samchain/econo-pairs-v1 huggingface dataset:
Safeguarding the credibility of this goal is crucial for monetary policy to be an effective tool that not only succeeds in keeping inflation low and stable but also helps to reduce the volatility of output and employment. Now I would like to take a look at recent macroeconomic developments and their implications for the conduct of monetary policy. From the high inflation to the great recession In the early part of the past decade we enjoyed relative quiet in the macroeconomic front. Inflation moderated across the world and the economies resumed their trend growth rates. There were some tensions here and there in the region, a mild recession in the U.S. when the tech bubble burst, but the years were generally calm. However, towards 2007–2008 we were hit by an unusual price shock in foodstuffs and oil that triggered a significant increase in inflation around the world (figure 2). In Chile, this shock was visible only in the inflation of foods and fuels because core inflation was contained (figure 3). The Bank hardened monetary policy, but the unusual transmission of said prices to the rest of the economy caused inflation to deviate largely from the target. Several reasons explain the unusual propagation of this inflationary shock to other prices. The economy was operating with narrow or even negative output gaps. The cost pressure this generated combined with the effects of the oil price increase on the cost of electricity (figure 4). Meanwhile, as the crisis incubated, the exchange rate depreciated.

12  BIS central bankers’ speeches  Figure 13 U.S.: Fed fund rates and public debt (percent) 16  100  14  90  12  80  10  70  8  60  6  50  4  40  2  30  0  20 82  86  90  94  Fed funds rate  98  02  06  10  Public debt (% of GDP)  Sources: Bloomberg, U.S. Economic Analysis Department and U.S. Treasury Department. Figure 14 Sovereign risk premiums (*) (basis points) 7.000  7.000  700  700  6.000  6.000  600  600  5.000  5.000  500  500  4.000  4.000  400  400  3.000  3.000  300  300  2.000  2.000  200  200  1.000  1.000  100  100  0  0  0  0 10 jul.10ene.11 Jul. 11 jul.11 Jul. ene.10 Ireland  Portugal  10 jul.10 Jul. ene.11 11 Jul. ene.10 jul.11 Greece  Italy  France  Germany  Spain  (*) Measured through 5-yr CDS premiums. Source: Bloomberg. BIS central bankers’ speeches  13  Figure 15 Long-term nominal interest rate variation (percentage points) Turkey Israel Brazil South Korea Canada Australia Colombia (3) Mexico Germany U.S. Chile (2) -2,0  -1,5  -1,0  vs. max.
This means that downside risks for household income and debt-  2  BIS Review 75/2010  servicing capacity are likely to persist and that banks could face losses for some time, although there are important differences across countries. However, on a more positive note, there are signs that the past sharp falls in house prices, together with low interest rates, have improved housing affordability. This appears to explain, at least in part, the recent turnaround in the extension of new loans to households for house purchases, shown in the Chart 4 on slide 8, although substantial differences in these patterns remain across Member States. III. Main risks identified within the euro area financial system  Let me now turn to the three main risks that we have identified within the euro area financial system. The first is the possibility of a setback to the recent recovery of bank profitability. After the sizeable net losses, which were endured by around half of the euro area large and complex banking groups (LCBGs) in late 2008, many of them returned to modest profitability during 2009. Moreover, as shown in the left-side of Chart 5 on slide 10, banks’ financial performances strengthened further in the first quarter of 2010 and all LCBGs which have reported financial results so far have shown a positive return on equity. The same pattern can be seen as regards the return on assets. The leverage ratios of LCBGs have remained broadly constant after a sharp decline in the first quarter of 2009.

The baseline scenario reflects the slowdown in output that has been occurring during the year. It also assumes that investment will moderate further as the investment cycle is completed, consistently with adjustments seen in business surveys and investment plans. Consumption is expected to slow gradually because of the still strong labor market and the relative stability of household saving during the expansionary phase of the cycle. Consumer expectations are less optimistic these past few months and are approaching neutrality, which will help moderate this component of expenditure. So will the slower pace of marginal job creation, particularly salaried work, and the slowdown of real wages. Coupled with this is the depreciation of the real exchange rate which will affect durable consumption. Also, moderating investment will help to take pressure off the labor market. Finally, there is the foreseen reduction in the impulse from abroad (table 2). Inflation is expected to continue to grow steadily to reach 3% during the first half of 2014 and and be stable until the end of the projection horizon, this time the third quarter of 2015. The CPIEFE will take somewhat longer to hit 3%. The underlying assumption is that nominal wages will rise in line with productivity and the inflation target. There is also the methodological assumption that the RER will remain near its recent values. Finally, the baseline scenario uses as a working assumption that the MPR will follow a path similar to the one implicit in expectations surveys available at the closing of this Report (figure 5).
housing  6  5  5  4  4  3  3  2  2  1  1  0  0 1971-1989  1993-1999 Source: Statistics Sweden  Diagram 3. Growth, total and in industry  Growth Percentage annual change 4  4 Growth Growth in corporate sector  3  3  2  2  1  1  0  0 1971-1989  1993-1999 Source: Statistics Sweden  3  BIS Review 39/2000  The employment rate has increased substantially during the last few years. The difference between the two periods is even greater if we confine ourselves to employment in the private sector. In fact, employment in the sector fell substantially during the 1970s and 1980s, at the same time as public sector employment increased rapidly, a development which would not have been sustainable in the long run. Diagram 4. Working hours, total and in industry  Hours worked Percentage annual change 1.0  1.0 Total  0.8  0.8  Corporate sector  0.6  0.6  0.4  0.4  0.2  0.2  0.0  0.0  -0.2  -0.2  -0.4  -0.4  -0.6  -0.6 -0.8  -0.8 1971-1989  1993-1999 Source: Statistics Sweden  The return to low inflation has also yielded higher real wage increases for employees. Although nominal wage increases have been moderate, low inflation has meant that real wage increases have been considerably higher than previously.

This both can and must conceal considerable differences between sectors and regions. The wage formation system must achieve something better than a result for the economy as a whole which is commensurate with average inflation and productivity. If we want low unemployment and price stability, wage outcomes must be adjusted to productivity in different sectors of the economy, indeed to the situation in individual enterprises and to different individuals. The design of pay systems and pay determination is also crucial to the distribution of resources and thus productivity and economic growth. In other words, higher productivity can create more scope for wage increases, but a functioning wage formation system can also help to improve productivity. Sweden’s success in this area in the next few years will depend both on the measures taken by Parliament and the Government and on management and labour. Parliament and the Government establish the framework for the functioning of the labour market and wage formation. A more expansive financial policy would make the task of management and labour and of monetary policy more difficult in the next few years. The legal framework, for example the rules on industrial disputes, is another factor. Tax and benefit systems are important and affect both wage formation and the behaviour of private individuals, ie their willingness to find work, move, etc.
BIS central bankers’ speeches  11  Figure 5 Unemployment Per cent of the labour force, seasonally-adjusted data 12  12  10  10  8  8  6  6  4  4  2  Austria Norway USA Sweden  0 90  95  2  Netherlands United Kingdom Germany  0 00  05  10  Sources: The Bureau of Labor Statistics and Eurostat  I am sure most people would agree with me that actual unemployment is much higher now than any reasonable estimate of long-run sustainable rate of unemployment, even if I know of course that estimates of long-run sustainable rate of unemployment are uncertain.25 Why has monetary policy been so stringent that it now results in such low inflation and such high unemployment, a target fulfilment that must be regarded as very poor? Why did the Riksbank begin to raise the repo rate in summer 2010, despite the fact that the forecast for CPIF inflation was below the target and the forecast for unemployment was above any reasonable estimate of the long-run sustainable rate of unemployment?26 The reason could be that monetary policy has been aimed at limiting household debt, although this purpose was not as clearly stated as has been the case more recently. A more expansionary monetary policy, in line with what Karolina Ekholm and I have advocated, would have led to a better outcome in terms of inflation and unemployment.

Ardian Fullani: The Albanian economy and the banking sector in 2010 Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the reception of the Albanian Association of Banks, with bankers and representatives of banks operating in Albania, Tirana, 17 December 2010. *  *  *  Dear bank executive managers, Dear participants, It is always a pleasure to meet once the year-end approaches to make a summary of events that characterized the Albanian economy and the banking sector over the course of 2010. The Albanian economy is forecast to grow in 2010 slightly higher than in 2009. Industry and services provided the largest contribution to the positive economic growth, yielding as well a relative improvement in the balance of payments’ current account. Lek’s exchange rate was more stable compared with the preceding year, whilst consumer prices fluctuated within the Bank of Albania’s target of 3%. Fiscal policy engaged in a process of fiscal consolidation during the present year, which we consider as critical in order to preserve the budget deficit and domestic debt levels and keep the level of interest payments in check. Developments in the financial system attest to the full recovery of public confidence in the banking system. As at end of the third quarter of 2010, total banking sector assets accounted for 81.7% of GDP, up 12.2% y-o-y versus merely 0.9% in the same period in 2009. Deposit growth and higher capital account provided the major positive contribution to the expansion of banking sector activity.
I will now go on to speak about some conceivable changes in the work on monetary policy, financial regulation and financial stability and – not least – the interaction between them. In addition to new thinking on policy and other issues, we also need to adapt our organisations and our governance to achieve optimum efficiency. The recent financial crisis provided additional input into the discussion on how the work on financial stability can become more effective and what instruments are appropriate in achieving this goal. Furthermore, having clearly proved that there are close links between monetary policy and financial stability, the financial crisis has revitalised the debate on whether central banks need to consider not only price stability but also financial stability when setting interest rates. Just a couple of years back, the common view was that since it was difficult to predict a crisis, a central bank should try to do no more than react forcefully when the crisis was already a fact. The main explanation of this reassessment is probably that the costs of a financial crisis – and hence the potential benefits of preventing a crisis – can turn out to be much bigger than previously thought. In my view, regulation and supervision remain the first line of defence in preventing unsound developments in financial markets. The financial crisis has clearly shown that there is an urgent need to reassess the regulation of the financial sector, in addition to strengthening the macro-prudential framework.

There are several arguments for conducting financial stability work in the central bank such as: –  There is a clear link to monetary policy;  –  Central banks usually run the large value payment system which is an important nexus in the financial system;  –  Central banks may provide exceptional liquidity assistance – ELA – to problem banks, but must then understand the implications for the system as such;  Much of the stability work is crisis-oriented – both the precautionary work and that dealing with actual crisis situations. The Riksbank participates in many international fora that promote stronger frameworks to prevent or at least to manage crises. The recent global crisis led to a number of conclusions showing that we need a broader framework in which to analyse financial stability and deal with problem situations. For instance: –  Not only banks will destabilise the system;  –  Systemically-important institutions pose even greater challenges than we thought;  –  Liquidity developments must be closely monitored;  There are clear linkages between submarkets and also between jurisdictions. The experience gained during the crisis leads to some specific challenges for central banks: –  Central banks must maintain a sufficient capacity to provide liquidity to meet sudden needs, but at the same time we must maintain strong incentives to avoid the banks and markets relying on central bank funding rather than approaching their normal channels.
2  BIS Review 27/2001  Modified capital requirements Let me begin by explaining what we are doing to ensure that the capital held against loans made to small and medium-sized companies is truly reflective of risk. The Committee has on two occasions over the past year asked banks to assess the impact of the revised Accord. The data gathered have enabled us to evaluate the level of capital that our proposals would generate and to consider several modifications. As you may know, our early findings suggested that the internal ratings-based approach as outlined in the Second Consultative Paper would have required banks to set aside too much capital. Contrary to the Committee’s clear intent, banks would not have received a capital incentive for adopting this more sophisticated approach to capital adequacy. As a result, we had to adjust the capital requirements to provide banks with the right incentives under the new framework. The Committee’s aim is to avoid unintended consequences stemming from the new proposals. That’s why we are taking additional time to make sure our proposals are right. To this end, we published in November a change in the IRB formulas for calculating bank capital requirements. This change – based on the Committee’s internal research as well as additional input by bank risk management experts – reduces the extent to which capital will vary with the internal ratings banks assign to their exposures.

Like you, I recognize the need for small and medium-sized enterprises to retain access to credit at reasonable and fair prices. Access to credit matters not just because credit can enable small businesses to grow, but more because small businesses enable the whole economy to grow. This is true not just for the “Mittelstand” in Germany, but also of entrepreneurial ventures around the world. In the United States, for example, small businesses traditionally create the majority of new jobs, invent a large proportion of all new technologies, and are responsible for nearly 40% of our gross national product. Preview I know that you are deeply interested in the steps that the Basel Committee is taking to ensure that small businesses continue to enjoy fair and open access to credit, and I am pleased to share with you the good progress that the Committee has achieved since the release of the Second Consultative Paper in January 2001. I’ll begin with an overview of the importance of regulatory capital to the stability of the banking systems – and that of the economy – and how the Committee’s current efforts will reinforce that stability. Second, I’ll discuss some changes that are of particular interest to banks that lend to smaller businesses and to owners of small and medium-sized enterprises as well. I would like to close by giving you some insight into the process and the timeframe that is guiding our work to complete the impact studies and to move toward release of the final Consultative Paper.
See www.bankofengland.co.uk/publications/speeches/2009/speech374.pdf  BIS Review 85/2009  3  difference between landing in the red rather than the black. In that sense, stress tests are not something it is possible definitively to “pass” – though experience suggests they are somewhat easier to “fail”. On thresholds, determining the optimal level of capital for a bank is an area which has been chronically, and perhaps surprisingly, under-researched. Policymakers have repeatedly ducked this question. Aggregate amounts of capital in the financial system have been fixed at the same levels which prevailed at the time of the first Basel Accord. And academics have, to my knowledge, no definitive quantitative answer to the optimal capital question. Longer runs of data, while interesting, are far from definitive. Over the past 150 years, capital ratios among US commercial banks have fallen roughly by a factor of ten (Chart 7). Is the optimal capital ratio to be found from experience in the 1990s – roughly, 5%? Or from the interwar years – roughly 10%? Or from the latter half of the 19th century – between 20% and 40%? Answering those questions will mean reassessing the validity of the Modigliani/Miller (MM) theorem in today’s capital markets. 3 MM states that firms’ debt/equity ratios are essentially irrelevant to their total cost of capital. Why? Because a rise in leverage generates offsetting movements in the cost and risk of banks’ capital, in a frictionless world leaving the riskadjusted cost of capital unchanged. By revealed preference, owners and managers of banks have rejected the MM hypothesis.

But, on the other hand, since we only have limited experience of macroprudential instruments, a step-by-step approach may seem more attractive. Furthermore, even if the first best solution would be bold steps, it may be more difficult to gain consensus for these. I think it would be better and more reasonable to take a number of small steps in order to avoid inaction bias and a standstill in reforms. Taking Sweden as an example: in its biannual Financial Stability Report, the Riksbank outlines several alternatives for how the growing risks associated with increasing household debt may be managed. The second issue that needs to be addressed is how macroprudential policy should interact with other policy areas when it comes to tackling systemic risk. My view is that monetary policy could take systemic risk into consideration under the precondition that this doesn’t conflict with the objects of monetary policy. That is, if the object of monetary policy is inflation targeting, monetary policy may very well serve as a line of defence if inflation is not too far from the target and if inflation expectations are firmly anchored.1 However, macroprudential policy also has links to microprudential policy and fiscal policy. All these policy areas may need to be involved in order to curb systemic risks in the most effective way. What instrument to choose in a specific situation should depend on the problem at hand and the purpose of the policy action. The most effective tool may not always be in the hands of the macroprudential supervisor.
The situation may be different, however, if growth is boosted by a combination of higher public investment and structural reforms creating incentives for higher private investment, which will induce a rise in permanent income. This could be a major confidence boost to the economy  11  See Cœuré, B. (2015), “Paradigm lost: Rethinking international adjustments”, Egon and Joan von Kashnitz Lecture, Clausen Center for International Business and Policy, Berkeley, 21 November. 12  See Carcea, M.C., Ciriaci, D., Cuerpo, C., Lorenzani, D. and Pontuch, P. (2015), “The economic impact of rescue and recovery frameworks in the EU”, EC Discussion Paper, No 004, September. 13  See https://www.bundesbank.de/Redaktion/EN/Reden/2014/2014_03_17_weidmann.html. 14  This line of thinking has been formalised in a recent paper by Olivier Blanchard and co-authors which looks at the effect of higher government spending and inflation in core countries on those in the periphery. They find that, in normal times, the benefits for periphery countries are minimal as terms-of-trade gains are offset by the central bank raising rates. In a liquidity trap situation, however, the effects are markedly different. Crucially, if monetary policy is expected to not raise rates for a couple of years or more – as it is the case today – the stimulus for the periphery can be large. See Blanchard, O., Erceg, C.J. and Lindé, J. (2015), “Jump starting the euro area recovery: would a rise in core fiscal spending help the periphery? “, NBER WP 21426.

The only way ahead over the medium term, then, is for crisis-hit countries to find a combination of current account surpluses and nominal GDP growth that can produce both external and internal balance. So how can that be achieved? Further action on the nominal side is clearly necessary, in particular to support employment and resource reallocation. And, within limits, that would not necessarily be inimical to growth: a recent modelling exercise by the IMF shows that wage moderation may have a positive economic effect on crisis-hit countries, especially if accompanied by more dynamic wage growth in surplus countries.10 The structural reforms undertaken since the crisis would also allow such adjustments to be made more quickly and with less employment cost than in the past. However, at some point nominal adjustment leads to a change in dynamics – that is, the positive substitution effects of relative price changes are dominated by the negative effects on incomes and real rates. That is why any effective adjustment strategy also has to be based around productivity growth. Productivity growth both lowers ULCs, supporting exports, and lifts permanent income and potential output, supporting debt reduction through real GDP growth. And though this might lead to higher investment, that would not necessarily be contrary to current account adjustment. If new investment occurs in the tradable sector it should lead to a stronger exporting base in the future.