samchain/econo-pairs-v1 huggingface dataset:
When the economy is vulnerable to a financial crisis – that is when the levels of debt are high and the macroeconomy is at or past a peak, and in some cases, a housing boom is ending – then financial intermediary leverage and the issuance of money-like debt instruments can become excessive. Such excess can lead to a rapid scramble to deleverage – that is, to reduce levels of debt, causing fire sales and failures of financial intermediaries, which, in turn, confers further distress on the financial economy and the working of the  12  Prior to October 3, 2009 the FDIC limit on deposit insurance was $ but was raised on that day to $ for a temporary period. The Dodd-Frank Act made the expansion in the insurance limit permanent. BIS central bankers’ speeches  7  macroeconomy generally, as important sources of credit are blocked from reaching households and firms. In essence, I’ve argued that there are two views of the mechanisms that could lead to a crisis: one is about excessive leverage or the scarcity of loss-bearing capacity that builds up in an expanding economy and the other is about the excessive provision of liquidity in the private sector, or excess private money creation. Of course, liquidity and leverage go hand in hand: Private money creation enables firms that issue it to take on high leverage, both in the financial and the nonfinancial sectors.

In other words, the total amount of all the currency in the country is only a comparatively small proportion of the total deposits in all the banks of the country. “What, then, happened during the last few days of February and the first few days of March? Because of undermined confidence on the part of the public, there was a general rush by a large portion of our population to turn bank deposits into currency or gold – a rush so great that the soundest banks couldn’t get enough currency to meet the demand. The reason for this was that on the spur of the moment it was, of course, impossible to sell perfectly sound assets of a bank and convert them into cash, except at panic prices far below their real value. By the afternoon of March third, a week ago last Friday, scarcely a bank in the country was open to do business. Proclamations closing them, in whole or in part, had been issued by the Governors in almost all the states. It was then that I issued the proclamation providing for the national bank holiday, and this was the first step in the Government’s reconstruction of our financial and economic fabric.”1 Roosevelt understood the recipe for a banking crisis: fractional reserve banking and an undermined confidence by the public in banks, which led to widespread runs on banks. In turn that led to panic prices on bank assets and bank closures.
It is true that the economy is not overheated, so rate hikes do not have the intention of affecting that. But interest rates do affect inflation even though the current situation does not entail overheating. These effects come through a stronger currency and lower wage drift. Furthermore, it is very common that central banks begin to shift towards a neutral monetary stance by raising nominal interest rates before the slack has disappeared so as to avoid sharper increases later at the tipping point between slack and excess demand. Examples of this are the European Central Bank’s rate hike earlier this year and the Swedish Riksbank’s increases in mid-2010, when unemployment in Sweden topped 8% and the output slack measured almost 4%. Iceland’s output slack is just under 2% this year. I will conclude my remarks now. I know there are a number of questions I have not answered, and a number of aspects of this complex situation that I have not addressed. My answers to the questions you ask me now may fill in some of the gaps. On the other hand, it is important that we discuss these matters calmly and try to promote the best possible understanding of how monetary policy works, as this will make a genuine contribution to the current discussion of Iceland’s future monetary policy regime. It is well to remember, though, that no monetary policy will be successful if the tools it offers are never used to tighten the stance.

We also stated that, in view of the economic situation and outlook, the current interest rate level appeared broadly appropriate for the next several months. In other words, significant new developments would be required for the MPC to raise interest rates – or lower them – at upcoming rate-setting meetings. I notice that the bond market seems to have realised the implications of this, as yields at the longer end of the market have not risen since the last interest rate announcement. But looking further ahead, it should be clear to everyone that if GDP growth forecasts materialise in coming  BIS central bankers’ speeches  3  years and the slack in the economy disappears, the monetary slack manifested in a negative real policy rate of over 1% must be removed over time. So where do we stand with respect to the monetary policy stance? Is monetary policy lax or tight? Chart 3 shows the Central Bank’s real interest rate measured by the effective policy rate and twelve-month inflation. The chart shows that, in spite of two recent rate hikes, the real interest rate will be lower in Q4/2011 (assuming unchanged interest rates in December) than at any time since the financial crisis struck, with the exception of Q1/2009, when inflation soared up above 18% and a dramatic disinflation episode was in the offing. Chart 3  Chart 4  But what about the Taylor rule, shown in Chart 4? There is a significant deviation at the moment – one that perhaps requires some explanation.
Model Drift  Model drift is the risk that the capital requirements calculated using an internal model may gradually weaken over time such that they no longer reflect the risks to which the firm is exposed. No measure of model drift is perfect. The PRA tracks movements in internal model capital compared to the standard formula and the net best estimate of liabilities.2 The first benchmarks the tailored risk calibrations in an insurer’s internal model against the ‘off the peg’ measures of risk specified in Solvency II. The second compares them to the size of the insurer’s balance sheet – a sort of insurance ‘leverage ratio’. Supervisors supplement these aggregate measures with ‘bottom up’ analysis to compare the outputs of internal models, looking at calibrations risk by risk, over time and across insurers.3  (see Chart 2)  In 2016 and 2017, the aggregate capital requirements of UK general insurers with internal models increased more or less in line with the standard formula and best estimate of liabilities. That is the outcome I would expect, other things being equal. No generalised model drift was apparent. For life insurers in aggregate, by contrast, both standard formula capital and best estimates of liabilities rose considerably more than internal model capital. At face value, this looks like considerable model drift. For a couple of reasons, though, we are not yet ringing the alarm bells. First, it is only two years of data. We will need a longer period to draw strong conclusions about trends.

Consistent macro-economic stability is perhaps the greatest contribution that the authorities everywhere can make to financial stability. Of course that is easier said than done. While it is true that sharp changes in economic conditions, and asset prices, may be home-grown - often as a result of allowing domestic demand to outstrip the supply-side capacity of the economy to meet that demand, it is also true as we saw very dramatically two or three years ago that instability can be internationally contagious - especially in today’s world of financial globalisation. A great deal of work has gone on internationally over the past few years to improve our understanding of how national authorities can better protect their economies against shocks of this kind. It has resulted in a plethora of internationally agreed standards and codes of best practice ranging from transparency in the conduct of monetary, financial and fiscal policies, through financial regulation and the collection and dissemination of statistics, to various aspects of the financial infrastructure, including the legal and accounting framework, corporate governance arrangements, payments systems and so on. The emphasis now is on implementation and the IMF has the task of encouraging and assisting all of its members to step up their efforts, as best they can given their particular  1  BIS Review 66/2000  circumstances, in all of these respects. This is in the member countries’ own individual interests, but it is equally in the interest of greater stability of the global economy.
2.3  The challenge for the EU institutions: enforcing economic union  The weakness of European economic union in the context of monetary union contributed to the development of the current crisis and, if we are to emerge from it stronger, real improvement is required in this area. European governments have fully understood this issue and have made concrete and significant progress towards a more integrated economic union. On the one hand, Europe has considerably enhanced its fiscal discipline framework. The legislative package (the so-called “Six Pack”) entered into force in December and considerably reinforces the Stability and Growth Pact: the surveillance powers of the European Commission over national budgets have been enhanced, sanctions have become quasi-automatic, the criteria for public debt and public spending are being more closely scrutinised and a new framework for the surveillance of macroeconomic imbalances and competitiveness developments has been put in place. In addition, 25 European Heads of State or government signed the Treaty on Stability, Coordination and Governance which establishes a comprehensive new “fiscal compact”. It includes in particular a requirement for national budgets to be in balance or in surplus, a criterion that will be met if the annual structural government deficit does not exceed 0.5% of GDP. This rule must be incorporated into the Member States’ national legal systems, preferably at the constitutional level. On the other hand, Europe has equipped itself with an instrument to combat crises.

In other words, in trying to divide up the cake more equally we could, if we are not careful, end up reducing its overall size. The trick it seems to me is to find ways of having our cake and eating it which some forms of government intervention can, as I say, achieve. But that’s a great deal easier said than done. I only thank my lucky stars that I am not a politician! Where then do the financial institutions of the City fit in to all of this? Well, money changers have never been exactly popular. That is partly because of a perception that while the rest of the community earn their living making things, bankers simply make money - and what’s more they make money by using “our” money. But it is partly because of a perception that people who work in the financial services industry are pretty heartless people anyway. In fact financial intermediation is a critically important component of a market economy. Behind the popular - or perhaps unpopular - image of erratic and speculative, short-term, financial market trading, which is in fact an important element in the process of price discovery - the essential role of financial intermediation is to gather together our collective financial resources - our savings if you like - and to direct their investment into those activities in which they can be most productivity employed.
TLTRO’s and the tiering system we use today for refinancing the Eurozone banks are two good examples in this respect. On climate change, the emphasis put by Christine Lagardeix herself is welcome and totally warranted. In my view, the fight against global warming is already an imperative for us under our price stability mandate: not only will the effects of climate change have significant repercussions on future inflation and growth, but they are already having an impact now. We could implement our climate decisions in no more than 3 to 5 years, which would make us pioneers among major Central banks. Page 8 sur 10  4. How to improve communication with the general public? My final remarks concern communication. Central banks have come a long way in being transparent about their decisions and explaining their reasoning. However, our communication is too often addressed to a narrow group of people – the media, the markets and economists. We need to do a better job of reaching the general public. And this means two changes of paradigm:  it is not only a question of democratic accountability – however essential this remains –, it is also key for our economic efficiency. Better-informed firms and households will also make better decisions and ones more aligned with our strategy, I will come back to it.  Secondly, we should evolve from a narrow objective of “transparency” to a wider objective of “clarity”.

Our knowledge is quite simply too brittle to enable us to lead the economy exactly by fine tuning monetary policy at perfectly chosen moments. The second reason why fine tuning of monetary policy is doomed to failure is that the repo rate is only one of the factors affecting the economy. The most important economic decisions in our society, such as house purchases and corporate investment, are mainly due to developments in long-term interest rates, and monetary policy decision-makers can only have an indirect and very limited effect on these. This reasoning therefore comes to the conclusion that we should not have overly high expectations of what the Riksbank can achieve to influence real economy developments, as has been the focus of recent debate. There is in actual fact every reason to be humble with regard to what we can actually achieve. But if we can keep inflation within our target area of 1-3 per cent and clearly anchor inflation  2  BIS Review 37/2005  expectations around two per cent, this will have great significance for growth and employment in the long term. Monetary policy is not an exact science. Sometimes monetary policy is described as a car, where gentle acceleration or easing on the gas adjusts the speed of the journey down a winding road. This is a very misleading image.
As was the case before the crisis and indicated in the June 2011 principles, the Committee intends to adjust the policy stance during normalization primarily through actions that directly influence the level of the fed funds rate and other short-term interest rates rather than through active management of the size or composition of the Fed’s securities holdings. Specifically, when economic conditions and the economic outlook warrant a less accommodative stance of monetary policy, the Committee will raise its target range for the fed funds rate. During normalization, the Committee intends to move the fed funds rate into the target range primarily by adjusting the rate of interest on excess reserve balances (IOER) that it pays. We expect changes in the IOER rate to have a significant influence on the fed  BIS central bankers’ speeches  1  funds rate and other short-term interest rates. However, to help control the fed funds rate, the Committee also intends to use an ON RRP facility and other supplementary tools, as needed. The Committee will use an ON RRP facility only to the extent necessary, and will phase it out when it is no longer needed to help control the funds rate. With regard to the Fed’s balance sheet, the Committee intends to reduce securities holdings in a gradual and predictable manner, primarily by ceasing to reinvest repayments of principal on securities held in the SOMA.

Simon M Potter: Interest rate control during normalization Remarks by Mr Simon M Potter, Executive Vice President of the Markets Group of the Federal Reserve Bank of New York, at the SIFMA Conference on Securities Financing Transactions, New York City, 7 October 2014. *  *  *  I would like to thank Josh Frost, Lorie Logan, and Matthew Raskin for their excellent assistance in the preparation of these remarks and colleagues in the Federal Reserve System for numerous insightful comments and suggestions. Thank you, Rob. I appreciate the opportunity to participate in this important event. Securities financing markets are essential to the efficient functioning of the global financial system, and to the implementation of monetary policy in the United States and abroad. As you know, the Federal Open Market Committee (FOMC) recently published a statement on its policy normalization principles and plans. Today I would like to talk about these principles, and more specifically, about how the Committee plans to raise and control shortterm interest rates when it becomes appropriate to do so. Obviously, these plans are of interest to the Open Market Trading Desk (the Desk) as we must implement the directives issued by the FOMC after each meeting, and I am responsible for reporting to the FOMC on the transactions made to meet its operating target. I’ll also review the overnight reverse repurchase agreement (ON RRP) operations that the Federal Reserve has been testing for the past year, and explain recent changes the Committee made to these operations.
those which, given their significance, would not be wound up in the event of insolvency, are required to hold a minimum volume of loss-absorbing instruments in the event of resolution. This is known as the MREL (Minimum Required Eligible Liabilities) requirement. 4/10  Accordingly, the European regulations are precisely tailored to the new resolution principles and contain provisions that minimise the likelihood of crises resulting in the disbursement of sizeable public funds. That said, the challenges posed by the practical implementation of these provisions are manifold. For example, the relative rigidity with which it is stated that receiving public aid generally implies the non-viability of an institution and, therefore, facilitates the activation of the resolution (or, where appropriate, winding-up) process, considerably constrains the supervisor’s management of financial crises. It might be advisable to make this aspect of the regulations more flexible, albeit maintaining, in any event, the subjection of any public support to the prevailing State aid arrangements managed by the European Commission. Yet the main challenge for the industry and its supervisors stems, to my understanding, from the potential implications of the new resolution framework for banks’ business models and for the structure of the banking sector. Allow me to expand on this. The demands of the regulations would point, in principle, to a configuration of the financial system that, in simple terms, would comprise two groups of relatively differentiated banks.

Christian Noyer: The power of monetary policy Speech by Mr Christian Noyer, Governor of the Bank of France and Chairman of the Board of Directors of the Bank for International Settlements, at the Paris Europlace Financial Forum, Tokyo, 25 November 2014. *  *  *  Two weeks ago, I had the privilege to chair in Paris our triennial Banque de France Symposium. Governor Kuroda made us the great favor to participate. At that Symposium, one speaker remarked that, during the financial crisis, Central Banks in most countries had been (quote) “the only game in town” (end quote). And he went on wondering whether this would still be the case in the future. This observation captures the essence of my remarks today. I would like to talk about the power of monetary policy in the current – low inflation – environment. Central Banks have been all powerful and decisive in fighting off the biggest financial crisis of the last 70 years. And they succeeded in avoiding a prolonged recession and the collapse of our financial system. Today, however, they are facing a different challenge. Growth has been disappointing in many parts of the world and forecasts have been constantly revised downward. Even more worrisome for central banks, inflation has persistently undershot our definition of price stability. For the euro area, it has declined from 2.5% in 2012 to 0.3% in annual terms, as of last September. This drop in inflation has occurred despite the most accommodating monetary conditions ever witnessed in Europe.
In particular, because even though expectations have improved in general, they have done so by anticipating a better future economic performance rather than by current results. In this context, we have held the Monetary Policy Rate (MPR) at 2.5% since May and we expect that, if the baseline scenario comes true, we will keep the monetary impulse near its current levels, to begin withdrawing it only once the economy begins to close the activity gap. Anyway, it is important to carefully monitor any downward deviations of inflation in the short term, because in the context of a weak economy, low inflation and some measures of medium-term inflation expectations remaining somewhat below 3%, the convergence of inflation could be affected, in which case it would be necessary to make the already expansionary monetary policy more so. The financial conditions have helped to shape the macroeconomic scenario described above. Borrowing remains accessible and inexpensive, in line with the orientation of monetary policy. The local financial market has seen no major disruptive events and the internal and external payment systems have functioned normally. Non-financial companies maintain their levels of profitability and indebtedness, while the increase in household debt is concentrated in mortgage credit, which covers long periods, at fixed rates and with a prudent loan-to-value ratio, which keeps the financial burden fairly constant. For its part, in the residential real estate sector, sales of new homes stabilized and prices continued to rise, albeit modestly. Nonetheless, some financial risks identified in past reports are still important.

It is important to note that, as from this MP Report, for the purposes of the conjunctural analysis of activity and the measurement of the gap, the concepts of “natural resources GDP” and “other GDP” have been replaced by “mining GDP” and “non-mining GDP”. A box in the Report explains the reasons behind this change. There we note that the sectors that we discounted from GDP until now (i.e. mining, fishery, and electricity, gas and water) are actually more volatile and less persistent. It is also shown that, in general, its relationship with the rest of the economy is limited. However, in line with the change that I have just commented, it is concluded that only the exclusion of mining activity has significant effects in the analysis of the dynamics of the aggregate economy, because of its important effects on the variance of growth. In such circumstances, and considering that broad measures are better to work with than narrow ones, 3  we adopted the distinction between mining and non-mining GDP to substitute for natural resources GDP and other GDP. Moreover, this change allows the analysis in the MP Report to be aligned with the publication of the mining and non-mining Imacec2 that we introduced a few months ago. Returning to the recent evolution of activity and demand, the sectoral composition of nonmining GDP shows better figures for sectors linked to consumption than those related to investment, particularly construction.