samchain/econo-pairs-v1 huggingface dataset:
This kind of effect was reflected in the MPC’s judgment in the February 2010 Inflation Report that effective supply capacity might at the moment be reduced below  9  Nelson and Nikolov (2005) suggest that in the 1980s the average real-time output gap measure was over 5 percentage points below the average final measure, of which more than 4 percentage points was due to revisions to the level of output. 10  Discussed in detail in Neiss and Nelson (2005). 11  Greenslade, J and Parker, M (2008). 4  BIS Review 27/2010  the estimate which would result from simply looking at trends in capital, labour and total factor productivity. The MPC is prompted to look at this type of explanation against the background that at present CPI inflation (adjusted for estimates of the impact of the VAT change and of higher oil prices) is rather higher than might have been expected given the sharp fall in output. But the possible explanations discussed above suggest that the output gap has recently not been as large as simple models might suggest, and therefore higher CPI is less surprising. One reason for thinking that this effect may be pertinent is that indicators of spare capacity (Chart 3 shows one example) have fallen by less in response to the sharp fall in output than might be expected. But it is also probably true that these surveys are more difficult than usual to interpret in the wake of very large shocks to demand.

The reasons for this period of relatively high inflation are related in large part to external pressures from past exchange rate depreciation (and the exchange rate has recently depreciated further) and the rise in the oil price over the past year. Some domestic inflationary pressures remain low, as indicated by the present low rate of increase in wages (the latest data for average weekly earnings showed an annual increase of just 0.8% for total pay in the three months to December 2009). So looking beyond 2010, the latest inflation projection suggested there that inflation could be a little below target at the two-year horizon. However, the present above-target inflation background suggests little cause for anxiety about inflation expectations becoming deanchored on the downside, if the MPC were to suggest it might take a little longer to move the underlying inflation trend back to target. Indeed, that might be one way to respond to the balance of risks the MPC faces, with inflation uncomfortably high in the short term, but medium-term prospects still likely to be on the downside. There are other arguments on both sides. The remit for the MPC invites us, subject to achieving the inflation target, to consider the Government’s polices for growth and employment. In the present context, a strong argument for continuing to focus on the twoyear horizon is that would encourage policy to aim at a rate of growth in the short-term which would reduce the scale of excess capacity in the economy as fast as possible.
BIS Review 161/2008  3  The use of techniques and technology It has been fashionable for scientists to make use of scientific techniques and technology to facilitate the decision making process, when undertaking scientific inquiries. Extreme care should be exercised by scientists in this instance. Every technique has its own methodology and limitations and the scientist should be fully aware of same when such techniques are used. Inappropriate use of the techniques or wrong conclusions made on the basis of the results derived amount to misuse of science by the researchers. It also paves way for crafty individuals to use the results to their advantage and gullible individuals to get victimised. The use of econometrics has been one of the techniques employed by scientists to prove or disprove their hypotheses. This has also been one of the sources of misuse of science, either because wrong calculations are made or wrong conclusions are arrived at, due to the failure of the researcher to analyse the error term appropriately. Wikipedia, the cyberencyclopaedia, is full of the instances of such misuse of econometric methods in research. It is noteworthy to refer to two studies done by Deirdre N McCloskey and Stephen T Ziliak of the University of Iowa on the status of econometric studies in research articles published in the reputed journal American Economic Review in 1980s. They have found fault with authors for not analysing the error term properly and using the statistical term “significance” inappropriately.

It is the responsibility of the editors of journals to verify the black box and assure quality on behalf the general public who consumes the outcome of research studies. It is, therefore, disheartening that learned journals have published such papers without due reference and consideration of the methodology adopted in conducting the research under reference. Today, of course, with advanced statistical packages available, it is possible for the editors of the journals to check on the appropriateness of the statistical calculations made by the paper writers. Since the ordinary readers of scientific papers are unable to gauge the wrongful way of handling econometrics by researchers, such studies by editors before papers are published become all the more important. In view of the gullibility of general readers, the misuse of econometrics in learned papers is akin to “misselling” that one finds in the market place when a seller has not fully apprised a buyer of the risks of buying a product. This type of mis-selling by researchers could be termed “econometric dishonesty” which they are not supposed to practise. Researchers find a truth and not the truth The real world is vast and complex. Hence, it cannot be mapped out by scientific research adequately, just like neurologists are unable to map out the human brain completely. What  4  BIS Review 161/2008  the science does is to discover only a flint of the truth in the vast real world.
SPEECH DATE:  10 June 2020  SPEAKER:  Governor Stefan Ingves  VENUE:  Swedish Economics Association  SVERIGES RIKSBANK SE-103 37 Stockholm (Brunkebergstorg 11) Tel +46 8 787 00 00 Fax +46 8 21 05 31 registratorn@riksbank.se www.riksbank.se  The monetary policy toolbox* The spread of the coronavirus came as an unpleasant surprise to us all. It is now clear that the economic consequences of the pandemic threaten to be both serious and protracted. Most analysts have very weak forecasts for economic developments in the coming quarters, and in some scenarios also for a longer period to come. We are in the midst of an unforeseen economic development that needs to be met with various macroeconomic tools, and the Riksbank has an important role to play here, together with the Government, the Riksdag (Swedish parliament) and other authorities. During the initial phase of the crisis, we Executive Board members have already taken a large number of decisions to support the Swedish economy, and thus contribute to meeting the targets for economic policy, and I will comment on what we have done in more detail later on. We can note that many of the measures have major consequences for the Riksbank's balance sheet – something that will be a recurring theme in today’s speech. Today I intend to focus primarily on how the “monetary policy toolbox” needs to look to be able to manage future challenges.

With today’s integrated capital markets, we will have a global trend with lower real interest rates. An individual country with a floating exchange rate may deviate from this trend in the short term, partly for cyclical reasons and partly  5  Ingves (2019), and Frohm and Ingves (2020). 6 See Lundvall (2020). 5 [25]  because global investors may demand a time-varying risk premium to invest there, but in the longer run the real interest rate in a small open economy will follow the global trend downwards. The challenge for monetary policy is that the low real interest rate limits the monetary policy scope to manage a severe recession by cutting the repo rate. The nominal interest rate cannot continue to be cut indefinitely – a negative repo rate makes it increasingly attractive to hold cash. Even if frictions in the banking system make it possible to have a weakly negative repo rate, it is not possible in practice to cut the repo rate indefinitely. The average repo rate is the total of the average real interest rate and the inflation target – the lower the real interest rate is, the lower the average repo rate is and thus there is less scope for interest rate cuts in a recession. Figure 3: Global real interest rates have fallen in the past 25 years  Note. Per cent. Source: Lundvall (2020). Increased indebtedness Parallel with the fall in real interest rates, indebtedness has increased in Sweden and in many other countries (see Figure 4).
Financial cycles have longer frequencies than business cycles, and the two cycles tend to diverge. The interest rate appropriate for price and output stability may therefore not be consistent with financial stability. This has been the case in Asia in recent years. 23 When Asian economies recovered fairly quickly from the Global Financial Crisis, their central banks raised interest rates. This was, by a happy coincidence, congruent with the need to stem rapid credit growth that was being fuelled by improved economic prospects domestically and easy monetary conditions globally. 24 But subsequently, economic activity in Asia started slowing down, following the Eurozone debt crisis and other domestic shocks. It became untenable for Asian central banks to raise interest rates further. However, risk-seeking capital flows continued washing into the region, inducing further increases in credit and asset prices. The business cycle and financial cycle began to diverge. 25 A second constraint on the effectiveness of monetary policy to deal with domestic financial stresses is the prominent role played by international liquidity in fuelling these stresses. •  Philip Lane has detailed the strong inter-linkages between global liquidity conditions, international debt flows, and domestic credit conditions. •  Hélène Rey has observed that global liquidity conditions determined by advanced economies’ monetary policies, can, at times, override domestic monetary policy even with exchange rate flexibility. •  Maurice Obstfeld, who will speak on this subject in a few minutes, takes a less extreme view.

Borio, C and Disyatat, P (2011), “Global imbalances and the financial crisis: link or no link?”, BIS Working Papers No. 346. Eichengreen, B J and Mitchener, K J (2003), “The Great Depression as a credit boom gone wrong”, BIS Working Papers No. 137. IMF (2012), “The Liberalization and Management of Capital Flows: An Institutional View”, Staff Paper. Kuttner, K and Shim, I (2013), “Can Non-Interest Rate Policies Stabilise Housing Markets? Evidence from a Panel of 57 Economies”, BIS Working Papers No. 433. Lane, P R (2014), “International Capital Flows and Domestic Credit Conditions”, Macroeconomic Review Vol. XIII(1), Monetary Authority of Singapore, Economic Policy Group. BIS central bankers’ speeches  7  Mishkin, F S (2008), “How Should We Respond to Asset Bubbles?”, speech at the Wharton Financial Institutions Center and Oliver Wyman Institute’s Annual Financial Risk Roundtable, Philadelphia, Pennsylvania, 15 May 2008. Obstfeld, M (2014), “Trilemmas and Tradeoffs: Living with Globalization”, paper commissioned for the Asian Monetary Policy Forum (draft). Rey, H (2013), “Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence”, Proceedings – Economic Policy Symposium – Jackson Hole, Federal Reserve Bank of Kansas City. Schularick, M and Taylor, A M (2009), “Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870–2008”, NBER Working Paper No. 15512. Stein, J C (2014), Comments on “Market Tantrums and Monetary Policy”, speech at the 2014 U.S. Monetary Policy Forum, New York, 28 Feb 2014.
Section 7 of the Banking Ordinance goes on to say, among other things, that our functions include the following aspects that have a distinct “ethical” flavour: •  taking reasonable steps to ensure that authorised institutions operate in a “responsible, honest and business-like manner”;  •  promoting and encouraging “proper standards of conduct and sound and prudent business practices” ;  •  suppressing “illegal, dishonourable or improper practices”. These specific functions can be related to our general function of promoting the stability of the banking sector. Clearly, if banks are involved in illegal or improper activities (such as fraud or money laundering) this may threaten the reputation not only of the bank concerned but also of the banking system as a whole. This in turn may lead to a loss of public confidence in the banks. I believe however that our functions also imply a broader interest in the concept of “fairness” in the provision of banking services. This is not to say that the HKMA should act as a “consumer watchdog” in investigating and adjudicating on disputes between banks and their customers on matters such as the cost or quality of banking services. But at the same time we should not be indifferent to how banks treat their customers in general. If banks consistently provide a bad or unfair service, this may damage the reputation of the banks and destroy customer loyalty and confidence.

It is also necessary to ensure that the behaviour of the organisation is in practice aligned with these values and that employees buy into them, so that the organisation actually practises what it preaches. Let me try to put some flesh on these arguments with some practical examples of ethical dilemmas involving banks that have been in the news recently. I have said that banking business is becoming more complex. One aspect of this is the globalisation of business activities which may be summed up as the tendency of the world to become one market place. As banks reach out beyond their home market, they become exposed to unfamiliar business environments and customers whose ethical standards may be very different from their own. This puts extra strain on the “know your customer” policy upon which regulators are so insistent. Business dealings with Russia are a case in point. Here you have the situation of a country that is making the transition from a communist to a capitalist economy. This naturally creates profit opportunities for Western banks. It could indeed almost be argued that these banks have a moral responsibility to assist in transforming the Russian economy. Unfortunately, somewhere along the line, this transformation has gone wrong, and the borderline between what is legitimate and illegitimate business in Russia has become blurred, to say the least. In this situation, what should a bank do? The decision can obviously be viewed in strictly commercial terms. But there is an ethical dimension as well.
Higher interest rates should help shift priority to the investment projects that are the most profitable and economical. This is the best way to foster increased productivity. The aftereffects of the 1970s - when inflation had finally been subdued - provide a good object lesson as well. Many companies had grown accustomed to negative real rates;  5/8  BIS - Central bankers' speeches  too many investments had been undertaken on the assumption that real rates were negative and would remain so. This led to a painful adjustment when inflation subsided and real rates turned positive, and many firms - even some large ones - folded as a result. All of this points in the same direction: it is of paramount importance to take the reins firmly and bring inflation down before it starts to distort the economy. Honoured guests: The Central Bank's interest rate hikes have caused a marked increase in monthly debt service on non-indexed, variable-rate loans. Furthermore, fixed-rate clauses on many borrowers' loan agreements will expire this coming winter. A decisive response is needed, but first we must diagnose the problem. To start with, it is clear that there are few casualties in the real estate market - as yet. Those who have financed home purchases with nominal-rate loans in the past three years have profited on higher property prices and negative real rates. At the same time, wages have risen significantly overall.

I suspect that societal discourse in Iceland has seldom been as destructive as it was then. I was born in 1970, and I remember well how inflation, the labour market, and the exchange rate dominated the radio and newspapers. I thought a lot about this inflation boogeyman that everyone was always talking about but no one could control. Actually, I was lucky enough to have price-indexed income: I owned two sheep - one multicoloured and one black. And some of the many agricultural pricing committees calculated the present value of the lambs and their wool, which I deposited to the Stykkishólmur co-op in line with inflation each year. On the other hand, money kept in banks and savings banks burned to a crisp under the white heat of negative real interest rates. At that time, interest rates, including Central Bank rates and commercial bank rates, were in principle set by political leaders. This led to real interest rates that were negative by 10 - 20% for quite some time. By 1979, negative real rates had scorched Icelanders' savings to the point where banking system deposits had shrunk 30 - 40% in real terms since the start of the decade. As a result, banks and savings banks had steadily less money to lend. Iceland's key economic sectors were in a state of continuous financial distress. Residential mortgages were in short supply. But perhaps it is incorrect to refer to "burning up" in this context.
We expect all financial institutions to properly inform and educate their customers on security measures implemented, and how customers can and should protect themselves. At the same time, various educational and awareness initiatives are being undertaken by relevant agencies, including the Financial Education Network (FEN) and Bank Negara Malaysia, such as through Amaran Scam Facebook page (facebook.com/amaranpenipuan). We also work with other law enforcement agencies and authorities to investigate fraud incidents and provide assistance and supports to victims. PDRM’s Scam Response Centre which was set up in collaboration with Bank Negara Malaysia, MCMC and the financial industry aims to ensure that immediate action can be taken to prevent further financial losses and attempt to recover stolen funds. For this, customers should lodge their complaints to their banks and the police immediately upon discovering that they have been defrauded or scammed. We are committed to working with other authorities to further strengthen existing arrangements in ongoing efforts to combat fraud and financial crime. This includes sharing of resources, expertise and data, as well as joint preventive measures. Compliance officers in the financial industry also have a role to play by being vigilant of emerging scam typologies and ensuring that response measures remain effective against new threats. I urge the entire compliance profession, including self-regulatory bodies, to take up leading roles to identify red flags and develop guidance to mitigate these threats. In 2019, we launched MyFINet to facilitate intelligence sharing on financial crimes.

Even if liquidity abounds, it does not move from those who have it in excess to those in demand, because of the great uncertainty that exists and the decision of financial entities to hold on to their liquidity surpluses to cushion themselves against balance-sheet shocks (Allen and Carletti, 2008) or simply to benefit from buying assets at discount prices. The financial crisis is the outcome of two key phenomena. On one side is a period of stability, low interest rates, abundant liquidity, fast economic growth and an asset price bubble (figure 7). This combination of aggregate factors gives way, as often occurs, to a phase of fast credit expansion. Actually, a financial crisis is much more likely to owe to a credit expansion, but not every credit boom ends up in a crisis 4 . At the same time, many countries have recorded a real-estate boom, but not all of them have found themselves in the extreme financial system breakdown as the United States. The problem is that this has occurred within a spiral of financial innovation in very poorly regulated market segments. One important task will be to figure out why the financial systems of different economies with similar credit growth rates and housing price behaviors have had so different outcomes. The low interest rates prompted a search for better returns. Individuals with zero repayment capacity were provided loans, and to reduce the risk, said loans were securitized and often taken out of the banks' balance sheets (i.e.
Evidence of the persistence of misperceptions can be seen in the imbalances in the world, and especially the European, economies. I do not mean to imply that when economic agents make these mistakes they are behaving irrationally. Rather that in a world of intrinsic uncertainty it is far from obvious how to make decisions. The assumption of rational expectations is very helpful for economists when trying to understand the implications of their own models – it is a discipline to prevent the drawing of arbitrary conclusions. In practice, however, households are on their own in a highly uncertain and complex world where they are learning from experience. When it comes to decisions about how much to spend and how much to save, expectations of future incomes are crucial. In the absence of a complete set of markets for future consumption goods – and labour – there is no mechanism to ensure that decisions today, and so the implied plans for tomorrow, will be consistent with the possibilities available in the future. If revisions to expectations of future incomes are uncorrelated across households, then aggregate spending will be relatively stable. The problem comes when many households have similarly over-optimistic views about the future. Aggregate spending and borrowing can then be unsustainably high and lead to an inevitable correction at an unpredictable date when reality dawns. Financial markets both reflect and propagate that common degree of optimism. Sentiment and animal spirits can change very quickly.

Although there is a, by now extensive, literature on financial frictions, including attempts to incorporate them in New Keynesian models, it turns out that such extensions make little difference to the propagation of shocks, to optimal policy, or to the quantitative conclusion that overwhelmingly the most important objective remains inflation stabilisation. 12 There is no doubt that financial frictions such as asymmetric information, credit constraints, and costly monitoring of borrowers, to name but a few, are an important part of the story of how crises happen and why they impact on output. But those models do not provide a convincing account of the gradual build-up of debt, leverage and fragility that characterises the run-up to financial crises. 13  8  This specification of the objective function can be derived as an approximation to the maximisation of the welfare, defined over consumption and leisure, of a representative consumer with an infinite horizon (see Rotemberg and Woodford, 1997). 9  The frontier is named after the US economist John Taylor. 10  To implement such a policy reaction function requires an empirical judgement about the factors that drive the volatility of both inflation and output. In principle, these should include those factors in the banking and financial system, including movements in asset prices, that generate fluctuations in demand and output and affect the way in which shocks are transmitted through the economy. In practice, however, rather little attention was paid to the role of the banking system in determining inflation and output. 11  Brazier et al.