samchain/econo-pairs-v1 huggingface dataset:
All else equal – for a given setting of monetary policy – it was also disinflationary. Qualitatively, at least, the same thing is going on right now. Public sector debt has risen significantly, across the developed world, in response to the pandemic. But, as was the case after the financial crisis, this has not been caused by any material rise in governments’ spending on goods and services, or their direct demand for underlying economic resources. It’s because tax receipts have fallen sharply and, more materially, because governments have compensated people for the impact of mandated lockdowns. Private and aggregate demand have fallen, below the economy’s supply capacity – despite these huge transfer programmes, rates of unemployment and wider measures of spare capacity are rising. And it’s in response to these disinflationary pressures that independent central banks everywhere, including in the UK, have eased monetary policy. Anyhow, having set out at some length the points I want to make, I hope I can be reasonably concise in the body of this talk. I’ll cover first the cyclicality of interest rates under inflation targeting. Via some very simple simulations I’ll then look briefly at the impact of inflation on the public finances, focusing in particular on the effect of paying interest on central bank reserves. After an equally brief canter through some of the relevant bits of UK history there’s a short concluding section.

I mention this only because some of the commentary claims not so much that QE is potentially fuelling too much inflation, and helping governments that way, but that it’s doing so by artificially depressing the cost of new debt issuance in a manner that does not (somehow) have any impact on inflation. 9  Broadbent (2014). Note that, while the impact of QE is arguably detectable in Chart 7 – the launch in 2009, for example, in the UK and the US, and again this year – it’s not as if bond yields are (or were) otherwise static. They moved around just as much beforehand, generally downwards over this period and especially so during global downturns. They might reasonably have been expected to do so in response to the pandemic, even without QE. Nor are these changes well correlated with fiscal news. As I said earlier, a model of bond yields that has them responding only to government debt and/or QE performs poorly in the data. For more on what’s depressed long-term “neutral” interest rates, see for example, Vlieghe (2018), Broadbent (2014) and the August 2018 Inflation Report. 10 If the perceived risk were that the authorities would try to “inflate away” the debt, it would be priced into conventional bonds alone (and therefore into the “breakeven” spread between the yields on conventional and indexed debt); if people worried about formal default yields on both would be affected.
In these past 15 years, the Norwegian economy has been exposed to different types of shocks. The supply side has been influenced by increased labour immigration following EU enlargement in 2004. The legacies from the financial crisis have posed challenges that monetary policy has had to address. And not least, the Norwegian economy has had to contend with wide fluctuations in the terms of trade. Chart: Performance Inflation targeting has performed well over the past 15 years taken as a whole. When inflation targeting was introduced, inflation had already come down after years at an elevated level and has since been low and relatively stable. At the same time, monetary policy has helped to moderate fluctuations in the real economy. Flexible inflation targeting has functioned well. The monetary policy framework has provided sufficient flexibility to address the shocks that have hit the economy. LONG-TERM INTEREST RATES HAVE FALLEN Chart: International interest rates In recent years, monetary policy has faced a new challenge in many countries. The interest rate level that is consistent with balanced developments in the economy has fallen. This is reflected in the low level of global interest rates. The decline in real interest rates has been particularly marked over the past 15–20 years. In 2001, when inflation targeting in Norway was adopted, real long-term interest rates were around 3 percent. Now, the same interest rates are around zero. Chart: Forces driving the fall in the global real interest rate The causes of the decline in interest rates are complex.

It may also be difficult to predict financial market reactions to very low and negative real interest rates. As early as 1967, US economist William Brainard discussed how central banks should respond to economic shocks when there is uncertainty about the impact of the policy rate on the economy. He concluded that the policy rate should be used with greater caution when uncertainty about its effect increases (Brainard (1967)). This involves a trade-off that can be illustrated graphically. Chart: Monetary policy and uncertainty This chart describes a situation where the policy rate is used to counteract the effect of a negative shock to the real economy. Two different interest rate paths are shown. The uncertainty is illustrated using bands around the expected paths for the policy rate, inflation and the output gap. In the scenario denoted by the blue line, the central bank does not take the uncertainty associated with the interest rate into consideration. In contrast, the yellow line represents a scenario based on a more cautious monetary policy response to the perceived uncertainty involved. The expected real economic costs of a more cautious response – as measured by the output gap – are somewhat higher, and inflation moves further from the target. In that respect, this is a less appropriate path for the policy rate. But there is also a benefit: uncertainty about the future path is substantially reduced. As you can see in the chart, the uncertainty bands around inflation and output have narrowed.
So it was absolutely right to counteract this danger by lowering interest rates and to generally loosen monetary policy in order for us to bring inflation to a level below, but close to, 2%. The ECB has now bought government bonds and other securities amounting to € trillion. Interest rates have been at zero for years. You are offering banks unlimited credit, as long as they can back it with appropriate collateral. The official motivation for taking all these measures was to bring the inflation rate up to just below 2%. That is the ECB’s inflation target. But inflation is currently at 1.5% and the ECB has fallen short of 2% for years. So what is the point of it all? Again, we had to respond to the risk of deflation; and we have come nearer to our aim of maintaining an appropriate level of inflation over the medium term. Our actions have had an effect: lending to households has been boosted just as much as lending to companies. So we have seen an overall rise in the propensity to invest. The negotiated wage agreements also show that our measures are having an impact. Wage growth in the euro area stands at more than 2%, and it is even slightly higher in Germany. That will push up prices. But it is slower than we had thought. Why? The level of economic growth is one factor, but another is the labour market.

You can’t keep on building up debt, sooner or later you will have to repay it. But you are not putting it correctly. Ideally, we would not only pass on our debts to future generations, but also assets that were created from that debt. That can’t work if you are living permanently above your means. When a crisis breaks out, we are pleased if countries have a buffer enabling them to make anticyclical investments and stimulate growth. Only countries that have previously pursued sound economic policies have that buffer. 3/3  BIS central bankers' speeches
In the latter part, I will share with you my thoughts on the way the Thai economy is moving forward as well as opportunities for Japanese businesses. Let me start with the first part, by reviewing what we went through last year. I believe you all agree with me that 2016 was full of unexpected events and turns. On the domestic front, we faced with a severe drought early in the year followed by a historic flood in the South around the end of the year, and of course the passing of His Majesty the late King Bhumibol, which caused all Thai people the greatest sorrow. Also, the government’s crackdown of illegal tour operators led to temporary yet significant effects on the tourism industry which had been a major growth driver of the economy in the past few years. On the external front, we saw the Bank of Japan’s adopting a negative interest rate policy in January of last year, an unease  1  over the fate of European financial institutions, the Brexit vote, and the unexpected outcome of the U.S. presidential election. Yet the Thai economy was able to weather these storms, one after another, and ended up with a 3.2 percent growth with all stability intact. The resilience reflected the underlying strength of the economy which owed partly to preemptive policies to create shock absorbers for the economy such as ample international reserves and ample banks’ capital base and loan loss provision.

The public debt to GDP ratio currently at 43 percent is projected to stand well below the sustainability ceiling under the ongoing fiscal reform. In coordination with the expansionary fiscal policy, monetary policy remains accommodative to reinforce the economic recovery. The Monetary Policy Committee (MPC) has decided to keep the policy interest rate on hold at a low level since April 2015. Yet the MPC deems that monetary conditions should remain conducive until the economic recovery becomes more broad-based and more robust. For the future, the MPC’s decision on monetary policy will be carefully balanced between accommodating economic recovery and avoiding financial stability risks that could result from an extended period of low interest rates. Ladies and gentlemen, To wrap things up before I move to the second part of my talk, the Thai economic recovery has become more broad-based with a firmer momentum compared with last year while our economy has relatively strong buffers compared to emerging-market peers in the region. Now let me turn to the way forward for the Thai economy. With the short-term trajectory of the Thai economy holding up well thanks to the first two ‘arrows’ as in the Abenomics terms, namely fiscal stimulus and monetary easing, Thailand’s long-term future depends critically on the success of the third arrow of ‘structural reforms’. This brings me to the second part of my talk tonight on the way forward for the Thai economy, and how we and our partners like Japanese businesses may work together towards sustainable economic prosperity.
This is positive news, before reform action at the national level is ultimately the most important for getting the crisis behind us. Substantial progress can be seen most clearly in the development of current account balances. Much of this was driven by an inevitable drop in domestic demand, but we have also seen strengthening exports in a global environment that is not really buoyant. This indicates that the countries’ efforts to rebalance their economies are starting to bear fruits. Part of this picture is also the partial reversal of previous losses of competitiveness, but here the pace of progress varies across countries. 5  See D. Ioannou and L. Stracca (2013): “Have euro area and EU economic governance worked? Just the facts”, European Journal of Political Economy, forthcoming. BIS central bankers’ speeches  5  Fiscal balances have also shown strong improvements. For example, Greece’s structural primary balance has improved considerably, though the fiscal situation is still facing big challenges. At the same time it is positive to see that the general upward trend in private sector indebtedness has been halted in most countries, both in the household and the corporate sector, including the financial sector. Last but not least, structural reforms have gathered pace. The countries under an adjustment programme have taken many initiatives to make their economies more flexible and marketoriented, thus sowing the seeds for better performance and increased competitiveness in the future.

Moreover, the shape of the underwater part can be difficult to judge by looking at the section which is visible above the surface. This is in my view a useful metaphor, because as the crisis gradually unfolded, a chain of unexpected problems came to the surface and vulnerabilities that were previously underestimated became apparent. Let us consider first the tip of the iceberg, namely the liquidity crisis. Tensions in money markets erupted in August 2007 when the US mortgage market, which was at the epicentre of a complex network of financial derivative products held globally, started to un-ravel. Liquidity in interbank markets worldwide dried up as market participants became paralysed by uncertainty. The key problem was that counterparty risk – which had hitherto remained  BIS central bankers’ speeches  1  limited – suddenly increased in great proportions because the distribution of risk exposures to US subprime mortgage markets was markedly opaque. This led some market segments to partially freeze and others to close completely. This is where the second layer of the iceberg comes onto the stage. The collapse of Lehman Brothers in the autumn of 2008 triggered an exceptionally abrupt re-pricing of risks globally. It led to a very significant intensification of the financial crisis; to a temporary freeze in trade financing and a global trade decline; to a curtailment of credit and domestic demand; and, ultimately, to a severe decline in global demand and output.
At the current juncture, the need for the data granularity is pertinent for all the aspects of the policymaking, including the monetary policymaking, monetary analysis and the research in this area. The recent crisis did not question the need and usefulness of the traditional aggregate economic and financial statistics (GDP and its components, aggregate credit growth, employment, total external and public debt, budget deficit etc.,), but surely revealed that it is not enough. If we want to increase the effectiveness of monetary policy measures, we should accept the more granular and micro data, as a regular analytical underpinning for the monetary policy decisions nowadays. Of course, the idea is not to act selectively with the monetary policy measures. I still believe that monetary policy tackles the aggregates. It is more about having wider understanding of why the aggregates behave in the manner they do, and more importantly, to have better understanding of the heterogeneous behavior of the different economic agents in the economy. The ultimate outcome of this should be a better understanding of how the monetary policy transmission functions, what the main constraints for more effective transmission are and what can be done to overcome the obstacles. Hence, micro and granular data should supplement the aggregate statistics, allowing us for timely detection and better understanding of “financial innovation, regulatory changes or a behavioral reaction to a changing economic environment”. Also, granular data imply higher flexibility for statisticians in responding to urgent and ad-hoc requests of the policy makers.

This new puzzling reality has triggered more profound discussion on the monetary policy frameworks with the academia and policy making community. Are the main traditional monetary policy principles -price stability as a main objective, some form of flexible IT as a most adequate strategy, policy rate as a main instrument- still valid? As crisis clearly demonstrated that price stability is not a guarantee for financial stability and that financial instability can have long lasting effects on output and inflation, the discussions focus on the need to take into account financial stability in the monetary policy frameworks. Thus, the question: Is the so called “flexible IT” enough flexible to deal with the current and future challenges or maybe as some observers have suggested, a thought should be given to the other alternative strategies such as targeting price level or nominal GDP. The discussions even touch upon the question of adding explicit financial stability objective. For example, as Borio (2016) claims ”if mandates (of the central banks) are seen as overly constraining the room for maneuver, revisiting them should not be taboo. After all, mandates are a means to an end.” Concerning the instruments, the current debates focus on whether the unconventional tool kit is temporary, as initially considered, or will become conventional tool supplementing the traditional monetary instrument. This is, in particular, in the context of the ultra-low interest rate environment and still anemic recovery.
The Governor of the Israeli central bank, Stanley Fischer, is one of the optimists and has recently likened central bank independence to marriage; like in a marriage, there are things you do together and things you do separately.8 However, regardless of which solutions gradually crystallize, I believe it is essential not to withdraw the central banks’ independence with regard to the task of price stability. The central bank should be able to decide independently over the means allocated for this purpose, such as the policy rate and other potential means. 7  This is one example of the so-called Lucas critique, which says that empirical relationships can change if the economic policy changes as the economic policy affect agents’ expectations. 8  See Da Costa (2013). 6  BIS central bankers’ speeches  Inflation targeting Let me go on to the other area I intend to discuss today – inflation targeting. As I mentioned earlier, the central banks’ independence and inflation targeting can be regarded as inseparable. They are both central parts of the monetary policy framework that was regarded as very successful, at least up until the crisis. Independence and inflation targeting can reinforce one another in both good and bad ways. Increased independence can contribute to greater credibility, which in turn can make it easier to attain the inflation target. A period of low and stable inflation creates confidence and legitimacy for inflation targeting and increases the political support for independence, and so on.

One type of argument concerns the fact that many central banks cut their rates as far as possible in connection with the crisis and were forced to go on to more unorthodox and untried means of conducting monetary policy. When monetary policy was delegated to independent central banks, this was during a period when there was in principle only one instrument – the policy rate – at the central bank’s disposal. Unlike, for instance, taxes, the policy rate was regarded as something that could be delegated to “technocrats” who have not been popularly elected. But with the monetary policy conducted by a number of central banks after having cut their policy rates as far as possible, the situation has become much more complicated. Many of the measures implemented are considered to border on fiscal policy and then it is less evident that the central bank can act entirely independently of the political system. Some people say that the financial crisis led to a “creeping politicization” of monetary policy.3 Another type of argument focuses on the expanded role that many people assume central banks will gain in future, and in some areas have already gained, with regard to attempting to prevent future crises – in the new policy area known as macroprudential supervision. According to law, the Riksbank is to “promote an efficient payments system”, but this very general wording is not linked to any specific instrument that can be used for this purpose.
Against this backdrop, it seems appropriate to dedicate this year’s conference to taking stock of the transformations that have occurred in monetary policy, if not in the objectives, at least in the tools by which these objectives are achieved. Moreover, such introspection seems crucial to our understanding of how to go forward. Indeed, it is very likely that such measures will become standard practices, with the subtitle “unconventional” eventually scratched off altogether. In fact, there are several reasons to suspect these exceptional measures are here to stay. On the one hand, it might very well be the case that we are witnessing profound structural changes that imply a new normal of much lower interest rates that we have been accustomed to –I suspect the keynote address by Larry Summers tomorrow may touch upon such issues. If this is so, then it is more likely that we will run into the ZLB in future business cycles, forcing central banks to tap upon these so-called unconventional measures time and again. On the other hand, these measures have apparently worked. Why then should we not embrace them as part of our standard set of instruments? The structure of this conference follows the logic of addressing three main aspects of the transformation in the practice of Monetary Policy in the last decade. Our first session includes three papers that tackle, from both a theoretical and empirical perspective, the impact of such unconventional measures on interest rates at different horizons and over a wide variety of securities.

It contains a commitment, for example, to reduce the burden of public sector expenditure on the productive areas of the economy, and targets a 6 percent reduction this year. It also provides new incentives for investment in R&D by the private sector and more generous allocations for the development of industrial areas. As far as the labour market is concerned, new training and placement programmes are envisaged for persons who lack skills and for the long-term unemployed, especially those interested in setting up their own business. There are also plans to establish a register for those seeking part-time employment, along with incentives that should encourage a greater take up of temporary employment as well as labour market participation after pension age. In the education sector, a wide range of measures are envisaged aimed at improving the quality of education. There are also plans to offer land to international educational institutions interested in developing campuses in Malta. This year will also see a record amount of funds allocated for higher education, including for the creation of an ICT faculty, the modernisation of science and engineering laboratories and additional investment in e-learning facilities. In this same area, a new ICT strategy has been launched which aims to establish Malta among the top ten Smart Islands by 2010. The strategy aims at improving further the ICT infrastructure, the diffusion of next generation applications and at creating the right environment for large projects that are in the pipeline, including the Smart City by Tecom Investments of Dubai.