samchain/econo-pairs-v1 huggingface dataset:
Honoured guests: The news that WOW Air has discontinued operations broke this morning. With that, a part of the risk facing the Icelandic economy in the recent past has materialised. Last autumn, the Central Bank conducted a scenario analysis providing for the potential collapse of WOW. It was clear that the impact on the economy would depend to a substantial degree on how quickly, and to what extent, other airlines would step into the breach. The analysis was based on WOW Air’s size and operations in 2017. The WOW Air that closed shop this morning is about half that size, according to a very rough estimate. Nevertheless, it is clear that WOW’s collapse will have a negative impact on GDP growth, particularly in 2019. It is unlikely that this alone will push Iceland into a contraction this year, though. On the other hand, this shock comes on the heels of others, such as the failed capelin season. In addition there are risks that have not yet materialised, including the possibility that wage settlements will be out of line with price stability and the repercussions of a disorderly Brexit. If these risks do materialise, a temporary contraction cannot be ruled out. In this context, it matters greatly that we are now more resilient and better able to mitigate shocks than perhaps at any time in our history. I have already mentioned many of these strengths here today.

GDP contracted by nearly 13% from its Q1/2008 peak to its Q1/2010 trough. This caused unemployment to soar — although with a lag, as always — to a post-war high of over 8% in Q4/2010. Inflation had peaked at nearly 19% in January 2009 and had fallen back to about 12% by mid-year. At the same time, the Central Bank’s key policy rate had been lowered from 18% to 9½%. State and local governments were hit hard by the economic contraction and spike in unemployment. In 2009, the public sector deficit was nearly 10% of GDP, excluding one-off items such as the recapitalisaton of the Central Bank. Gross public sector debt peaked in 2011 at 92% of GDP. Iceland’s net external debt position was poor as well, with external debt exceeding external assets by nearly 130% of GDP at the end of 2008, excluding the estates of the failed banks. During the run-up to the financial crisis, Iceland’s international reserves equalled only 12% of GDP. They grew somewhat with the first drawdown of the loan in 1  connection with the economic programme with the IMF, to about 24% of GDP by mid-2009. Nearly all of Iceland’s reserves were financed with foreign credit. So the situation was difficult, but in addition, there was substantial uncertainty about what would happen next. Would we succeed in stopping the depreciation of the króna, which was still ongoing, partly because the capital controls weren’t working as intended?
So a price-level targeting regime which specifies that prices should grow at x per cent a year ought to lead to fewer instances in which the ZLB on interest rates bites than does an inflation targeting regime with a target rate of x per cent. This proposition is demonstrated formally by Eggertsson and Woodford (2003). It is, though, worth pointing out that there may be times when having a price-level target is likely to be unhelpful. For instance, consider the present case of the United Kingdom, where upward shocks to oil prices and indirect taxes and a substantial depreciation of sterling have led to inflation running consistently above the 2 per cent target, but at a time when the economy has also been subject to an adverse demand shock which has opened up a substantial margin of spare capacity. Price-level targeting would dictate that this excess inflation must subsequently be unwound. Consequently, inflation expectations would be lower and real interest rates higher. That in turn would exacerbate the downward pressure on demand, worsening the constraint of the ZLB. The theoretical superiority of price-level targets over inflation targets hinges on the forwardlooking nature of expectations. If expectations are not forward-looking, then their automatic stabilising feature is lost. And the presence of inertia in the inflation process also reduces the relative superiority of price-level targets. In particular, if a significant fraction of firms set their prices on the basis of past inflation, then it becomes optimal to permit some drift in the pricelevel path in response to shocks.

But the sharp increases in a range of credit spreads from the onset of the crisis in August 2007, and especially after the collapse of Lehman Brothers in the Autumn of 2008, meant that policy rates had to fall sharply merely to  3  8  Though in any case, the Bank of England’s asset purchases are indemnified against loss by HM Treasury. BIS Review 111/2010  maintain the pre-existing levels of key borrowing rates, 4 let alone lowering them in order to stimulate aggregate demand to counteract the substantial contraction over 2008 Q4 and 2009 Q1. As a result, many monetary policymakers soon found themselves with policy rates at, or near, the zero interest rate lower bound (ZLB) and were forced to turn to other means to inject further monetary stimulus. There are two 5 main options facing a central bank when it nears the ZLB, both of which seek to depress longer-term interest rates and raise asset prices: committing to keep future policy rates low; and reducing the spreads of longer-term interest rates over expected policy rates through asset purchases financed by money creation. In the canonical New Keynesian/New Classical DSGE model, being able to commit to keep policy rates low for a sustained period is the only way of further stimulating the economy at the ZLB, as the impact of monetary policy is completely summarised by the current and future path of the policy rate.
The statute’s definition of non-financial resources specifically mentions human resources – that will likely include many of you here today – and we have reflected this emphasis in our Senior Managers Regime to give specific responsibilities to key individuals in firms for the implementation of the prudential framework. Whilst we, as supervisors, may identify issues that warrant further investigation, we will not spot everything. Ultimately, it remains the responsibility of senior managers and Boards of Directors to identify and mitigate the risk that firms are not complying with the spirit of the regulation. Indeed, we hold industry to account for its compliance with the Fundamental Rules and Senior (Insurance) Managers Regime, just as much as we hold it to account for its compliance with the detail of our regulations. Solvency II contract boundary. Turning to an insurance example, Solvency II has introduced some changes to the way insurance companies calculate the reserves for their insurance products. In particular, the rules defining the ‘boundary’ of an insurance contract means that firms cannot recognise future premiums on 49 50  Individual Capital Adequacy Assessment 2.1 and Individual Liquidity Adequacy Assessment 2.1 Financial Services and Markets Act 2000, http://www.legislation.gov.uk/uksi/2013/555/article/2/made 22  All speeches are available online at www.bankofengland.co.uk/speeches  22  unit-linked savings policies that do not include any insurance cover or financial guarantee of benefits.

That should not be a problem if lenders can be confident about the availability of such retirement income, or about the scope for the borrower to downsize and use the sale proceeds to pay off the balance of the loan. But if lenders become too narrowly pre-occupied with the profile of the loan in the first 5 years (in line with MMR affordability rules), this could store up a problem for the future. Since this type of lending seems to be on the up, we have included expectations on lending into retirement in the updated version of the Sourcebook and the information we have been receiving as a result demonstrates the extent to which societies, over a short period, now engage in such lending. There is also evidence that some societies are searching for yield by creeping up the risk curve in prime residential mortgages. High LTV lending (over 90%) has increased to 4.5% of new lending in Q4 2016, from 2.8% in Q4 2015. High/high lending  48  was 3.1% of new lending in Q4 2016, up from 1.8% in Q4 2015. Most  medium/small societies have mortgage indemnity insurance, so are partially protected against this risk. 47  http://www.bankofengland.co.uk/pra/Pages/publications/statement040717.aspx See chart 1. High/high lending is over 90% LTV and over 3.50 LTI for single income or 2.75 LTI for joint income. Small societies fall below the FPC threshold for controlling high LTI lending.
Taken together with workers’ apparent willingness to accept lower real pay levels, the non inflationary rate of unemployment, or NAIRU, looks to be at a lower level than we might have expected. The MPC already built into its August forecasts the possibility of some positive labour supply shock. It took the judgement then that, contrary to previous assumptions and the experience of previous recessions, the labour participation rate would be less affected by an ageing population. And, having seen little evidence of pay pressure, it took the view that the NAIRU had fallen to 5.5% – not far off the 5% rate that prevailed in the UK before the crisis. But even relative to last August’s judgement on labour supply, pay growth still looks weak relative to models calibrated on the pre-crisis period. At the same time, unemployment is still falling more rapidly than expected. 4  BIS central bankers’ speeches  The MPC is left with a judgement whether those falls in unemployment presage an imminent sharp pick up in pay growth. Or whether the continued weakness in labour costs means we can afford to let falls in unemployment continue to run for some time yet. As always with economics, it is possible to make a good case on either side. We will know more when we see the extent of pay pressures in the big annual settlement rounds in the first quarter of next year.

The question as always is whether the risk of not waiting until the picture is clearer is outweighed by the risk of not acting in time. To sum up, some of what the MPC, at the point I joined it, thought would happen has happened. We have gone from recovery to expansion. Growth is slowing to something close to its pre-crisis average. Investment has made and is making an increasing contribution to growth. But the behaviour of unemployment, productivity and, most recently, pay continue to surprise and puzzle. More “normal” relationships between these variables may reassert themselves quickly and the pay rounds next year in particular should illuminate some of the picture. But there is also reason to believe that some changes, as in labour supply, may be longer lasting. When I started at the Bank this time last year, the MPC was half way through the process of putting together its latest set of forecasts for inflation and growth. That process is now again in train. The softening in the pay and inflation data, together with the weaker external environment, for me implies that we can afford to maintain the current degree of monetary stimulus for a longer period than previously thought. That of course will be a subject for the MPC to debate in the coming weeks. BIS central bankers’ speeches  5
Financial stress Prior to 2015, financial stress indicators exhibited a strong co-movement with the dispersion index (Slide 4). However, this relationship has since become less pronounced. The de-coupling of financial stress indicators and the dispersion index is particularly striking during the recent pandemic period. In the spring of 2020, when indicators of financial stress increased dramatically, the dispersion index of overnight money market rates remained at remarkably low levels, mainly owing to the structural shift to largely secured transactions and the high amounts of central bank liquidity outstanding even before the pandemic. The low dispersion across overnight rates during the pandemic stands in contrast to the sharp and persistent rise in term money market and commercial paper rates, which points to measurable tensions in other segments of the market (left-hand side of Slide 5). Commercial paper rates rose quickly as the demand for commercial paper from non-bank financial institutions froze at the height of the pandemic crisis. In March 2020, investment and money market funds faced heavy withdrawals from their investors due to a dash for cash and tried to sell off commercial paper before maturity to build up liquidity buffers. [12] The events of the spring therefore clearly demonstrated the extent to which the liquidity management policies of non-banks can have severe ramifications for broader market functioning and hence also for the transmission of monetary policy.

Prasarn Trairatvorakul: Managing emerging market challenges – Thailand’s and Asian perspectives Remarks by Dr Prasarn Trairatvorakul, Governor of the Bank of Thailand, at the reception of the 2011 Emerging Markets Central Bank Governor of the Year Award for Asia, Emerging Markets, Washington DC, 24 September 2011. *  *  *  Distinguished Ministers and Governors, Ladies and Gentlemen, It is my great honor to receive this prestigious award, and I would like to thank the Emerging Markets for your kind recognition. In fact, such recognition is unexpected as I simply fulfill my obligations as central bank governor. To be awarded for doing your job, I guess the job must be quite difficult or challenging. More importantly, I consider this award a recognition of the dedication of the staff of the Bank of Thailand, who have worked hard to ensure Thailand’s sustainable economic and financial stability over the years. As the Bank of Thailand enters its seventieth anniversary next year, our institution is faced with a great challenge to maintain price stability while sustaining growth in the midst of heightened global economic and financial risks. We have no luxury of taking a wait-and-see approach but to continue our best efforts to better manage the external spillovers on our economy and financial system. With continued volatile global capital movements, central banks in emerging markets need to ensure that our financial institutions and markets remain robust; that they can safely and efficiently manage foreign capital inflows as well as outflows, without disrupting the real economy.
Timothy F Geithner: Economic policy and the sustainability of US productivity growth Remarks by Mr Timothy F Geithner, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Puerto Rico Bankers Association Luncheon, New York, 12 April 2005. *  *  *  Thank you for the opportunity to speak to you today and to support the important work of improving economic and financial education. I am going to focus my remarks on two important dimensions of our economic future - the acceleration in the rate of growth in productivity of the past decade and the more recent decline in our net national savings rate. The former offers considerable promise for future growth in the living standards in the United States. The latter presents some risk and challenges to that brighter prospect. Both are areas where education, education in general and financial education in particular, can make an important contribution. The United States has been through an exceptionally good decade of economic performance. While growth in most mature economies slowed, we averaged a respectable 3.5 percent growth in real GDP a year. Inflation moderated to a rate of around 2 percent, and long term inflation expectations stayed stable for some time at quite moderate levels. The volatility of U.S. output, which declined significantly in the mid-1980s, remained low, meaning growth was smoother, with recessions less frequent, shorter and shallower.

Nurturing a sophisticated, technologically advanced workforce that is capable of contributing to the competitiveness of our society has to be one of our highest goals and most rewarding objectives. These are achievable ambitions. They would not guarantee that the future will look as good as the recent past, but they will improve the probability it will. The hardest of these are those where the politics are hard. And this is why it’s so important that we work to strengthen the constituency in the United States for good fiscal choices and good trade policy choices. Education is an important part of this. And the work of the Economic and Financial Education Alliance of Puerto Rico can play a valuable part in creating a stronger foundation for future economic growth in Puerto Rico and in the country. Thank you. BIS Review 25/2005  3
Commodity prices continued along a rising trend during the last quarter of 2009, with the improving perception regarding the global economic recovery (Figure 32). Accordingly, oil prices hovered above our assumption of 70 USD per barrel for the fourth quarter (Figure 33). Therefore, oil price assumptions stated in the previous Report have been revised in line with futures prices registered during the first half of January. In this context, the previous assumption of oil prices have been revised up from 75 USD per barrel to 80 USD for 2010, and from 80 USD to 85 USD for 2011 and thereafter (Table 1). This revision has added around 0.2 percentage points to the 2010 inflation forecasts. Moreover, in line with oil prices, imported input prices are also assumed to increase gradually throughout the forecast horizon in response to the gradual recovery in the world economy. BIS Review 31/2010  13  The October Inflation Report envisaged annual food inflation to be 5.8 percent for 2009 and 6 percent for the years to follow. However, as I have mentioned earlier in my speech, unprocessed food prices exceeded our forecasts. Therefore, we revised our assumptions for food inflation up from 6 percent to 7 percent for end-2010 (Table 1) and this added around 0.3 percentage points to the 2010 inflation forecast. Similarly, assumptions for 2011 food inflation have been raised to 6.5 percent from 6 percent. We maintain our 6 percent annual food inflation forecast for subsequent years.

In the short term, many of the uncertainties obstructing the economic outlook – and especially the manufacturing sector – are man-made – and even one-man made. Contingencies that not so long ago appeared as tail risks, such as the possibility of an escalation of trade tensions or a disorderly Brexit, have become looming threats. But uncertainty also pertains to long-term structural trends. Over the past decade, the world economy has steadily recovered from the global financial  Page 2 sur 11 crisis. But it has not returned to its pre-crisis normal. Interest rates remain at historical lows, due to a historically low level of the natural rate of interest R* ii. In the short run, this analysis – uncertainty as the first trigger of the present slowdown – should guide our ranking of policy answers. Monetary policy plays its role, but it should not – less than ever – be the only game in town. It should not even be the first game in town. The first response would be for government-driven uncertainties to be addressed directly by governments, by removing the self-induced threats to world growth. Failing that, a second answer is for fiscal policy to step in. Fiscal stimulus from countries with fiscal space would both stimulate aggregate demand, and, with targeted, quality investment, increase long-term growth. iii Wage increases in countries that have long relied on wage moderation could also help in bolstering aggregate demand and inflation. And pro-growth reforms would raise R*. Monetary policy provides a third response.
In my remarks, I will discuss the U.S. economic outlook and the implications for U.S. monetary policy. I will focus primarily on last month’s Federal Open Market Committee (FOMC) “lift-off” decision – the first increase in the federal funds rate target range in nearly 10 years. I’ll explain what motivated my vote to begin to normalize U.S. monetary policy. I’ll also offer a preliminary assessment of how things are going so far – both with respect to how the U.S. bond market reacted to lift-off and how well our new tools are working as we begin to push up short-term interest rates. Both issues are pertinent, as money market rates have spent a very long time close to zero and we have never attempted to tighten monetary policy with such a large balance sheet and high level of excess reserves. To summarize my conclusions: Generally so far, so good on both fronts. Looking ahead, I’ll talk about what comes next. No surprises here – it depends on the data. As noted in the December FOMC statement, we expect that the normalization of monetary policy will be quite gradual. But, there is no commitment here. The flow of the data – broadly defined – will drive our actions as it influences our assessment of the economic outlook and our view of the stance of monetary policy best suited to achieve our dual mandate objectives of maximum sustainable employment and price stability.

Looking at the post-war period, whenever the unemployment rate has increased by more than 0.3 to 0.4 percentage points, the economy has always ended up in a full-blown recession with the unemployment rate rising by at least 1.9 percentage points. This is an outcome to avoid, especially given that in an economic downturn the last to be hired are often the first to be fired. The goal is the maximum sustainable level of employment – in other words, the most job opportunities for the most people over the long run. Some of you may be wondering whether the risk of a recession isn’t already quite high? And, if so, doesn’t this imply a need for special care in adjusting monetary policy? After all, the current economic expansion is more than six years old – a bit long in the tooth by post-war standards. Even so, recession risk did not play a major factor in my thinking. Economic expansions don’t simply die of old age. They primarily end either because monetary policy is kept too loose for too long, thereby necessitating a subsequent sharp tightening in monetary policy to prevent a significant inflation overshoot, or because some large adverse shock hits the economy that the central bank cannot easily offset. Mitigating the first risk of being forced to choke off the expansion argues for getting started with policy normalization now rather than holding off. With respect to the second risk of unanticipated shocks, this is obviously very difficult for the central bank to insulate the economy from.