samchain/econo-pairs-v1 huggingface dataset:
There were in fact transitional regulations that initially meant that the banks were not able to calculate so liberally, but these were the regulations that would apply in the longer term and thus those that the banks and investors, and often the authorities, primarily focused on. Given that the banks, in Sweden and in other countries, only needed a small amount of capital, and given that it was often assumed that they were backed by government guarantees, it was highly profitable for them to take substantial risks. The banks themselves carried only a small part of these risks, while it turned out that the banks’ customers and the taxpayers had to carry the major part. In several countries – Spain, Ireland and Denmark for example, in addition to the United States – we have seen how substantial falls in the prices of the banks' assets, mainly in the form of mortgages, have led to major economic problems. The point is that the risk capital that the banks and their shareholders provide is limited to the value of the share capital. But society’s risks are greater than this. A mainstream assessment in economic research is that a national crisis in the financial system costs the economy around 60 per cent of GDP. In Sweden, this would be equivalent to over SEK 2 000 billion, or  BIS central bankers’ speeches  1  more than SEK 200 000 per Swede.

The Swedish banking system is special It is thus important to put the Swedish banking system into perspective. The total domestic and foreign assets of the four major banking groups amount to 400 per cent of Sweden's GDP. In other words, out banking system is huge. Relatively speaking, it is on a par with the banking system in the United Kingdom, for example. The Swedish banking system is also highly integrated, which means that problems in one bank can easily lead to a crisis of confidence for the entire system. If we were hit by a financial crisis, the costs to society could thus be very high. With this in mind, I intend to focus in more detail on two vulnerabilities in the Swedish financial system that are interlinked. The first is the indebtedness of the Swedish households. The second is the banks’ funding in foreign currencies and their dependence on the currency-swap market. The Swedish mortgage market has structural weaknesses An issue that has been widely discussed recently is the indebtedness of the Swedish households and the risk of a fall in housing prices. Experience in several countries has shown that indebtedness and the development of housing prices are the main explanations of why some countries are hit harder than others during economic crises.
In other words, a central bank can run the risk of being insolvent, even when it has been successful in maintaining the stability in the value of its currency. The insolvency risk of a central bank is less obvious, because of the very nature of a central bank. A central bank, even if its capital is negative and its currency liability is not matched by an equivalent value of foreign assets or valuable domestic assets, could still continue to be in business unlike a private organisation. In the case of a private organisation, if the net-worth is negative, it has to be re-capitalised as an urgent need. If it does not happen, it cannot operate as a going concern and has to be liquidated on the ground of insolvency. However, a central bank can still operate with a negative net-worth, by continuing to issue currency as long as the members of the public are willing to accept such currency in exchange for the assets held by them. It could, in these circumstances, defer and hide the need for recapitalising itself and continue to be in operation. The fact that the insolvency of a central bank is not known to the outside world does not mean that a central bank is without problems. A central bank’s operations are smooth and faultless, if its expenses are funded out of net interest income it earns on its foreign reserves or its domestic asset portfolio.

Assessing whether capital flows to emerging market economies are permanent or transitory is a challenging task. The current wave of capital inflows reflects both global push factors (including ample liquidity and low interest rates across advanced economies) as well as country-specific pull factors (including buoyant growth prospects, relatively sound fiscal positions, and decreasing country risk perceptions). Over the medium term the pull factors  BIS central bankers’ speeches  1  are likely to remain complacent, as relative to advanced economies, emerging markets are expected to grow faster, which would put upward pressure on interest and exchange rates, perpetuating their attractiveness for international capital. Although it is far from certain whether quantitative easing in several advanced economies would persist in the medium term, monetary authorities in these countries are likely to maintain their accommodative stance in the near future as well. All in all, the current outlook suggests that capital flows to emerging market economies may be a permanent phenomenon, while its magnitude is subject to change in risk perceptions. While tools to manage large capital inflows are well known, the appropriate policy mix depends on country-specific circumstances. Fiscal policy, monetary policy, exchange rate policy, foreign exchange market intervention, macro-prudential tools, and capital controls could be used to cope with the inflows, but each of them entails some tradeoffs, which are likely to be quite costly for emerging deficit countries in particular.
Substantial emphasis was  6  Kydland, Finn and Edward Prescott (1977): “Rules Rather Than Discretion: The Inconsistency of Optimal Plans,” Journal of Political Economy 85, 473-91, June 1977. 7  Skånland, Hermod (1979): “Strategier for 1980-årenes politikk” (Policy strategies for the 1980s), Sosialøkonomen No. 10, 1979. BIS Review 36/2004  3  placed on the importance of wage formation for developments in employment. Only when wage growth dropped below the level of our trading partners did unemployment begin to fall and the manufacturing sector began to pick up. Thus, the fixed exchange rate policy was not introduced in order to strengthen the internationally exposed business sector in the short term. On the contrary, it was a breach in the approach whereby monetary policy and “exchange rate policy” had been oriented towards safeguarding these sectors. A fixed exchange rate was an intermediate target for achieving low and stable inflation. The alternative of inflation targeting was not developed in 1986, and adhering to the fixed exchange rate regime was probably the best available option. The report from the publicly appointed Steigum Commission, submitted in 1988, contains a very thorough discussion of the need for a credible longterm policy, but also of the challenges involved in providing the economy with a nominal anchor after such a long period of high inflation:8 “Such a consistent exchange rate policy can yield better results in the long run than a strategy that is based on frequent devaluations or downward adjustments of the krone.

Two areas which have been identified as having the potential for efficiency gains are the education and healthcare systems. Together, these absorb around 25% of general government expenditure. A recent study by the European Commission suggests that, as far as tertiary education is concerned, the same level of output could be attained with 44% of the present level of expenditure per student. 9 The equivalent figure for the healthcare sector stands at 38%. On this basis the study concludes that even incremental efficiency gains in these two areas can lead to substantial savings. No doubt, other spending categories offer similar possibilities. As for spending priorities, the choice needs to be guided by some important criteria, such as the delivery of a minimum social safety net for those who are genuinely in need; the ending of benefits that discourage participation in the labour market; the elimination of excess demand for, and waste of, free public goods and services; and a greater focus on policies and programmes that would promote innovation and encourage entrepreneurship and investment, and thus generate long-term economic growth. The room for retrenchment may be limited in the short-term, but in the long-term all expenditure categories should come under close scrutiny. Since the outcome of such an exercise will inevitably entail a departure from established practices and the loss of acquired rights, it should ideally be based on a broad consensus among the social partners. Conclusion In conclusion, the economy has come a long way since 2004, and is now much more diversified and market-oriented.
In the process of dollarization, in which the central bank will have to buy back the local currency, a large portion of the current stock of international reserves is needed. Although the need for international reserves to support the exchange rate is eliminated, it is still crucial that the central bank retains an adequate level of reserves to help support economic shocks, as well as to finance its operations. 7. Dollarization will eliminate seigniorage earnings, which is the income of the central bank from issuing the local currency minus the cost of printing banknotes and coins. This could lead the reduced income to the government. 2  BIS Review 164/2009  4. View on dollarization  Particularly the reduction in banking costs and the perspective of low interest rates could make dollarization appear very attractive. However, it seems to me that in a stable economic environment with strong fundamentals, a reliable macroeconomic policy, and a credible central bank, the advantages of dollarization are marginal. The more so when there is a good track record of maintaining a fixed and stable exchange rate with the US dollar. The goal of maintaining a fixed exchange rate is to be able to benefit from the trade advantages of being anchored to the currency of the country with which there exist strong economical ties, while maintaining some degree of independence in terms of monetary policy. Furthermore, it cannot be denied that there is a political and social aspect to this.

Having one’s own central bank and issuing one’s own currency not only gives political status, it is often an important element of national identity. 5. The case of Aruba  Only a few months prior to Status Aparte in 1986, the Island Council of Aruba, after many studies and discussions, decided to institute its own central bank and issue its own currency, the Aruban florin, with the same nominal value as the Antillean guilder, and that is 1.79 florin to one US dollar. The prime reasons behind this decision were the perceived complexities within a monetary union with the Netherlands Antilles hen adopting the Antillean guilder and the loss of monetary independence in a fully dollarized economy. For those who are not fully familiar with these issues, I must point out that the decision of the Aruban authorities to peg the Aruban florin to the US dollar is a unilateral one, and is anchored in the Central Bank Ordinance, the Ordinance governing foreign exchange transactions, and the State Decree value of the florin. In other words, it takes a political decision to change the exchange rate of the Aruban florin vis-à-vis the US dollar. Just as the Netherlands Antilles, Aruba has been able to maintain this peg, meaning that we have experienced an unchanged rate of exchange with the US dollar since 1971.
During more recent decades, global inflation has declined. This is of course due to many factors. One is increased competition resulting from the deregulation of the financial and product markets as well as from the fact that previously closed economies are now integrated into the world economy. In Europe, the preparations for and introduction of the EMU contributed to a greater degree of price stability. In addition, the shift in economic policy in general has made a contribution, not least the introduction of inflation targets. In Sweden we chose the alternative of a flexible exchange rate combined with an explicit inflation target in 1993. Since then the inflation rate has gradually shifted down and appears to have stabilised at a low level. Inflation has been around 2 per cent a year on average since 1993, which can be compared with an average inflation rate of almost 8 per cent a year during the 1970s and 1980s. Everyone now understands that we are serious in our fight against inflation, which is important for the policy to succeed. There has been less fluctuation in the real economy than during the decades prior to the crisis in the early 1990s, and developments in both real growth and real wages have been significantly better. In addition to the introduction of an inflation target, the consolidation of central government finances and efficient wage formation have been important conditions behind this positive development. Where has this development taken us? The Riksbank’s tasks are stated explicitly in the Sveriges Riksbank Act.

Our objective is to maintain price stability. In addition, we have the task of promoting a safe and efficient payment system. The Riksbank's tasks were established in the new law introduced in 1999. This also created greater independence for the Riksbank. Decisions on the repo rate are made by the Executive Board of the Riksbank and the members of the Board are explicitly forbidden to seek or accept instructions when carrying out monetary policy tasks. Given this, I shall now discuss the Riksbank’s tasks and how we work to achieve price stability and financial stability. Formulation of the inflation target We have more precisely defined the first of our statutory tasks in the inflation target, which states that the annual rate of change in CPI should be 2 per cent, with a permitted deviation of ± 1 percentage point. The Riksbank chose CPI as the measure of inflation, partly because it is a broad price index that represents typical consumer purchases and it is familiar to the general public. In addition, CPI is used as a basis for price clauses in many types of contract. An explicit numerical target makes it easier to understand what we do. Choosing an inflation rate of 2 per cent as a target was not self-evident. Real price stability could be perceived as the inflation rate being zero per cent, but neither we nor any other country has chosen such a target.
Chart 3 shows some detail on recent behavior of the forecasts for core PCE inflation from the SPF and dispersion in long-run CPI inflation forecasts. The first panel shows the average of point forecasts since 2007 for the current year and year-ahead core PCE inflation rate. As one would expect, the current year forecast is more variable, and for the most part the yearahead forecast remains above the current year forecast after the financial crisis, consistent with the pull of anchored inflation expectations. However, both sets of forecasts are still below what some have called, based on the Summary of Economic Projections, the mandate consistent range of Federal Open Market Committee participants. 2  BIS central bankers’ speeches  The second panel of Chart 3 shows a measure of uncertainty for these forecasts. Here we can see that uncertainty increased as the financial crisis took hold but has returned to 2007 levels recently. The third panel shows that disagreement across forecasters also increased with the financial crisis and has not returned to pre-crisis levels. Much of this disagreement appears to be related to differing views on the strength of standard Phillips curve dynamics versus other approaches to inflation dynamics. The final panel shows the disagreement in 10-year average CPI forecasts over the last 20 years. As you are aware, one of the great successes of the Federal Reserve in the 1980s and 1990s was a reduction in long-run inflation expectations.

In formulating a question on wage expectations we needed to pose a hypothetical situation to gain information of direct relevance to inflation. It is easiest to illustrate this by giving you the format and exact wording of the question: We first asked individuals who reported to be working for pay how many jobs they had. We then informed them that in some subsequent questions we would ask about their MAIN job, which we defined to be the job at which they usually work the most hours. We then ask: “Suppose that, 12 months from now, you actually are working in the exact same [MAIN] job at the same place you currently work, and working the exact same number of hours. Twelve months from now, do you expect your earnings on this job, before taxes and deductions, to have gone up, or gone down, or stayed where they are now?” For those who said gone up or gone down we then asked: “By about what percent do you expect that your hourly earnings on this job, before taxes and other deductions, will have gone [UP/DOWN], 12 months from now, if you actually are working in the exact same job at the same place you currently work, and working the exact same number of hours?” As in the rest of our work we also elicited uncertainty around this wage expectation. Chart 8 shows a time series of the median response and inter-quartile range to the point prediction question along with the average uncertainty as defined above.
Stripping out the compensation for bearing risk to better reflect the service component of the financial sector could be achieved in different ways. One possibility would be to adjust FISIM using provisions as an indicator of expected losses. A broader adjustment for risk, as has been suggested by several commentators, would be to move away from the risk-free rate as the reference rate within FISIM. 3 For example, a paper prepared for the OECD Working Party on National Accounts (Mink (2008)) suggested that the FISIM calculation should use reference rates that match the maturity and credit risk of loans and deposits. This would also eliminate an inconsistency within the current National Accounts framework. Measured financial intermediation output increases if a bank bears the risk of lending to a company. But gross output is unchanged if a household holds a bond issued by the same company and thus bears the same risk. To see how such a mechanism would work, consider the following simple example. A bank lends £ to a corporate borrower at 7% per annum for one-year. The risk-free rate is 5%. The bank correctly assesses the credit risk of the corporate to be A-rated. The market spread for A-rated credits at a maturity of one-year is 1% over the risk-free rate. Current FISIM would estimate bank output as £ (Table 2). Risk-adjusted FISIM, though, would estimate banks’ output as £ An adjustment of FISIM along these lines could potentially be material.

The lack of a breakdown between client and proprietary sources of revenues is problematic when making sense of investment banking activities, both in the run-up to and during the crisis. In the run-up to crisis, FICC and equity-related activity contributed significantly to revenues, partly on the back of proprietary trading in assets whose prices were rising rapidly. Some of these gains then dissolved when asset prices, in particular for FICC, went into reverse during 2008. The story of 2009/10 is of a strong recovery in FICC and equity revenues. The source of this revenue recovery is, however, different to the boom. Instead of proprietary risk-taking, increased revenues appear instead to have been driven by market-making activities on behalf of clients. These were boosted by a bulge in client activity and wider bid-ask spreads, against a backdrop of lower levels of competition (Chart 38). It is an open question whether these returns to market-making will persist. In some respects, returns to M&A and advisory activities represent even more of a puzzle. For a start, it is well known that most M&A activity is value-destroying (for example, Palia (1995)). Advisory fees of 0.5–1.5% are typically taken, even though these activities are essentially risk-less. And in total under-writing fees are often around 3–4% in Europe and higher still in the US, having risen during the course of the crisis. The level and persistence of these fees is also something of a puzzle.
This revision takes into account the recent developments in global commodity prices. 6  BIS Review 91/2009  Monetary policy In October last year, in light of the weak economic environment and easing inflationary pressures, MAS shifted to a 0% appreciation of the $ policy band. This was followed by a re-centring of the policy band to the prevailing level of the $ in April 2009, while keeping the 0% appreciation path. At this juncture, notwithstanding the sharp rebound in the economy in Q2 2009, growth remains below trend and inflationary pressures continue to be muted. We assess that the current policy stance remains appropriate to support the economic recovery and ensure medium-term price stability, which in turn underpins confidence in the Singapore dollar. Our next monetary policy review will take place as scheduled in October. Conclusion Going forward, it will be important for central banks and regulators around the world to remain vigilant and to continue addressing financial system risks as the markets remain fragile and uncertainty remains. Singapore is not insulated from pressures in other parts of the world. We need to understand the changes and anticipate how they would affect us in order to take the right actions. MAS will continue to build on our key pillars of having sound financial institutions, ensuring well functioning markets and maintaining confidence of investors. Building on such strong fundamentals and adapting to new challenges, we can ensure we emerge stronger. Thank you. BIS Review 91/2009  7

18 It is possible that the interval between the reviews could also be slightly longer, as monetary policy objectives probably have quite a long “durability” and perhaps do not need to be reviewed quite so often. Such regular reviews would probably not lead to substantial changes over time, which has not been the case in Canada either. But now and then, the conclusion may be that a change to the monetary policy objective would be preferable, which would of course be entirely appropriate. The important thing is that the remit is formulated via objective and scientific examination and scrutiny and not determined by short-term political motives or subjective opinion moulding in the media. Before any system of regular reviews is introduced, legal aspects must of course be considered. As far as Sweden is concerned, this means, for example, that both the remit and its terms must be compatible with EU law, which states, among other things, that the central bank shall maintain price stability. Although this puts restrictions on the possible remits of central banks, there are nevertheless some degrees of freedom as regards the exact policy formulation. That the central bank should aim at maintaining price stability defined in one way or another is of course only natural. The terms of the reviews must also consider that the central bank shall perform its remit without influence from the Member State’s parliament, government or any other body.