samchain/econo-pairs-v1 huggingface dataset:
Higher interest rates can also reduce the probability of a banking sector crisis through the same leaning channel (𝜙𝑖 < 0), but do not increase resilience directly. The banking sector only provides a proportion (𝑏) of credit to the economy, the remaining (1 − 𝑏) share is provided by the market based finance sector (𝐵1𝑀 ). While higher interest rates have the same effect in reducing credit and the crisis probability in both sectors, increasing the CCyB leads to a leakage of credit from the banking sector to the market based sector, so the marginal effect of a higher CCyB on marketbased finance is to increase its growth rate (𝜙𝑠𝑀 > 0). This increases the probability of a crisis originating in the market based finance sector (𝛾1𝑀 ). In addition, there is no resilience benefit from a higher CCyB working to reduce the probability of crises originating in the market-based finance sector. The overall probability of a financial crisis is equal to the sum of the probabilities in each sector, weighted by their market-share. Both sectors are subject to shocks (𝜉1𝐵 , 𝜉1𝑀 ). A single policymaker sets both instruments, the CCyB and the interest rate, to minimise the joint loss function given below under discretion.

In the scenario where all credit is the economy is provided by banks (the blue line), the policymaker can use this tool in response to a 15pp increase in credit growth in the domestic economy over three years to reduce the probability of a crisis to well below 1% before the cost (in the form of lost output) becomes material. However, if 25% of credit in the economy is provided by market-based finance (red line), the policymaker struggles to reduce the probability of a crisis significantly below 2.5% as tightening the countercyclical capital buffer does not reduce the provision of market-based finance. Acting locally to address the risks of market-based finance  So how can we address risks emanating from global, market based finance? This is the subject of several panel discussions over the course of this conference, and indeed major international workstreams including of the FSB. So rather than pretend to have the answers, I will limit myself to two simple observations about how policymakers acting in their own best interest can help reduce these risks. The first is that by building strong domestic institutional frameworks and deepening domestic capital markets, recipients of global flows can reduce their susceptibility to volatility in those flows. Central bank credibility, a robust macroprudential framework, and fiscal stability all reduce the risk of a sudden stop, and liquid domestic capital markets make it easier to absorb larger inflows. As such they are prerequisites to being able to enjoy the benefits of open capital markets sustainably.
This is why, for instance, the minutes taken at the monetary policy meetings are normally published two weeks after the meetings. In addition, the Chairman and Vice Chairman of the General Council have the right, according to the Sveriges Riksbank Act, to attend the meetings of the Executive Board, which they normally make use of. 3 The purpose of this is in principle that they are monitoring that things are done correctly, on behalf of the Riksdag and the general public. We decided only a couple of weeks ago to make some changes in these areas. I shall return to this shortly. But let me first state another aspect as to why openness and clarity are so important to us. Target fulfilment – openness and clarity contribute to efficiency There are not merely democratic reasons as to why central banks have become more open and clear. Many central banks have seen greater transparency as a means of more easily attaining their objectives and of making monetary policy more efficient. Openness and clarity can even here enable us to better meet the requirements made by our principal. Firstly, openness and clarity regarding monetary policy make it easier for economic agents to be convinced that the interest rate decisions made are really intended to attain low and stable inflation. This contributes to greater credibility and to anchoring expectations around the target.

So allow me to briefly pause here and explain clearly my own intentions with regard to the next halfhour. The theme of my speech here today is how the Riksbank’s independent position, together with a high degree of transparency and efficient communication, contributes to long-term target fulfilment and credibility for monetary policy. Key words in this context are evaluation and accountability. It is these different pieces of the puzzle that I now wish to discuss in more detail. The Riksbank’s position – from bank crisis in the 17th century to independent central bank The fact that we are in this room today is actually rather appropriate. I can tell you an interesting fact here – that the Riksbank and the Riksdag had a fairly intimate relationship, in geographical terms, for over 70 years, from the early 20th century up until 1976. The Riksbank was then located in the building across the street, where the Riksdag now has its assembly hall. Riksbank officials thus sat almost side by side with the people’s elected representatives. Now I do not believe one should draw any far-reaching conclusions on the degree of independence for monetary policy on the basis of geographical location – other factors decide this. But for those who have any doubts, I can point out that the Riksbank is now at a more “suitable” walking distance from the Riksdag, a few blocks away. BIS Review 62/2007  1  The Riksbank is formally an authority under the Riksdag.
Mervyn King: The MPC ten years on Lecture by Mr Mervyn King, Governor of the Bank of England, to the Society of Business Economists, London, 2 May 2007. I am indebted to Alex Brazier, Iain de Weymarn, Richard Harrison, James Proudman, Chris Salmon, Tim Taylor and Ryland Thomas who have worked closely with me on this lecture. *  *  *  Not long before his untimely death, David Walton invited me to deliver this lecture. Anyone who knew David will be desperately sad not only that he is no longer with us to ask important questions and make us smile at his dry humour, but even more so that he is unable to take his place at the deliberations of the Monetary Policy Committee to which he contributed so much in such a short space of time. David had a wonderfully clear mind, an independence of thought, and was a warm and generous colleague. He is, and will continue to be, deeply missed. David asked me to look back on the experience of the first ten years of life with the MPC and to try to learn from that experience. So, in his memory, that is my aim this evening. Although the announcement in 1997 of independence for the Bank of England was a bolt from the blue, it was a long time in the making. During the 1970s inflation in the United Kingdom averaged 13% a year and peaked at 27%.

The stability charts – 3a and 3b – show the stability of growth and inflation in the G7 countries in the two time periods. In these charts a good performance is to be near the origin of the axes, close to the bottom left hand corner of the chart. The rather poor performance of the United Kingdom prior to 1997 is evident, as is the remarkable degree of stability in the United Kingdom relative to the rest of the G7 after that date. Of course, correlation does not imply causation. And there is little reason to suppose that the MPC is responsible for the higher average growth rate over the past decade. That more likely reflects structural changes in the UK economy, associated with other policy reforms. It is the stability of the UK economy which appears to be the most marked contribution of the MPC. That is a surprise. The conventional wisdom is that, although there is no long-run trade-off between the levels of inflation and output growth, there is a trade-off between the stability of inflation and of output growth. Inflation can be kept closer to the target only by larger changes in interest rates and bigger fluctuations in output growth. Policy-makers thus face a choice between different combinations of inflation and output growth volatility, which, when plotted on a chart, describe a “stability possibility frontier”.5 They can choose a point on that frontier depending on the relative importance they place on stabilising inflation and output growth, but they cannot move inside it.
In terms of output, third quarter data showed a marked slowdown that continued into the beginning of the fourth quarter, but which has tended to dissipate according to incoming information. The most recent data show that this deceleration has continued, albeit at a slower pace than forecast. Likewise, as regards financial conditions, after a shift towards a tighter situation at the end of last year, more recently we have returned to a more normal situation. In particular, the monetary market frictions that occurred in late 2011 were quickly overcome after the Central Bank adopted transitory measures to provide greater liquidity. To go into more detail regarding Chile’s current economic situation, allow me to provide some background on the challenges we face in light of last year’s economic developments in our country. BIS central bankers’ speeches  1  The Chilean economy in 2011 In early 2011, several emerging economies, among them Chile, experienced an increase in inflationary pressures due to an episode of rises in international prices of commodities, particularly oil and some foodstuffs. Additionally, in Chile domestic demand, output and employment recovered quickly, helping close output and labor market gaps. Likewise, in the face of rising prices of oil and foodstuffs, the private sector’s inflation expectations rebounded, reflecting a greater risk of inflation. Core inflation measures remained at reasonable levels, below the minimum level of the target range. In this setting, the Central Bank Board decided to speed up the normalization of monetary policy during the first half of the year.

We have taken the view that such fine-tuning is an unnecessary complication at this stage. If the MPC want to undertake further purchases, it would be straightforward to simply buy more gilts financed by issuing commercial bank reserves. 10  It was important that the gilts were not lent against cash, as that would have undone some of the intended impact of the initial asset purchases. 11  The 3 month commercial paper purchased had nearly all matured by the end of the programme, and had already been largely replaced by additional gilt purchases. 12  The cumulated dividends are not the profits on the portfolio, even before funding costs. Depending on such factors as the yield curves at the date of issue and purchase, and the maturity of the gilts; the dividends and market prices of the gilts are connected. See the DMO website for more information on changes in gilt prices: http://www.dmo.gov.uk/documentview.aspx?docname=publications/investorsguides/pig201204.pdf&page=in vestor_guide/Guide. 4  BIS Review 135/2010  Eventual exit strategy At this time, it is not clear whether the next step with the asset purchase programme is most likely to be to sell the assets back or to buy more. The Bank is prepared for either but it might be particularly helpful to set out in advance a few thoughts on the eventual exit strategy. After purchasing £ of assets in just under a year, the MPC paused its programme of asset purchases in February 2010.
In  2  The effects are dependent on, for example, how the long-term interest rate is assumed to move when the repo rate is adjusted. In example 1 the estimates are based on the short- and long-term interest rates moving to the same extent, which has largely been the case in recent years. BIS Review 61/1999  6  such a situation it is therefore reasonable to base policy on an inflation forecast that excludes the direct effects on interest expenditure. 8. Permanent and transitory inflation A schematic account Initial position  4  Economic development stable, underlying inflation UND1X - in line with the target. 3 UND1X  Government and Parliament lower indirect taxes CPI-inflation is lowered for a period of twelve months but underlying inflation, measured with UND1X, remains stable. 2 CPI  1  0 0  1  2  3  Year  Example 2: altered indirect taxes In this example economic activity is stable and inflation in line with the target. Suddenly a cut in indirect taxes, for instance the tobacco tax or the property tax on private houses, is announced and approved. The cut is assumed to have a downward effect on CPI inflation of 0.7 percentage points in the current year. This, however, constitutes a one-off shift in the price level, not an effect that alters inflation’s trend. All else equal, 12 months later the rate of inflation will shift back up to the earlier level.

It is difficult to completely capture a sequence of events where changes in different variables tend to reinforce one another in economic calculations. If the households have also been overly optimistic - irrational - in their expectations, it becomes particularly difficult to capture these effects. It is therefore important for forecasters to make more “qualitative” assessments in addition. Another reason for not trusting solely to formal models based on historical data is that the effects of structural changes that have taken place fairly recently can easily be underestimated. Let me give an example that to some extent captures these problems. During the years from the mid-1980s to the beginning of the 1990s, substantial changes were made in the economic structure and there was a clear correlation between the change in house prices and the change in household borrowing. The decline in house prices during the financial crisis at the beginning of the 1990s was largely due to an unfavourable combination of changes of both a structural and a cyclical nature. In connection with the deregulation of the credit markets during the second half of the 1980s, household borrowing increased substantially and the loans were largely used to buy houses. The fairly high and fluctuating inflation rate contributed to real interest costs after tax often being low, sometimes even negative, which in practice meant that one could at times make a profit from borrowing.
Wage growth is expected to come down this year from a high level in 2008. Lower corporate profitability,  8  BIS Review 37/2009  rising unemployment and lower consumer price inflation will probably result in low negotiated pay increases this year. The export sector has been particularly hard hit by the global downturn. Traditional exports have fallen markedly since autumn last year. A contraction in the world economy will result in a substantial decline in Norwegian exports ahead. Moreover, due to the marked fall in commodity prices, export prices are now very low. Expensive and reduced access to credit, high interest expenses and uncertainty about developments ahead amplified the downturn towards the end of 2008. Private consumption fell markedly, the decline in housing investment accelerated and mainland business investment started to fall. The downturn in the world economy and the abnormal conditions in  BIS Review 37/2009  9  financial markets are expected to continue to mark the Norwegian economy ahead. Mainland GDP is projected to contract by 1 per cent between 2008 and 2009. Norwegian government finances are sound with substantial net wealth, although the surplus will be reduced by the fall in oil prices. The automatic stabilisers in the national budget together with discretionary fiscal policy will stimulate the mainland economy by the equivalent of 5 per cent of GDP from 2008 to 2009. Fiscal policy is assumed to become less expansionary between 2010 and 2012.

The projections for the key rate, inflation, output and other variables are based on our assessment of the economic situation and our perception of the functioning of the economy and monetary policy. If economic developments are broadly in line with our projections,  5  See Staff Memo 2008/3 from Norges Bank. BIS Review 37/2009  13  economic agents can expect that the interest rate path will also be approximately in line with that projected. On the other hand, the interest rate path may shift if the economic prospects change, or if the effect of interest rate changes on inflation, output and employment differs from that assumed. In the Monetary Policy Report, we present two alternative scenarios where demand is higher or lower than presented in the baseline scenario. The yellow lines in the chart illustrate a scenario where growth in private consumption is stronger than expected and the turnaround occurs more rapidly. In this scenario, interest rates may decrease to a lesser extent and move up more quickly. The red lines in the chart illustrate a scenario where the global downturn is deeper and more prolonged, with more pronounced effects than assumed. It will then be appropriate to set a lower interest rate in order to stimulate the economy and thereby prevent inflation from becoming too low. The primary effect of a key rate close to zero will probably come via a weaker krone. It will then be appropriate to consider instruments other than the interest rate.
Possibly because they held back from selling their holdings because they were reluctant to go underweight a large component of an index they tracked (or were measured against). How to improve the performance of the asset management industry has been relatively neglected. That matters because in a market economy regulators should not be the first line of defence. Myopia Agency problems and incentives are not, however, the sole source of exuberance. I doubt that, in managing their banks, many bankers deliberately or even consciously drove the system over the cliff. Rather, like others, many were myopic about the risks in the system. Innovations in technology, the opening up of the world economy, new markets for transferring risk, and years of smooth growth, apparently attributable to better macroeconomic policy frameworks – all of this encouraged a sense that the world had become a safer place. High actual returns were extrapolated forward into required future returns. Add in to the mix, complexity obscuring the risks in the system as a whole. And, although UK policy rates were relatively high for a number of years, accommodative global monetary conditions fuelled a search for yield and underpinned confidence in resiliently liquid capital markets. 2 Distorted incentives, myopia, complexity, easy global monetary conditions: a heady mix. And a mix which the prevailing regulatory regime was singularly ill equipped to address, and in some respects had done much to create through inadequate capital requirements and an absence of liquidity requirements. In fact, a toxic mix.

When credit markets become overly exuberant, not only do the balance sheets of lenders become stretched, cheap credit leads borrowers to become over indebted,  2  2  See Tucker (2012), “National balance sheets and macro policy: lessons from the past”. BIS central bankers’ speeches  raising the probability of default. When defaults eventually pick up, a general awakening occurs, triggering mass deleveraging. This matters to debates about risk measurement and management. It is not simply that the models employed over recent years – notably Value-At-Risk – make assumptions, such as normally distributed returns, that are manifestly false. 3 It is not just a matter of finding better models, useful though that might be. The problem of exuberance is not simply one of lots of Black Swans. It is that the collective behaviour of market participants can generate the tail events that sow the seeds of the system’s destruction. It can breed swans. What the authorities are doing Given the complex mix of factors behind the crisis, it would be surprising if there were a single policy initiative that could make the system safer in future. The response is multi-dimensional. But you will be relieved to hear that at this point I am not going to summarise the whole of the international agenda. 4 I’m going to put to one side, for example, the panoply of measures being pursued internationally to simplify capital markets through greater use of central counterparties, and to avoid the systemic risks of banking activity simply relocating to shadow banks.
Without doubt there is a clear break in the GDP growth trend in the USA, which has been much higher during the second half of the 1990s than during the 1970s and 1980s. The fact that this has occurred without any corresponding increase in inflationary pressure indicates that there has been an increase in the economy’s long-term production capacity. But should this really be regarded as a “new” economy? In actual fact, the growth rate in recent years does not appear unusually high when seen in a perspective of 40-50 years. On the contrary, it is the growth rate during the 1970s and 1980s which appears to be unusually low. What really makes the 1990s in the USA unique is the course of the economic upswing, its long duration and especially the developments in productivity. Growth in productivity has largely increased over time, instead of decreasing, as has been the case in previous periods of economic upswing (slide 2). There has been an intense debate among leading US economists over the past year as to whether this increase in productivity merely reflects greater productivity in the manufacture of computers and other IT equipment, or whether this IT capital also has a spread effect to other parts of the economy. No one questions the fact that productivity in the actual manufacture of computers and IT equipment has increased. There has been an increase of almost 25% a year in this field during the 1990s. The dissension concerns the spread effects. 3  BIS Review 89/2000  2.

The need for fairness and transparency Banks are at liberty to impose such fees and charges, but it is essential that they should be fair and transparent in doing so. This is particularly the case if the banks are intending to get more involved in consumer and wealth management business where it is important to retain the trust of the customer. The banks cannot afford a bad image otherwise they may find their customers going elsewhere - for example, to internet-based financial institutions. As we have seen from some recent incidents, the banks in Hong Kong have been lagging behind in the provision of clear information to their customers about the cost of some financial products such as credit card advances. Moreover, there has been recent controversy about the provisions in credit card agreements that entitle the lenders to reclaim from debtors the full legal costs and expenses of recovering overdue debts. In a recent court case, the judge ruled that the relevant provisions were unconscionable and therefore could not be enforced. We have written to authorised institutions to ask them to review their terms and conditions in the light of the court’s ruling and to ensure that they are consistent with Hong Kong law. We have also initiated a review of the Code of Banking Practice with a view to strengthening the provisions on such issues as transparency in the provision of banking services and the proper and responsible use of debt collection agents.