samchain/econo-pairs-v1 huggingface dataset:
It is a massive improvement, and one which has earned the UK a good deal of respect on the international stage, as judged by the Article IV reports from the IMF and the convergence reports of the European Union. Shortly after Robert Rubin announced last week his impending departure as US Treasury Secretary, he gave the Commencement Address at New York University. In it he stated the four principles for decision-making that had guided him during his career. They encapsulate exactly 2  Shiller, R, “Why do people dislike inflation?” NBER Working Paper No.5539, April 1996  9  BIS Review 63/1999  the philosophy of the MPC. First, the only certainty is that there is no certainty. Second, every decision is a matter of weighing probabilities, or the balance of risks, as we say. Third, despite uncertainty we have to decide and act. Fourth, decisions should be judged not only on the results but also on how they were made. The first three principles guide every meeting of the MPC. And the fourth is one I commend to all those who wish to make their own judgment about the MPC two years on. Institutions matter. The Bank of England is an old institution. But its success has been based on its willingness to change and adapt. In its 300-year history, probably no change has been as significant as operational independence and the creation of the Monetary Policy Committee. The Bank aims to be at the forefront of the theory and practice of monetary policy.

Since the end of 1992 output has grown at an average annual rate of 2.8%, well above the post-war average. More significantly, growth was more stable, with a standard deviation less than one-half that of output growth in earlier post-war decades. And unemployment, as measured by the Labour Force Survey, has fallen from 10.7% at its peak in 1993 to a current level of 6.3%. So since the inflation target was adopted inflation has been lower, and growth as high, as in any post-war decade, and both have been more stable. And total output in the economy has now increased for 27 consecutive quarters, the longest period of uninterrupted growth since the Second World War. Part of the credit for this improvement in UK macroeconomic performance belongs to the policy framework (both pre- and post-MPC), and part was the result of favourable economic circumstances. From 1992 to 1996, the ability to grow at above trend rates without an increase in inflationary pressure was made possible by using up the margin of spare capacity created by the deep recession of the early 1990s. After 1996, inflationary pressures were contained by lower commodity and other world prices, and the impact of a sharp appreciation of sterling. These developments have had a significant impact on inflation. And they were largely unpredicted. So, although monetary policy has faced some difficult choices over the past two years, it has benefited from an unexpected downward movement in imported inflation. These external influences have offset a much higher level of domestically generated inflation.
We’re talking about the banking sector: the European banking sector is not as strong as it should be. Just over the weekend we have seen two Italian banks getting state aid, so it was hugely criticised. Why did they get that exception, that they’re allowed to have state aid? Constâncio: It is not an exception. Everything is foreseen in the laws. BRRD, the directive on resolution of banks, was not applied because the Single Resolution Mechanism decided that these two banks did not deserve to be resolved, which according to European law means rescuing some part of the banks, and that the banks should go into liquidation. But going into liquidation means that state aid rules apply, so any public money then requires two things. It requires that shareholders and subordinated debt-holders participate in the costs, which is the case in the two banks, because they go to the entity with the bad assets…  But not senior bond holders? Constâncio: No, but the point – if the solution, for instance, under BRRD, had been applying 2/3  BIS central bankers' speeches  precautionary recapitalisation in that case also senior bond holders would not have been bailed in. So it’s not much difference from a situation of precautionary recap, which is foreseen in the law. It’s not an exception. It’s not a special privilege.

So all this discussion about potential growth, productivity going forward, all that is important to see where this slack in our economies is going, and to take, then, monetary policy decisions. Slack in the economy seems to be the buzzword also here in Sintra. Listening to the President’s speech, of course slack is super-important to determine whether we can look through a period of low inflation, so where do we stand here now? Can we look through it, or is it still worrisome, where we stand when it comes to inflation? Constâncio: It’s very difficult for any central bank to have a very firm view on the slack. All central banks struggle to interpret where exactly is the situation, and in central banks we use many variables to try to gauge what is this slack, this difference that is in the economy. What we can say now is that what we observe is that domestic factors of inflation, starting with wage costs and then also price decisions, are not responding the way we would expect in view of what are the more common estimates of this slack. So we have to ask ourselves – are these measures of the economy correct? Should we look to other variables?
My first answer to this question was a clear “no” if faith means “belief in unquestioned authority”. Central bankers should not ask just for faith, they cannot expect such faith and they cannot take faith for granted. Instead they must work hard every day to earn the trust that the public places in them. Central bankers are not super-humans, they cannot be guaranteed to be benevolent or omniscient. They will perform best within an institution that is given a clear objective and that is held accountable by the public. Conversely, the public would be ill-advised to put “blind trust” in central bankers. Price stability, preserving the value of money is the precondition for a well-functioning market economy, for economic and social stability, a free and prosperous society. Price stability is too important for society to be left “on trust” to the vagaries of the political process or to the whims of individual central bankers. It requires to build solid and strong independent institutions which are dedicated to serve and defend the common good of price stability. It is both economically sensible as well as democratically legitimate for society to delegate such a limited and well-defined task to an independent central bank. Such an act of delegation confers an obligation on the central bank to fulfil this trust and to be held accountable. Faith may be all right, but control by an attentive public will also be needed.

On the one hand, it allows diverse experiences, arguments and points of views being brought to the table. On the other hand, there is a shared responsibility for the common decisions taken. It is not a single individual but the entire institution which is behind these decisions. To my mind both aspects are crucial for a strong and independent central bank. For these reasons accountability and transparency are both more easily and more appropriately implemented in the relationship between the public and the central bank as an institution, rather than primarily with respect to individual central bankers. In this relationship the public acts as a principal who delegates the task of monetary policy to the central bank as its agent. The act of delegation can be one-off, of a constitutional nature, or it can be periodically renewed. In both cases it is crucial that the central bank can be held accountable for its performance by the public. This can be achieved in different - more or less formal - ways. Even if no explicit contractual elements and specific sanctions are incorporated in this relationship the delegation of decision-making authority to an independent central bank establishes a kind of quasi-contractual relationship. The delegation of authority represents an act of trust on the part of the public and it represents a promise and an obligation on the part of the central bank to fulfil its mandate. So, should we - should you - have faith in central banks? The answer is yes and no.
Again simplifying, two features are added to the diagram to bridge from firms’ so-called ‘output’ – or wholesale – prices to the retail prices which the Bank targets. First, as well as being an input to producing firms, some imports are directly consumed by households. Second, distributors – including, most obviously, retailers – add another mark up, reflecting their own costs and desired profit margins. Changes in the economy affecting any of the links in this (stylised) chain will have a bearing on inflation dynamics. The challenge is to separate out cyclical, or temporary, factors from the more structural influences that over some periods alter firms’ costs and margins. That is important for policymakers, as to form a view on the medium-term outlook for inflation we need to distinguish between short-lived and persistent influences. Monetary regime change The monetary framework is one such structural influence. One of the most encouraging features of the post-1997 landscape has been that, as well as inflation tracking the target fairly well, expectations of inflation have been well anchored to the target (Chart 4). Uncertainty about future inflation has also fallen3 (Chart 5 ). It was different in the past. A characteristic shared by the various monetary regimes tried out by UK governments during the 1970s and 1980s was that no one could easily judge what rate of inflation the authorities were trying to achieve – or, therefore, have much idea about the outlook for inflation.

If so – if risk premia were systemically lowered – that would tend to reduce firms’ cost of capital and increase households’ financial wealth. Alternatively, the price of risk may just be temporarily low, possibly too low.8 The upshot is that we cannot yet be confident about the durability and macroeconomic implications of the changes seen in the financial environment. Mark ups It is a commonplace that competition has intensified. This is associated with ‘globalisation’. The facts are familiar. World trade has grown relative to world output (Chart 13). A wide range of emerging-market economies, notably in Asia, have become material participants in the world economy. Some UK businesses have relocated part of their production, or outsourced to firms operating in markets with cheaper labour costs. Partly reflecting these developments, although also increased specialisation, the share of imports in UK business investment and in consumption has steadily risen (Chart 14). 6  ‘The financing environment for smaller firms over the last decade’, in Finance for Small Firms – An Eleventh Report, Bank of England, 2004. 7  Hewitt, A. (2003), ‘Asset Finance’, Bank of England Quarterly Bulletin, Summer 2003. 8  See, for example, section 2 of ‘Financial Stability Conjuncture and Outlook’ Financial Stability Review, December 2004. 4  BIS Review 16/2005  These developments make markets more contestable. As does effective competition policy. An example in recent years was the car market, where prices converged with those prevailing on continental Europe.
In particular, the non-performing loan ratio for lending to the resident private sector, in business in Spain, stood at 5.3% in June 2019, down 8.7 pp from the high levels recorded in December 2013. Foreclosed assets, meanwhile, have fallen continuously during the years of recovery; a total cumulative reduction of 50% from the peak levels recorded in 2011 had brought them down to below € billion by June 2019. As I was saying, this progress should not cause us to forget that the Spanish economy has significant imbalances, among which the still high levels of unemployment, government debt and external debt stand out. Since the start of the recovery progress (of varying intensity) has been seen on these fronts, but the magnitude of the imbalances built up in terms of the stocks of these variables means that they still amount to vulnerabilities (to turbulence in international markets, for example). At the same time, the Spanish economy’s growth capacity continues to be constrained by its very poor productivity dynamics, which is particularly worrying insofar as it will also be adversely affected by the impact of population ageing. Main challenges facing the Spanish economy  Turning to focus on the labour market, as you all know, the Spanish economy’s rate of unemployment remains very high, at around 14%. Also, around 45% of the unemployed have been seeking work for a year or more, a factor that reduces their likelihood of success.

Such assessments are usually allocated according to each member’s contribution to the CCP’s default fund. This way of allocating assessments, provided it is transparent, gives members a degree of predictability about what will happen. Nevertheless, they could expose surviving clearing members to sudden and very large liquidity demands which they would have to source in the market, and could thus have strong contagion effects14 – even pushing members to close out their contracts and leave the CCP, rather than face the spiralling costs of remaining a member. For these reasons, such tools may prove problematic for bank supervisors. Another tool which is frequently mentioned in discussions on CCP recovery is variation margin gains haircutting (VMGH). In my view, this tool may have a certain advantage over ex post cash calls, in the sense that it would alleviate the need for members to raise extra  12  While central clearing protects banks against idiosyncratic risk, it can reduce their incentives to protect themselves from non-diversifiable shocks, hence the need for regulation to provide a strong incentive framework. For a theoretical discussion, see Biais, B., Heider, F., and Hoerova, M., “Clearing, counterparty risk and aggregate risk”, European Central Bank, October 2011. 13  For a discussion of loss-allocation rules, see also Elliott, D., “Central counterparty loss-allocation rules”, Bank of England, Financial Stability Paper, No. 20, April 2013. 14  See Heath, A., et al. (2015, op. cit.) for a simulation of the impact of different loss allocation mechanisms.
At the same time, just as a good meal not only requires high-quality ingredients but also an excellent cook and recipe, high-quality monetary policy analysis also requires excellent staff and an appropriate analytical framework. The importance of the latter can hardly be overstated. While central bankers around the world are “data fiends” in their heroic attempts to minimise errors of inference and to make robust decisions amidst uncertainty about the true structure of the economy, the availability of a vast wealth of raw data from diverse sources may mean that policy-makers become constantly bombarded by conflicting signals. Amidst such a flood of information, policy runs the risk of losing its bearings and of over-reacting to the latest indicator. It is against this background that the ECB decided to adopt an analytical framework within which all possible sources of information - statistical as well as judgemental - can be brought together in a coherent fashion while at the same time allowing for alternative and diverse models and perspectives of the workings of the economy. In our view, this framework enables a wealth of information to be “digested” routinely without compromising the ultimate objective: to maintain a clear sense of direction. In order to give a structure to the diverse sources of information, a structure that is consistent with our view of the monetary policy transmission mechanism, we have organised our analytical framework into “two pillars”. These consist of two complementary perspectives on the determination of price developments.

Let me elaborate a bit more on these three themes: the need for an encompassing and integrated set of data, the achievements of, and outlook for, euro area statistics and the ECB’s framework for analysing this information. Monetary policy and the need for an encompassing and integrated set of data If we lived in the world of macroeconomic textbooks, a few simple models with a limited set of variables would be a sufficient basis for monetary policy-making and the statistical requirements could be kept to a minimum. As we all know, the real world is much more complex and, therefore, information needs are much more elaborated. In such a world, a rich and integrated set of data is needed because macroeconomic models, synthetic indicators and unconnected statistical indicators are often too rough a guide to the current and likely future development of the economy. As mentioned before, central banks have to take decisions under conditions of constant uncertainty. The economy is never at rest. A multitude of disturbances of diverse nature affect the economy all the time: financial shocks, demand shocks, supply shocks etc., and these cannot easily be distinguished in real time, let alone foreseen. In their attempts to identify disturbances and track how they spread through the economy, central banks are assisted by models. But too often, existing models are not sufficiently sophisticated instruments to identify shocks. For one thing, their focus may be too narrow, in a way that makes them  BIS Review 67/2004  1  unduly selective.
8  When the Desk conducts a reverse repo transaction, it sells securities held in the System Open Market Account (SOMA) under an agreement to repurchase the securities at a predetermined price. The difference between the sale price and the repurchase price, together with the length of time between the two legs of the transaction, implies a rate of interest (the reverse repo rate) paid by the Federal Reserve to its counterparty. The transaction leaves the size of the SOMA securities portfolio unchanged but shifts some of the liabilities on the Fed’s balance sheet from bank reserves to reverse repos while the trade is outstanding. A repo (as opposed to a reverse repo) is the opposite. Before the crisis, repos were more common than reverse repos. The eligible collateral for the Desk’s repo and reverse repo operations is set forth in the FOMC’s Authorization for Domestic Open Market Operations. 9  Autonomous factors are those components of the Federal Reserve’s balance sheet that affect reserve balances but are not directly under the central bank’s control. The largest of these, by far, is currency in circulation. Others include U.S. Treasury deposits, Federal Reserve Bank “float,” and overnight reverse repos conducted with foreign central banks. See, for example, Hilton (2008). 10  The 2005 speech by then-Governor Bernanke that I noted earlier provides great detail on a day in the life on the Desk prior to the financial crisis.

Some infamous examples include the Bangladesh Bank incident, the hacking of ATMs in Taiwan and various other countries, Target’s credit card data breach which resulted in data of  1  over 70 million credit cards stolen, Equifax’s data leakage in which the company was fined 700 million USD, and more recently the case of Capital One Bank in which over 100 million customers’ data were leaked. Thailand is also not immune to these cyber threats. A state bank’s ATMs were hacked, customers’ data from 2 large banks were leaked on the Dark Web, and the WannaCry ransomware outbreak. In addition to attacks on financial institutions, customers’ behavior and lack of cyber threat awareness also pose significant cyber risks as well. Social media scams through LINE or Facebook Messenger in which attackers pretend to be the victim’s acquaintance, asking for a favor to transfer money; or users’ submitting their bank account information to questionable, illegal gambling website from which their data eventually got leaked a few weeks prior are some examples of cyber-attacks that hinge on the user’s inexperience or lack of awareness of online threats. As such, I don’t think it is an over exaggeration to say that cyber threats have kept many bank executives and regulators awake at night given the nature of these threats that can occur anytime and anywhere without warning, and the significant damage they could cause.
A period of overshooting would be followed by a period of undershooting, and vice versa 26 . Assuming complete credibility, this would mean that following an adverse demand shock, households and firms would expect sufficient policy stimulus to plug the gap left by deficient demand and, on top of that, to generate a little excess demand in order to raise inflation above its average and so bring the price level back to its targeted path. The consequent rise in near-term inflation expectations would, it is argued, make the job of offsetting the initial adverse shock somewhat easier. I wonder, though, whether price-level targeting might, in fact, endanger credibility by the extra complication it would bring to the formation of inflation expectations. When asked about what rate of inflation we are trying to deliver over the long run or cyclical horizons, the MPC’s answer is virtually  26  A short or a long horizon could be set for ‘correcting’ deviations from the targeted path for the price level. See King, M.A., 1999, ‘Challenges for monetary policy: new and old’, Symposium on ‘New challenges for Monetary Policy, Federal reserve bank of Kansas City at Jackson Hole, Wyoming . BIS Review 46/2006  9  always the same: 2% on the CPI (potentially departing from that only on rare occasions when, after a major supply/cost shock, we wanted to get inflation back to target more gradually than usual).

I do not think it is coincidence that arguably the two most significant monetary policy decisions taken over the past year – the decision to reduce Bank Rate by 1.5 percentage points in November and the announcement in February that the Committee had sought approval to use the Asset Purchase Facility to conduct large scale asset purchases – occurred in months when the Inflation Report was published. The quarterly forecast round provides an opportunity for the Committee to reassess thoroughly its view of the economic outlook. This view is then explained and communicated via the Inflation Report and in particular through the projections for GDP growth and inflation contained in the Report. In both November and February, the judgement of the Committee was that, without further substantial easing in monetary policy, there was a significant risk of a large and persistent undershoot of the inflation target. Given the transparency of these judgements and the clarity of the target, it would have been courageous not to have taken the decisions we did. The inflation target is symmetric. Likewise, the discipline it imposes on the MPC is symmetric. The inflation target has been instrumental in ensuring that monetary policy has responded boldly and decisively to the events that have unfolded since the autumn. And, when the time comes, the clarity and transparency of the inflation targeting framework will ensure that the Committee takes the right decisions on the way back up, however courageous or unpopular those decisions might appear.