchored expectations in flattening the Phillips curve is not obvious, and as HMS note, this flattening is not as clear in the wage inflation equations. This suggests other forces are at work. Several usual suspects come to mind, including the effects of supply shocks, increased globalization of goods markets and supply chains, and changes in the market structure for consumer goods.
In conclusion, I’d like to note that although the current economic slowdown is of both structural and cyclical nature, structural factors and the need to create new growth sources still play a major role. This means that monetary policy measures are not sufficient to solve all the problems facing the economy. Special efforts are needed to promote new investments in the economy, improve business climate, increase the mobility of labour and its skills, enhance the efficiency of natural monopolies and government expenditure, improve state governance, and develop infrastructure and logistics. Only these efforts will ensure sustained long-term economic growth based on increasing productivity and economic structural changes. 4  BIS central bankers’ speeches

Following this workshop, the results of these research works will feed into the decision making process and help the Bank of Albania to make more informed decisions and improve its models and the efficiency of policy-making. For this reason, I encourage and invite you all to ask questions, to comment and to assess our work with your opinions and academic proficiency, to challenge our findings and methodologies. The nature of our research is undoubtedly influenced by our main mission and prevailing concerns. It is for that reason that the majority of our research focuses on monetary policy, price and financial stability, models related to them and the economic events that affect them the most. Some of the trends that we will discuss today are global and fundamental in nature. They may not have reached our economies, yet, but they will definitely have a significant impact on our real economy and financial system in the future. For example, new technologies, such as crypto currencies, Artificial Intelligence and machine learning, which represent a major challenge, not only for central banks, will have various implications for monetary and financial stability. Research related to these new technologies will be beneficial for both advanced and developing countries. Unexpected, sometimes new, global or regional events can shock a domestic economy such that authorities need to intervene with what they already know and have experienced. It is important to understand the short and long-term implications of the adopted policies in these new environments.
But it isn’t that simple, and tonight I want to outline the role of financial markets and non-bank institutions (which sometimes go under the somewhat pejorative term of shadow banks) 1 within the overall financial system and describe how, with sufficient resilience, they play a number of key roles in the financial system, including offering borrowers alternatives to bank lending. Nevertheless, I also want to explain why there is significant and increasing emphasis on the risks they can pose to financial stability. Put simply, it is quite often said that we are living in unprecedented times in the performance of financial markets. The simple narrative around banks is that they over-extended themselves (over-leveraged in terms of the ratio of assets to capital and over-extended in terms of the ratio of illiquid to liquid assets) in the run-up to the crisis, and the resulting problems had two closely linked and malign effects: first, the crisis jeopardised the provision of those core financial services which banks provide and on which all of us depend; and second, by so doing – and being too big or complicated to deal with as failed companies – they required the use of taxpayers’ money to bail them out. That’s the story, and it explains why the public policy actions taken both immediately after the crisis (bail-outs) and the subsequent post-crisis reforms have been directed at protecting those or core financial services and seeking to ensure that taxpayers’ money does not need to be put at risk.

To be clear however, QE asset purchase operations were not designed to tackle a liquidity problem in the financial system. Rather, the impact on liquidity was one of the channels through which QE has affected the real economy and thus has had its intended effect in monetary policy terms. While estimates of the impact of QE are inherently uncertain, one of the desired outcomes of central bank asset purchases is to lower yields thus affecting longer term interest rates and creating a positive economic effect. In doing so, QE can improve the functioning of financial markets by reducing liquidity premia. The third post-crisis development is the impact of the growth of automated trading in financial markets, and the challenges this poses for maintaining continuous market and liquidity. Over the last year volatility in many financial markets has picked up from a low base and we have seen some acute but short-lived incidents of extreme volatility and impaired liquidity in secondary markets. On 15 October last year there was unprecedented volatility in the US Treasury market, and on 15 January this year there was substantial volatility in the Swiss Franc exchange rate following the unexpected decision by the Swiss National Bank to remove its Europe/Swiss Franc floor. Now, central banks are known for their powers of understatement, so what do I mean by words like “unprecedented” and “substantial”. On 15 October, 10 year US Treasury yields moved intra-day by around 8 standard deviations of preceding daily changes.
We expressed our confidence in the convergence towards SAPI (a sustained adjustment in the path of inflation). Let me elaborate somewhat on the foundations of this confidence, looking first at economic data and forecasts and second at some principles of our monetary policy. Data and forecast In economics, it can be hard to know exactly where you are. Monthly and quarterly data can be quite jumpy and there are often multiple plausible hypotheses to explain them: measurement error; abnormal season effects; one-off effects like strikes or natural disasters; or a genuine change in the underlying economy. What happened to output in Q1 is a case in point. Was the slowdown from 0.7% real GDP growth in Q4 2017 to 0.4% in Q1 2018 mismeasurement errors across quarters? Unusually cold weather or a German influenza outbreak? A sign of concern about a potential trade conflict? Or a warning of a slowdown in underlying economic growth? The Governing Council judged that it was largely a moderation from the exceptionally strong growth of Q4 compounded by some temporary and supply-side factors at both the domestic and the global level, as well as weaker impetus from external trade.

Although the performance of a currency union should be evaluated rather in the light of price stability, which is the principal task of the area’s central banks (and where performance has been strong), than in the light of fiscal performance, which is the responsibility of individual member states, or financial stability, which – unfortunately – is still largely the province of individual member states, it is not unlikely that the problems facing the euro area will affect voters’ choices. The looming financial and sovereign debt crisis in the periphery of the euro area poses a problem for the conduct of the common monetary policy that must be solved. In the event that membership is rejected, it would be appropriate to consider other options. The measures I mentioned earlier could improve performance without radical changes. How successful they are will be determined to a large extent by the strength of political support for the reforms. For example, will those who consider the decisions of the independent Monetary Policy Committee “crazy” agree to place further tools at the disposal of the Central Bank or an independent financial stability committee? The combination of short-sightedness and populism that has long characterised economic and monetary discourse in Iceland is a roadblock to enhanced stability.
We have been able to affect expectations for the following years through our communications. Other central banks that have not traditionally engaged in this type of communication have, as I mentioned earlier, experimented with different forms of rough ‘triggers’ of various kinds. The academic background to the concept is the insight that expectations of future policy rates are at least as important as their current level when it comes to affecting investment and consumption decisions. In normal cases, the central bank is assumed to be able to influence expectations satisfactorily through its systematic monetary policy. But when the policy rate reaches its lower bound, it is possible to communicate an intention to diverge from normal behaviour and keep the rate low for a longer period and thus substitute, to a certain extent, for an immediate policy rate cut. There has been, however, some discussion of how effective such communication actually is, particularly over longer horizons. 12 The Riksbank's method provides a more complete picture of how we see the situation and the development of the economy. But other ways of communicating about the future have their advantages. One variant of this is the state-contingent US approach: saying that the policy rate will not be raised until the outcome for inflation has reached 2 per cent. 13 In situations where the market does not share the Riksbank’s view of the development of inflation, the US way of communicating can provide more information than inflation and interest rate forecasts.

See Söderberg (2018) for a description of the development of means of payment. 2 [25]  rates, where a small number of central banks in practice conducted monetary policy for the entire world and thus ‘lent’ their credibility. 2 In Sweden, this system of fixed exchange rates did not function so well and this led to several major devaluations. The larger central banks also lost credibility for various reasons and the global economy underwent a period of high inflation in the 1970s and 1980s. Independent central bank with inflation target replaces gold The global developments over the past 30 years have entailed major changes to the monetary policy landscape, not least in Sweden. During the 1980s, work began in the leading countries of the world economy on rebuilding the confidence in monetary policy that had been lost in the 1970s. 3 At the beginning of the 1990s, Sweden experienced a severe financial crisis following the rapid winding up of several decades of hard regulation of the financial markets. During the crisis, there was strong pressure to devaluate and the defence of the fixed exchange rate finally became untenable. When the Riksbank abandoned the fixed exchange rate, monetary policy sought a new way to promote price stability, and Sweden joined the global trend of reinforcing the credibility of monetary policy. The answer became a more independent Riksbank with an explicit inflation target, and Sweden became one of the first countries in the world to try this new path.
Aside from the substantial communication and operational challenges involved, the very generous liquidity conditions established over more than a decade could have generated pockets of vulnerability in the financial sector, as the discipline on position-taking and balance sheet management imposed by liquidity constraints in normal times had been relaxed, at least for a time.5 To manage these concerns, the MPC set out a transparent strategy for normalising monetary policy centred on its plan to run down the stock of assets accumulated through QE in a gradual and predictable manner.6 This plan has governed the quantitative tightening (QT) programme over the past year. Addressing new inflationary shocks But monetary policy cannot be put on an autopilot. Any plan has to be conditional on economic conditions, and responsive to economic shocks and disturbances.7 The MPC has flagged that it will use Bank Rate as its active instrument to address new shocks as they emerge, leaving the QT programme to run ‘in the background’ as long as market conditions permit. Bank of England  Page 6  That naturally brings me to the second rationale for the substantial tightening of the monetary policy stance over the past year: the incidence of new inflationary shocks. Two shocks in particular stand out: the very sharp rise in wholesale European gas prices over the past year; and the decline in participation in the UK labour market (against a backdrop of sagging market competition in the goods market). The rise in gas prices has four important characteristics. First, it genuinely was a shock.

Taken together with the supply chain disruptions that accord firms pricing power in supply chains, this tightness creates conditions conducive to the emergence of the second-round effects we fear. Behind the labour market tightness lies a decline in participation rates among the working age population, particularly those in the 50-65 age group. The reasons behind this decline remain the subject of controversy, but the impact of the pandemic on early retirement and long-term health, as well as underlying demographic developments, all seem to have played a role.10 Crucially – and just like the rise in gas prices – rising inactivity among the working age population represents an adverse supply shock, which adds to the difficult shorter-term trade-offs facing monetary policy.11 Looking back to a year ago, the MPC debated whether the prospective end of the furlough scheme introduced during the pandemic would release furloughed workers into the labour market and ease the tightness emerging in the labour market. This was a difficult judgment to make, given that the furlough scheme was without precedent. As it turned out, that easing did not materialise: through the middle of this year, the labour market has continued to tighten and has proved tighter than we had expected, largely owing to the adverse developments in participation that we did not fully foresee. Now that the economy has slowed (and probably entered recession), we are starting to see labour market indicators turn. Vacancies have stabilised and there are tentative signs they will fall from their historically high levels.