samchain/econo-pairs-v1 huggingface dataset:
The difference between the red and blue yield curves shows what would happen to interest rates for various maturities if the repo rate path were to become credible. This would cause the blue yield curve to shift upwards to the red one. A three-year interest rate would thus increase by approximately 60 basis points, and a five-year interest rate would increase by closer to 90 basis points. Normally, the Riksbank’s wish and endeavour is that the repo rate path is credible, and incorporated into market expectations and market pricing. In this way, monetary policy has the largest possible impact. This time, it seems to be less desirable. If the repo rate path were to become credible, long interest rates would rise drastically, which would mean a substantial tightening of monetary policy in relation to the present situation. In my opinion, the repo rate path in the main scenario should be one that we want to immediately become  6  I have extended the repo rate path beyond the three-year horizon so that the repo rate rises steadily up to a long-term level of 4 per cent. BIS Review 158/2010  7  credible, if it is not already credible. That is, the repo rate path of the main scenario should be chosen such that is best stabilises inflation and resource utilisation when it is credible. Why such a modest krona appreciation in the main scenario? The main scenario includes a fairly modest appreciation of the krona. Why isn’t it bigger?

The grey broken curve called “Low interest rate path without initial increase” shows an interest rate path with an unchanged repo rate in October and then a gradual increase up to around 2.7 per cent at the end of the forecast period, that is, the repo rate path advocated by Karolina Ekholm and myself at the monetary policy meeting in October. Figures 9c and 9d show with the same colours the corresponding forecasts for CPIF inflation and unemployment, all conditional on policy rates abroad according to market expectations. Figures 9c and 9d clearly show that the low repo rate path without initial increase provides the best outcome, with a CPIF forecast closest to the target and with the lowest unemployment forecast. This is also illustrated with the aid of the mean squared gaps in Figure 9b, in which this repo rate path results in a point corresponding to a lower mean squared gap for both the CPIF and unemployment. The mean squared gap for the unemployment gap is calculated on the basis of an equilibrium unemployment rate of 5.5 per cent. The low repo rate path dominates, even if the equilibrium unemployment rate is assumed to be as high as 6.5 per cent. Judging from this figure, an even lower repo rate path could provide an even better outcome for CPIF inflation and unemployment.
Therefore, in our eyes, and in the eyes of many other leading central banks, transaction-based interest rates appear to be the way forward to create more reliable reference rates. SWESTR – the Riksbank's response to the shortcomings in STIBOR It is in this context that the Riksbank has undertaken to calculate and publish a fully transaction-based reference rate, SWESTR (Swedish krona Short-Term Rate). The test period for SWESTR ended at the beginning of September, and SWESTR can now be used in financial contracts. The Riksbank calculates SWESTR based on transactions in Swedish kronor that are made in the money market from the current business day to the next business day (overnight, O/N). The transactions reported to the Riksbank come from nine of the Riksbank's monetary policy counterparties, all of which are banks. These are the largest and most active banks in the money market in Swedish kronor.3 The banks report money market transactions of different types and at different maturities, but only those transactions where the counterparty deposits money overnight with the bank, without obtaining collateral, form the basis for the calculation of SWESTR. The banks shall report their transactions with a wide group of counterparties. Transactions with other banks, financial companies, non-financial  4 [8]  companies and the Swedish National Debt Office are used for the calculation of SWESTR. SWESTR shall thus reflect the prevailing level of interest rates in the overnight market in Swedish kronor. There are several differences between SWESTR and STIBOR.

As a result, the costs of the event were relatively low and order was quickly restored in both new currency markets. Despite the U-turn in decision-makers’ communication, the situation had been easy to read by markets, citizens and economic agents in general. A few years later, the Czech economy was hit by a severe currency and financial crisis. Until 1996, the Czech Republic maintained a fixed exchange rate regime and generally stabilisation-oriented (restrictive) macroeconomic policies. However, entry to the OECD and related capital flow liberalisation created an Impossible Triangle. This led to twin deficits and attempts to “half-free” the exchange rate regime similar to those made in the Bretton Woods case. Additional factors such as data errors and an insufficiently credible first reform package only exacerbated the problems. Serious worries of the Czech National Bank about its credibility and reputation contributed to its mistakes. A change of government made acts of government less predictable. The defence of the exchange rate was ended by the central bank without the knowledge of the government. This caused a wide rift to open up between these two authorities. A general lack of coordination of macroeconomic policies, and possibly too restrictive monetary policies, culminated in a severe financial crisis. The outcome was a very costly event that could, with the benefit of hindsight, be judged as avoidable to a significant extent. General U-turns made by policy authorities contributed to these high costs.
First, we have less of a handle on their impact than we do changes in short-term policy rates and, as I just indicated, that impact may well be less when markets are functioning normally. Second, if the central bank routinely deals in large quantities of government debt, it may find itself more open to pressure from the fiscal authorities, while market participants are more likely to fear that the debt will be permanently monetised. That brings me naturally to the topic of unwinding our present large stock of asset purchases. We have committed to maintaining the stock, including reinvesting the cash flows associated with maturing gilts, at least until the first rise in Bank Rate. But at some stage thereafter, as part of the transition back to normality, we expect to start running down the portfolio and withdrawing the associated bank reserves. In principle, we could do this just by letting the gilts mature. However, as Chart 5 demonstrates, it would take a long time to run off organically in its entirety because of the relatively long average maturity of the gilts held: the weighted average maturity of the portfolio is more than 12 years. So more active sales may be called for at some stage,  2  For the United Kingdom, see: Michael Joyce, Matthew Tong and Robert Woods (2011), “The United Kingdom’s Quantitative Easing Policy: Design, Operation and Impact”, Bank of England Quarterly Bulletin, 51(3), pp.200–212.

Our central view is that the margin of slack is presently around 1–1½% of GDP, though I should stress the considerable degree of uncertainty around that estimate. I should also stress that this is a short-run concept, relevant to inflationary pressures a year or so ahead, and does not incorporate any endogenous improvement in productivity that may materialise in the wake of faster growth over a rather longer horizon. We have said that we are aiming to  2  BIS central bankers’ speeches  close this gap over the next two or three years, while keeping inflation at around our 2% target. We have also said that when Bank Rate does rise, it is likely to do so only gradually and to a level that is likely to remain materially below its pre-crisis average of 5% for some while. That reflects: the continuing headwinds from public and private de-leveraging and continued weak growth in the euro area; continued downward pressure on global interest rates from high Chinese net savings; and the undue compression of risk premia during the run-up to the crisis. Let me now turn to asset purchases, our preferred tool for adding stimulus when Bank Rate reached its effective lower bound. Under this programme, the Bank acquired £ billion of longer-term UK government debt – equivalent to around 25% of annual GDP – comprising £ billion purchased between March 2009 and February 2010 and another £ billion acquired between October 2011 and November 2012.
Given this combination of immediate physical risks and prospective transition risks, the Bank of England has become increasingly active consistent with our financial stability and prudential mandates. In 2015, we examined the impact of climate change on the UK insurance industry.6 General insurers and reinsurers are on the front line of managing the physical risks from climate change, and they have responded by developing their modelling and forecasting capabilities, improving exposure management, and then adapting coverage and pricing accordingly. One of the lessons they have taken on board is that yesterday’s tail risk is closer to today’s central scenario. Sadly, with respect to climate, history repeats not as farce but as tragedy, with growing frequency. Despite the sophistication of insurers, there are some gaps in their risk management. The Bank is increasingly focused on cognitive dissonance in some insurers whose careful management of climate risks on the liability side of their balance sheets is not always matched by similar considerations on the asset side. With that in mind, we expect firms to consider stress testing and scenario analysis as part of their assessment of the impact of climate risk on their balance sheet and broader business strategy. This will also be reflected in our own market-wide insurance stress test exercises. For banks, the financial risks from climate change have tended to be beyond their planning horizons.

The TCFD delivered – to the Hamburg G20 Leaders’ Summit last year – final recommendations for voluntary disclosures of material, decision-useful climate-related financial risks.9 Suitable for use by all companies that raise capital, the recommendations:   Include disclosure of governance, strategy and risk management;    Establish consistent and comparable metrics and targets applicable across all sectors, as well as specific metrics for the most carbon-intense industries;    Encourage use of scenario analysis in order to assess the potential impact of the risks and opportunities of the transition to a low carbon economy on strategy and financial planning. The combination of the Paris Accord and the TCFD has led a clear transition in thinking and action about climate-related financial risks. Consider the changes in demand, supply and impact of climate disclosure. The demand for climate-related financial disclosure from the providers of capital has increased significantly. Current supporters of the TCFD include three-quarters of the world’s globally systemic banks, 8 of the top 10 global asset managers, the world’s leading pension funds and insurers, major credit rating agencies, the Big Four accounting firms, and the two dominant shareholder advisory service companies. These financial firms are responsible for managing nearly $ trillion in assets (or 20% more than global GDP). With climate-related shareholder resolutions tripling last year and litigation risks rising, the incentives for companies to disclose and manage climate-related risks have increased dramatically. Not surprisingly, the supply of climate disclosure is responding.
BIS central bankers’ speeches  3  than we were in 2008. Internationally, we have agreement on key minimum standards for dealing with large globally systemic banks. But the hard work of implementing the new powers, policies and standards is just beginning. Banks have to make the transition to the new world. This will require sustained effort on the part of the regulatory and of the political authorities. It will not be costless. And as the costs of ensuring orderly failure of large banks in bad times will fall on those banks in normal times, there will be pressure to skimp on what is necessary. I want next to review briefly the progress we have made on the five main planks of this programme of work. (i) Improved resilience The first plank is to keep banks out of trouble in the first place. This means ensuring that banks have sufficient resilience as going concerns to absorb losses without getting into trouble or having to cut back lending to the economy in times of stress. For the larger, systemic banks, it means having even higher resilience, not so much because of the extra risks they run but because of the greater damage they can do to the economy if they go wrong. I do not want to go into great detail on this today, but some headline numbers are worth highlighting.

This is not just a case of making sure that those that buy bank debt that can be bailed in realise the risks of the instruments they have purchased. It also means making sure that creditors understand the resolution strategy of the institution to which they have lent money. Unprotected depositors in institutions that have no bail-in debt should be clear that in the event of trouble, they stand next in line after shareholders when it comes to absorbing losses. Conclusion As I’ve tried to show, the question of how to deal with failing banks and who pays is not new. But the answers have changed over time. We no longer think we should rely on a diet of bread and water, unlimited liability, Shakespearian recitals, ordinary depositors or the taxpayer to bear the burden of failed banks. Our success can never be absolute. We can’t expect to insulate fully all institutions from all external shocks, however large.14 We have, however, in my view, put in place the legal, financial and practical arrangements to resolve banks of all sizes. But it will only be true if we implement the new regime on resolution fully. Both regulators and industry have an incentive to do so. If, next time there is a crisis, authorities face the same unenviable choice as in the crisis, if taxpayer bailouts cannot be avoided, then the case for breaking up banks and making them much, much simpler will be very hard to resist.
After adjusting for unconventional policy there’s greater monetary policy divergence than implied by a simple eyeballing of the currently highly synchronised global rates cycle. And there remains the prospect of a further widening. In other words, domestic economic conditions – conditions affected by domestic monetary policy – still very much matter. None of this diminishes the considerable challenges of returning inflation to target in the face of global developments. There are profound secular and cyclical disinflationary forces at work in the global economy, and for economies like the UK their impact is being reinforced by exchange rate movements which will drag inflation down further at the policy horizon. Moreover, as events of the past few weeks have reminded us, a variety of global factors can affect global financial conditions and influence the neutral rate of interest. Central banks must take these Disparate Confounding Dynamics (DCDs) into account when setting policy. 2 Even for those economies with the strongest recoveries and the best functioning financial systems, they mean that the policy rates consistent with returning inflation to target will likely need to rise in a gradual fashion and to a limited extent despite robust domestic demand and firming domestic costs. For the UK at least, global DCDs influence but do not dictate policy. 1  Subramanian, A and Kessler, M (2013), “The hyperglobalization of trade and its future”, Global Citizen Foundation working paper 3, June.

19, 20 Some have argued that this confers a particular responsibility on US policy makers. Yet US policy is not the sole determinant of global rates. Many recent movements in US long-term government bond yields have appeared to be influenced by ECB monetary policy actions. 21 This is in line with some recent evidence that funding conditions in other financial centres, notably the UK and the euro area, affect funding conditions globally and, therefore, the cross-border supply of funds. 22 Moreover, it is the divergence of monetary policies itself rather than the stance of one central bank in isolation that points to more volatility in exchange rates and asset markets with associated effects on global liquidity conditions. 23  17  Not surprisingly in light of its importance, issues related to pass-through are the subject of intense work at the Bank of England. 18  Bruno and Shin (2015). “Cross-Border Banking and Global Liquidity,” forthcoming in the Review of Economic Studies. 19  Rey, Helene (2013). “Dilemma not Trilemma: The global financial cycle and monetary policy independence” proceedings of the Federal Reserve Bank of Kansas City Economic Symposium at Jackson Hole. 20  Cesa-Bianchi, Cespedes and Rebucci (2015). “Global Liquidity, House Prices, and the Macroeconomy: Evidence from Advanced and Emerging Economies”, Journal of Money, Credit and Banking, Vol. 47, Issue S1, No. 1. 21  See May 2015 20150323a.htm. 22  Cerutti, E., S. Claessens, and L. Ratnovski (2014): “Global Liquidity and Drivers of Cross-Border Bank Flows,” IMF Working Papers 14/69, International Monetary Fund.
Of course, accommodating global monetary and financial conditions also contributed to highrisk appetites, high leverage and search for high yields. At this point we do not know the scale of economic fallout from the ongoing financial turbulence, nor its duration. It is, however, conceivable to expect some regulatory backlash by major industrialized countries. For example, just a few days ago the U.S. Treasury Department announced a new plan to overhaul existing financial regulatory structure to make it compatible with modern financial instruments. This is of course just a beginning and we should not be surprised to witness similar steps by other countries. Distinguished guests, Let me turn to the Turkish case and discuss recent developments in Turkey. As you may remember, throughout 1990s the Turkish economy was shaped by high and chronic fiscal deficits, high inflation rates and a weak institutional environment. The economic crisis in Turkey in 2001 was not only the lowest point of this period, but also a major turning point for our economy. Since then we have witnessed a very ambitious reform agenda taken towards reaching better economic governance. I classify these steps under four main categories: (1) Monetary policy, (2) Fiscal policy, (3) Financial stability and (4) Structural reforms. Taking into consideration the fact that I am a central banker, I think it will not be surprising if I start with the topic of monetary policy. Central Bank independence that was granted by Law in 2001 was the key step on the monetary policy side.

And last but not least, good governance requires a fair legal framework and impartial enforcement of this legal system that protects property and individual rights and constitutes a strong base for prudent policy-making. The rules need to be preset, predictable and applied equally regardless of whether the parties in dispute are domestic or foreign, individuals or state. Enforcement of rules in speedy and impartial manner would create a self-fulfilling environment, where adhering to contracts voluntarily becomes the norm and there is little need to formally recourse to the legal system. How can we match governance practices with the current financial turbulence? It is too early to make a judgment about the institutional failures that have led to current financial turbulence, but we have a few clues on what went wrong. Lack of transparency and accountability is at the top of the list. In retrospect there were some important gaps in the U.S. regulatory structure that caused poor underwriting and some fraudulent practices in the sub-prime mortgage sector. Parties in the originate to-distribute chain did not have incentives to generate and provide information on the quality of assets. We can add poor investor duediligence practices and poor performance of credit rating agencies to that list. Public disclosures required of financial institutions were not enough to shed light to the risks  2  BIS Review 38/2008  associated with their on- and off-balance sheet exposures. Public authorities were way behind in assessing and regulating the complex financial instruments created by financial engineers.
At high levels of reserves, the responsiveness of rates to changes in reserve levels is fairly low, and the demand curve is said to be “flat.” As excess reserve levels decline, the responsiveness of rates increases. At low levels of excess reserves, the overnight rate responds sharply to small adjustments in the level of reserves, and the demand curve is considered “steep.” 20 Despite some of the recent upward moves in overnight rates, I don’t believe we’ve reached the “steep” portion of the demand curve, where aggregate reserves are scarce. Let’s run through some places where evidence of aggregate reserve scarcity might be found. To begin with, if we were closing in on the “steep” part, I might expect to see substantial above-IOR lending in the unsecured overnight markets, as at least some banks each day found themselves short of reserves and had to borrow them from other banks. In fact, the current amount of such 18  Assuming that all banks place an equal value on the next dollar of reserves, aggregate reserve scarcity is when that value is above the rate at which reserves are remunerated, and aggregate excess reserves is when that value is at or below the remuneration rate. 19 The classic paper on this topic is Poole (1968). A number of recent efforts have been undertaken to modernize the Poole model by adding interest on reserves and other features of modern money markets. Two notable examples of this are Schulhofer-Wohl and Clouse (2018) and Afonso, Armenter, Lester (2018).

The monetary policy implementation framework continues to provide the FOMC with excellent control over overnight money market rates, and has proven to be flexible, including through the technical adjustment, in the face of new developments. Thank you for your attention. I look forward to the panel discussion. ###  29  The Federal Reserve is working on enhancements to the overnight bank funding rate (OBFR) to capture wholesale borrowing activity, which moved from offshore to onshore branches. Collection of these data began on October 1, 2018. There will be a review of the new data and an evaluation of how its inclusion will impact the OBFR before its expected addition. 30 For more information about this survey, see Senior Financial Officer Survey, August 29, 2018. 13