samchain/econo-pairs-v1 huggingface dataset:
Svante Öberg: Monetary policy and the elusive resource utilisation Speech by Mr Svante Öberg, First Deputy Governor of the Sveriges Riksbank, at Handelsbanken, Stockholm, 25 May 2009. The original speech, which contains various links to the documents mentioned, can be found on the Sveriges Riksbank’s website. *  *  *  Resource utilisation is falling rapidly and is unusually low. But it is difficult to determine exactly how low it is. And it is difficult to ascertain what consequences the low resource utilisation will have for inflation and monetary policy. These are the questions I intend to discuss in my speech today. I have divided my speech into four parts. I shall begin by discussing the importance of resource utilisation for monetary policy and pointing out the differences as to how the targets for inflation and resource utilisation can be expressed. After that I shall discuss different measures of resource utilisation. I shall go on to describe monetary policy and resource utilisation at present and I shall conclude with a few summarising comments. I wish to make clear from the start that I will not make any new assessment today of the appropriate direction for monetary policy in relation to the Monetary Policy Update that was published at the end of April. I also want to point out that the picture I paint of resource utilisation and monetary policy here is not necessarily shared completely by my colleagues on the Executive Board of the Riksbank.

One can draw the conclusion from this figure that resource utilisation in terms of the GDP gap has recently  2  BIS Review 66/2009  fallen below the normal level and that we are assuming that it will remain negative over the coming years. There are both advantages and disadvantages in measuring resource utilisation with the aid of the GDP gap. One advantage is that this method does not require any other information than historical GDP data. One disadvantage is that when using this method it is difficult to estimate the trend and thereby the GDP gap at the end of the time series and it is precisely the GDP gap at the end of the series that is the most interesting part. This problem becomes particularly troublesome in a recession like the current one. This is because experiences of previous recessions imply that some of the output capacity that is lost after a fall in resource utilisation never returns when the upturn comes. Quite simply, it is easier to wind up companies than to build them up. To some extent these problems are dealt with in the Riksbank’s calculations, in that the calculation of the trend level of GDP is affected by the outcomes for years of weak GDP growth and by parts of the fall in productivity being assumed to be permanent.
One is that it could jeopardise central bank’s credibility by giving rise to accusations of financial and fiscal dominance. A second side effect is that maintaining a larger balance sheet than necessary increases the Eurosystem’s exposure to credit and duration risk. The probability and extent of net losses are significantly higher the larger the amount of long-term fixed-rate assets the central bank holds on its balance sheet. [7] A third side effect relates to the functioning of financial markets. The APP, together with the pandemic emergency purchase programme (PEPP), has left a visible footprint in euro area financial markets. The Eurosystem’s outright holdings of euro area sovereign bonds currently amount to more than a third of the outstanding market (Slide 3). Mobilised collateral for longer-term refinancing operations further increases the encumbrance of government bonds through monetary policy operations. As a result, the “scarcity premium” that market participants must pay to obtain these assets has often been considerable, both in the repo and the bond market (Slide 4). [8] The inception and expansion of the Eurosystem’s securities lending facility have been able to partly alleviate these strains. [9] Yet, in times of heightened uncertainty, when the demand for safe and liquid assets rises sharply, market conditions tend to visibly deteriorate. Last year’s surge in market volatility is a case in point.

Reducing the size of our balance sheet is warranted for three reasons: first, to regain valuable policy space in an environment in which the current large volume of excess liquidity is not needed for steering short-term market interest rates; second, to mitigate the negative side effects associated with a large central bank balance sheet and footprint in financial markets; and third, to withdraw policy accommodation to support our intended monetary policy stance. I will then explain the effects of the reduction of our balance sheet on broader financial markets. While QT will not simply be a reversal of QE, investors anticipating balance sheet run-off are likely to have gradually reversed some of the risk premium compression induced by our asset purchases, thereby contributing to the timely return of inflation to our 2% target. Why quantitative tightening? Let me start by discussing the rationale for QT in more detail. Regaining policy space when excess liquidity is higher than needed The first reason relates to the ECB’s operational framework. After the start of the APP in 2015, we de facto moved from a corridor system for steering short-term market rates towards a floor system, as the large increase in excess liquidity caused money market rates  to converge to the rate applied by the Eurosystem to its deposit facility (the deposit facility rate, or DFR; Slide 2). [4] In the ongoing review of our operational framework, we are analysing whether in the future we will operate under a floor or a corridor system.
In a context requiring, first, that the funds be used nimbly to shore up the recovery and, second, a lasting impact to encourage the structural transformation, the ongoing assessment of the projects financed using those funds is the most effective answer to squaring these short and long-term objectives and to strengthening the necessary public fund control mechanisms. Ongoing assessment allows for experimentation with new ideas and transformative projects. It also minimises the danger of continuing to channel funds to projects which are attractive a priori, but which do not yield the expected results. Making mistakes can sometimes be a part of long-term success; however, persisting in the error never is. Spain and Europe need Next Generation EU to be a success, on account of it representing a chance to ready ourselves for the future and making the case for further European integration. Indeed, the need for the European funds to help foster our economy’s transformation is also determined by the requirement that the funds be used in conjunction with reforms addressing the structural defects that, according to the evidence, have weighed down growth and hampered our society’s well-being for decades (e.g. those related to low productivity and the poor functioning of our labour market).

We can do so adopting a culture of permanent assessment of the actions arising from our responsibilities; providing other economic policymakers with the best analyses and proposals for improving economic growth and citizens’ well-being; assisting and collaborating with the research community in the use of our information to contribute to that objective; and promoting – also in collaboration with the public and private sectors – the economic and financial education of the public at large, enabling them to sufficiently understand and appreciate public policies and take the best financial decisions for themselves. This is part and parcel of our commitment and service to Spanish society. 1 For a discussion of the role of the independence of economic regulators, see P. Hernández de Cos  (2020), Testimony by the Governor of the Banco de España before the Audit Committee on Democratic Quality, the Fight against Corruption, and Institutional and Legal Reforms. 2 See S. Albrizio and J. F. Geli (2021), “ An empirical analysis of the determinants that can boost Next Generation  EU’s effectiveness”, Analytical Articles, Economic Bulletin 4/2021, Banco de España. 3 For a discussion on the importance of the use of administrative data by researchers, see M. Arellano (2018), “El  acceso a los microdatos administrativos públicos: la nueva frontera de la investigación económica y social”, XVIII Aula de Verano Ortega y Gasset, UIMP, Santander, 20–21 August. 4 See the Banco de España “Survey of Financial Competences”.
(c) The dotted black line is a suggested trigger level for contingent capital calibrated by minimising a loss function which takes into account both Type I and Type II errors. Type I error is the probability that conversion occurs despite capital not being required. Type II error is the event that conversion does not occur despite capital being required. The loss function places greater weight on Type II errors. Note that the loss function takes into account the full range of banks, not just the average score for each set. (d) 30-day moving average of market capitalisation. 24  BIS central bankers’ speeches  Table 1: Estimated subsidy for UK and global banks $  Contingent claims / Kou(a)  Ratings(b)  2007  2008  2009  2010  2007– 2010 average  2007  2008  2009  2010  2007– 2010 average  UK  134  354  622  250  340  9  51  178  58  74  Global  496  1,308  2,294  924  1,256  33  211  528  197  242  a) Calculated using an extension to the Merton (1977) model developed by Kou (2002). It models changes in banks’ assets as being normally distributed with upward and downward “jumps” designed to reflect the possibility of extreme movements in asset values, and “fatten the tails” of the resulting distribution. This model is fitted to the prices of options written on the four largest UK banks’ equities.

3, June 1958, pp. 261–297. Morgan, D P and Stiroh, K J (1999), “Bond market discipline of banks: is the market tough enough?”, Federal Reserve Bank of New York Staff Reports, No.95. New Economics Foundation (2011), “Quid Pro Quo: Redressing the privileges of the banking industry”. Organisation for Economic Co-operation and Development (2010), “Corporate Governance and the Financial Crisis: Conclusions on emerging good practices to enhance implementation of the Principles” available at http://www.oecd.org/dataoecd/53/62/ 44679170.pdf Oxera (2011), “Assessing state support to the UK banking sector”, Oxera Consulting Limited. 16  BIS central bankers’ speeches  Perotti, E C, Ratnovski, L and Vlahu, R (2011), “Capital Regulation and Tail Risk”, Centre for Economic Policy Research Discussion Paper, No. 8526. Reinhart, C M and Rogoff, K S (2009), “The Aftermath of Financial Crises”, American Economic Review, vol. 99(2), pages 466–72, May. Hickson, C R and Turner, J D (2005), “Corporation or Limited Liability Company”, Encyclopedia of World Trade since 1450, Macmillan. House of Commons Treasury Committee (2010), “Too important to fail – too important to ignore”, Ninth Report of Session 2009–10, House of Commons 261-i. Turner, J D, “Liability Regimes, Shareholder Capital, and the Genesis of Bank Regulation in Britain”, Mimeo. Turner, J D (2009), “ ‘The last acre and sixpence’: views on bank liability regimes in nineteenth-century Britain”, Financial History Review Vol. 16, Issue 2, pages 111–127.
And this seems to have fed anxiety, among firms and their employees, about the challenges in coping with these forces. These changes have taken place in the context of a longer-term increase in income inequality in the United States. Incomes have grown more rapidly for the richer and better educated than for those at lower points of the income scale. BIS Review 84/2007  1  These changes have, in turn, contributed to some erosion in the strength of the political center in the United States on a range of economic policy issues. Surveys suggest diminished support for global trade. And there is more divisiveness on a range of issues such as tax policy and the appropriate role for government in the regulation of economic activity. Over the last half century and more, the U.S. economy has enjoyed some substantial and important relative advantages. Among the most important of these are the quality of our best universities; our openness to change; the incentives provided for innovation; the strength of property rights; the depth and liquidity of our world-class financial markets; and a record of stability in macroeconomic policy. These relative strengths of the U.S. economy remain significant and substantial. But the rest of the world is getting better at establishing the important conditions for dynamism and innovation. These improvements are not a reflection of U.S. weakness, nor are they themselves a threat to U.S. competitiveness.

To complete this list of policy challenges that are important to U.S. competitiveness, let me conclude with a few brief points on the broader imperatives of macroeconomic policy. The United States faces very substantial gaps between our fiscal resources and our expenditure commitments. The size of these gaps, these deficits, have been masked in recent years by a substantial, unanticipated and probably transitory surge in revenues, and by an unusually long period of unusually low long-term interest rates, in part the consequence of foreign official capital flows. But these gaps remain substantial and the U.S. fiscal position is unsustainable. Time does not help. We are going to have to begin to develop a political consensus on the mix of policy changes that can bring our commitment and resources more into balance, if we are to preserve confidence in our market and our long-term economic prospects. One of the most important roles for public policy is the maintenance of a stable macroeconomic framework that enables firms to make long-term investment decisions. In this sense, the fiscal policy choices ahead for this country will be critically important to the overall environment in which U.S. enterprises operate. The business community will play an important role in shaping the policy response to these longer-term economic challenges. These reforms will have a long fuse. The benefits will be shared broadly, rather than captured specifically by particular sectors of the economy.
But I have to emphasise that one thing remains unchanged, and that is Singapore’s commitment to promoting the growth of the Asian Dollar Market, and the international business of banks based in Singapore. Establishment of Financial Centre Advisory Panel (FCAP) 26. Indeed, a strong partnership between the MAS and industry leaders and practitioners has been key to the development of Singapore’s financial sector, and how we got to where we are today. It will be even more important in the coming years, with changes accelerating in the financial world. 27. MAS will therefore strengthen its dialogue with the financial industry. We will set up a Financial Centre Advisory Panel (FCAP) comprising senior leaders from the banking,  1  For example, as a D-SIB, the foreign bank will be required to conduct recovery and resolution planning to reduce the potential for failure and promote their resolvability for an orderly winding-down. BIS central bankers’ speeches  3  insurance and asset management industries. The Panel will provide guidance in two broad areas: •  First, overall financial sector developmental strategies. Industry leaders and experts will provide advice on opportunities across the various financial activities, and propose initiatives to ensure continued vibrance in Singapore’s financial centre. This includes building synergies across different activities – for example, spurring the development of the capital markets by building on the asset management sector to catalyse equity, fixed income and FX trading activities. •  Second, we have to build deep skills and expertise relevant to the future and harness technology.

Would two loans of £ each to the same customer represent a higher level of activity than one loan of £ Methods for measuring FISIM at constant prices are based on conventions. In the UK, real FISIM is calculated by applying the base-year interest margins to an appropriate volume indicator of loans and deposits. The latter is estimated by deflating the corresponding stocks of loans and deposits using the GDP deflator. This method means that any volatility in the current price measure of FISIM caused by changes in interest margins does not feed into the real measure. (c)  Refining the measurement of FISIM  While the introduction of FISIM into the national accounts was an important step forward, it is not difficult to construct scenarios where the contribution of the financial sector to the economy could be mis-measured under this approach. A key issue is the extent to which bearing risk should be measured as a productive service provided by the banking system. (i)  Adjusting FISIM for risk  Under current FISIM guidelines, which use risk-free policy rates to measure the reference rate, banks’ compensation for bearing risk constitutes part of their measured nominal output. 2  4  1993 System of National Accounts, paragraph 6.128: http://unstats.un.org/unsd/sna1993/toctop2.asp. BIS Review 95/2010  This can lead to some surprising outcomes. For example, assume there is an economy-wide increase in the expected level of defaults on loans or in liquidity risk, as occurred in October 2008.
Those who are in charge of monetary policy have strong tools at their disposal. Their responsibility is always heavy, due to the fact that their actions or failure to act impact on the entire population. In normal times, however, the impact of these strong tools is rather less acute, and the effects of monetary policy – both intended and non-intended – are usually easy to foresee. At the moment, this is more difficult because we are obliged to use unusual instruments. Consequently, at times like this the SNB bears a particularly high level of responsibility. We are therefore subjecting the impact of the measures we have taken so far to repeated and very fundamental review, and are approaching this task with a completely open mind. Conclusion I would like to conclude my presentation to you as follows. The SNB is fighting for price stability with total conviction and great commitment, while at the same time keeping the development of the economy in view. Within the context set by our monetary order, the SNB does its utmost, through its monetary policy, to ensure that our money retains its value, thereby remaining a sound pillar of our society. This is the SNB’s most important contribution  BIS central bankers’ speeches  7  to ensuring the long-term attractiveness and competitiveness of the Swiss location, as well as the social cohesion of our population. By their nature, central banks tend to be conservative institutions.

In other words, estimated risk weights are very likely to be least reliable when regulators are most reliant on them. By construction, when it matters most, risk weights are likely to be long noise and short signal. 4  BIS central bankers’ speeches  Theoretical objections to risk weighting are no less deep-seated. One key issue is aggregation (Masera (2012)). Regulation has focussed on ever-more granular and precise risk estimates for individual assets. Fewer attempts have been made to consider correlations across broad asset classes, other than in parts of the trading book. Yet it is these correlations which fundamentally determine risk across a banking portfolio. Indeed, this is perhaps the key lesson finance theory has taught us over the past half-century. There is a cruel irony here. One of the great pre-crisis mistakes was to look at risk in the financial system institution by institution, atom by atom. Doing so resulted in regulators missing the systemic crisis of a lifetime. Yet an asset by asset, atom by atom approach to risk measurement still lies at the heart of the post-crisis regulatory framework. A second conceptual problem with risk-weighting is that it takes no account of the collective consequences of banks’ asset allocation decisions. For example, no account is taken of the externalities, positive or negative, that banks’ portfolio choices may give rise to. This may lead to risk weights being mis-calibrated from the perspective of the financial system as a whole and the wider economy.
Much hinges on the speed with which domestic confidence returns. As is entirely appropriate, there is a debate at the MPC over the relative merits of near term stimulus to reinforce the expected recovery in UK growth and inflation. 19  All speeches are available online at www.bankofengland.co.uk/news/speeches  19  On the one hand, there is a modest but rising degree of spare capacity in the UK and core inflation remains subdued. There are downside risks from global growth and the possibility that uncertainties over future trading relationships could remain entrenched. With the relatively limited space to cut Bank Rate, if evidence builds that the weakness in activity could persist, risk management considerations would favour a relatively prompt response. On the other hand, global growth is showing tentative signs of stabilising. The global manufacturing PMI has returned to expansionary territory, helping push the composite to a six month high in December. Past global monetary policy stimulus is gaining traction and global financial conditions are supportive. Early indicators, from financial market prices and the limited number of business surveys since the election, suggest that there has been some reduction in Brexit-related and domestic policy uncertainties. The labour market remains tight and domestically generated inflation remains generally firm. And total monetary policy space is larger than conventional measures would suggest. In the coming weeks, the MPC will watch closely surveys of business and consumer confidence (including intelligence from our Agents) as well as global developments. We will also undertake our annual supply stocktake.

One reason why equilibrium interest rates are low at the moment is because the distribution of economic outcomes has become more skewed to the downside. In this regard, low rates are a consequence of riskier environment, not the cause of higher risk premia. 26 For example, see Ihrig, J, Klee, E, Li, C, Wei, M, and Kachovec, J (2018), ‘Expectations about the Federal Reserve’s balance sheet and the term structure of interest rates’, International Journal of Central Banking, vol. 14(2), pp. 341-390. 21  All speeches are available online at www.bankofengland.co.uk/news/speeches  21  V. Winter – Monetary policy in a persistently low r* world Looking ahead, deep structural changes in economies are creating disinflationary pressures at a time when conventional monetary policy space is already limited. Inflation targeting frameworks will be tested in new ways. It feels like winter is coming. In all likelihood, equilibrium interest rates will remain low for a prolonged period as many of the structural forces that have pushed them down are set to persist for years. Moreover, these could likely to be reinforced by flaws inherent in the international monetary and financial system27 and the disinflationary effects of advances in technology and the changing nature of commerce.28 The principle structural force leaning in the other direction on inflation is that the shift towards deglobalisation with the potential fracturing of the global trading system.