samchain/econo-pairs-v1 huggingface dataset:
It can be very painful for both the economy and society to correct entrenched inflation – as I learned when I left this university in the mid-1970s – or indeed entrenched deflation. But monetary policy works through many channels in the economy. It affects borrowers and savers. It affects wealth – the value of houses and financial assets. It affects jobs and pay. And the impacts on individuals can be difficult to disentangle. Low rates, for example, can increase housing wealth and the value of pension investments while reducing the return on savings accounts. And to the extent that by smoothing the volatility of output monetary policy can prevent the adjustment to economic shocks leading to more persistent damage to the economy, it can prevent longer lasting loss of jobs and loss of pension values. A pension, after all, is in the final analysis a claim on the future economy – it is an investment, public or private, that has to be paid out of future revenues, dividends, capital values and taxes. However, these effects can be felt more powerfully when policy rates are at what appear to be very high or very low absolute levels. We are of course explicitly mandated to make difficult trade-offs. Most notably, when inflation is off track, they have to balance the speed with which it is brought back to target against the impact on growth.

Why are interest rates low? Speech given by Jon Cunliffe, Deputy Governor Financial Stability, Member of the Monetary Policy Committee, Member of the Financial Policy Committee and Member of the Prudential Regulation Authority Board  Manchester University Wednesday 16 November 2016  1  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  I left this University almost exactly 40 years ago and, armed with a Masters in English Literature, ventured out into the wider world. There was no great expectation of making one’s fortune. It was a very different world. I had no interest whatsoever in economics. But even I knew the economy was in pretty bad shape, following the oil crisis, the three day week and the recessions of the previous two years. Even my younger, 1976, self, knew that inflation was running at 15%. To be honest that seemed pretty normal – it had been above 15% for three years. I didn’t realise then that I actually had inflation expectations but had someone asked I guess mine would have been pretty high. I am quite sure, however, that I didn’t know that Bank Rate was also 15%. Banks did not like giving students bank accounts in those days let alone loans. And most had grants anyway. But as with inflation, while I might have thought 15% Bank Rate a bit high, I would not have been all that surprised – Bank Rate had been around, if not above, 10% for most of the 1970s.
The forecasts for inflation and unemployment are calculated under an assumption  11  At the monetary policy meeting in September 2010 I criticised “the revisionist argument”, that is that monetary policy is governed by revisions of the assessment of the state of the economy. This implies that the previous monetary policy decision and the previous repo-rate path have been accepted without criticism and that the repo-rate path has then been shifted upward or downward depending on whether the development of the economy and inflation have been above or below expectations. No monetary policy decision is perfect. Each decision includes greater or smaller errors. Allowing revisions to govern means allowing new errors to be added to the existing ones. In my view, the previous repo-rate path should not be unreservedly taken as the starting point. Every monetary policy decision should stand on its own two feet and not lean on the previous decision. BIS central bankers’ speeches  7  that we believe to be more realistic and more compatible with how the exchange rate is determined. This assumption is that foreign exchange rates will develop in line with prevailing market rates (more specifically in line with the paths indicated by foreign implied forward rates). We can see in panel b that the lower repo-rate path leads to a better stabilisation of both inflation and unemployment. The mean squared gaps in Figures 7 and 8 are calculated assuming a sustainable rate of unemployment of 5.5 per cent.

As there are so many ways of measuring resource utilisation one might think that it would be appropriate to take a broad approach and make an “overall assessment” based on a large number of indicators when making decisions about monetary policy. It is, however, generally accepted that an inflation targeting policy in which target attainment is measured using a large number of different measures of inflation does not work very well. It is often possible to find a measure of inflation that is reasonably close to the target and almost any monetary policy can be justified with the help of a clever choice of index. Therefore, if the target and target attainment are to mean anything, one measure of inflation must primarily be used. 2  BIS central bankers’ speeches  Similarly, I also believe that it does not work well to use a large number of different measures of resource utilisation. It is also often possible to find at least one measure that comes fairly close to normal resource utilisation and almost any monetary policy can be justified with the help of a clever choice of the measure of resource utilisation. This problem is in fact worse for resource utilisation than for inflation. This is because measures of resource utilisation also require us to make an assessment of the normal level for the measure concerned. For the output gap and the hours gap it is a case of determining the level and forecast for potential GDP and potential hours worked.
It has been agreed that all EU Member States may connect their national RTGS systems to TARGET, whether or not they join EMU. The main policy issue outstanding concerns the terms on which the European Central Bank will grant intraday credit to the “outs”. We see no monetary -- or other -- grounds for any discrimination against the “outs”. If intraday liquidity to the “outs” were to be restricted the effect would be to increase the cost of using TARGET, and to damage the efficiency of the system for both “ins” and “outs”. That would simply divert euro payments to alternative mechanisms, including correspondent banking and the EBA’s net end-of-day settlement system. It would be unlikely significantly to deter the international use of the euro -- if that were the objective -- any more than lack of direct access to national RTGS systems deters the international use of the dollar or yen or Deutsche Mark now. Its main impact would be to make intra-European payments less secure. We would regret that. Besides payments systems, the preparation of securities settlement systems for the introduction of the euro is a complex task in its own right. One of the reasons for this is that there are different approaches to securities settlement between different Member States and financial institutions. Another is that different approaches may be required to meet issuers’ requirements for re-denomination.

Looking ahead, I expect the New York economy to continue to strengthen along with the national economy over the next few years. The Fed’s Policy Response This brings me to the Fed’s policy response. In its December 2020 statement, the FOMC said it would continue asset purchases at the current pace until it sees substantial further progress toward our maximum employment and price stability goals.3 Given what I have said, I think it’s clear that we have made substantial further progress on achieving our inflation goal. There has also been very good progress toward maximum employment. Assuming the economy continues to improve as I anticipate, a moderation in the pace of asset purchases may soon be warranted. It is important to remember that even after the asset purchases end, the stance of monetary policy will continue to support a strong and full economic recovery and sustained attainment of 2 percent average inflation. In particular, the FOMC has indicated that it will continue to hold the target range for the federal funds rate at its current level until the economy reaches conditions consistent with its assessments of maximum employment, and inflation has reached 2 percent and is on track to moderately exceed 2 percent for some time. There is still a long way to go before reaching maximum employment, and over time it should become clearer whether we have reached 2 percent inflation on a sustained basis. Conclusion I began by saying that it’s nearly impossible to predict the future.
And why, at least across these two periods, does neither measure of money growth seem to have much to do with inflation? What follows is not remotely a full and comprehensive answer to these questions. Nor are the points made here remotely novel. Over the years, reams have been written about all of them, including in some very good articles by Bank economists. But they’re certainly relevant in interpreting these data and therefore worth touching on. One I mentioned in the introduction: commercial banks can create and withdraw deposits – principally in the act of extending or reducing the quantity of their lending – independently of their reserve holdings at the central bank. Suppose you borrow £ from a bank. What the bank actually does, in granting the loan, is to put an extra £ into your deposit account. This is newly created (broad) money, matched, on the asset side of its balance sheet, by the debt you now owe the bank. This process doesn’t require any matching increase in reserves[9]. It has its limits, not least because banks are obliged to fund a proportion of their lending with equity (rather than deposits). They can’t (and don’t) expand or reduce the quantity of money  Page 17  indefinitely. And monetary policy, via its effects on the wider economic environment, will also influence these decisions.

Broad money also includes physical cash circulating outside the banking system but this is only a fraction (4%) of the total: the vast majority is accounted for by sterling deposits in commercial banks (the precise definition of M4 is here). Traditionally, narrow money has been defined as physical cash plus reserves (the deposits of commercial banks at the central bank). However, the nature of these reserves changed significantly in 2006, when the Bank of England began remunerating them, at Bank Rate (this was done to ensure short-term rates in interbank markets stayed close to the official interest rate – Clews (2005)). see and). It no longer made sense to group them with (non-interest-bearing) cash and at that point the Bank ceased publishing a combined series for “narrow money” (Janssen and Andrews (2005) ). This change explains the initial, pre-QE jump in reserves around that time (evident in Chart 1). As I try and explain in the body of the talk I think it also has some bearing on the impact of QE. 2. I’ll say a little more about this process later on, when discussing the contrasting patterns of “narrow” and “broad” money growth over the past. 3. Reflecting this point commercial bank deposits are sometimes referred to as “inside” money – they’re assets within the (private-sector) financial system, not for the system as a whole. By distinction, central bank reserves are sometimes called “outside” money. 4. Even a “helicopter drop” may not add to net wealth.
Finally, it may also be said that, from a medium and long-term perspective, population ageing exerts upward pressure on items such as healthcare, care for the elderly and, in particular, pensions. In this latter case, the reforms introduced in recent years, such as raising the retirement age, the definition of a factor of sustainability linking the initial pension to the increase in life expectancy, and the new mechanism that makes the annual revision of pensions conditional upon balance between the system’s revenue and expenses, with ceilings and floors, have  7/8  contributed to containing the increase in expenditure and to shoring up the long-term sustainability of the pensions system. That said, in the absence of increased revenues, the adjustment mechanism would rest mainly on a reduction in the average pension relative to the average wage, which is known as the “replacement rate”. With a view to the future, it would be advisable to set an “objective replacement rate”, on the basis of which system revenues should be adjusted to ensure their sustainability. It would moreover be desirable if the reform strategy chosen were to lead to an increase in the system’s transparency and a stronger relationship between contributions and benefits, maintaining automatic adjustment mechanisms that ensure financial equilibrium. Challenges for the European Union governance framework I should like to conclude with a very brief reference to the risks arising in Europe and globally too from political positions and currents of opinion contrary to globalisation and free trade.

Qualitative survey balances can be adjusted to match the mean and variance of an estimated productivity gap from which inference about productivity may be drawn. See Charts 3.7 and 3.8 in the August 2011 Inflation Report. 9  Potential productivity is constructed using the BCC surveys of capacity utilisation and productivity data from the ONS for the manufacturing sector and private services excluding finance sector. The BCC survey asks firms whether they are operating at or below full capacity. Since the survey measures are qualitative, they have been mean and variance adjusted over the period 1989 to 2006 to infer a measure of the gap between actual and potential productivity. The trends shown in charts 5 and 6 are chosen such that the shortfall between actual and potential productivity maps closely to the mean-and-variance-adjusted survey measures of spare capacity. 10  The annual flow of business investment prior to the recession averaged around 7% of the UK capital stock. A 20% reduction in business investment for 5 years would result in the capital stock being only around 2% lower (assuming plausible assumptions for the rate of depreciation). 4  BIS central bankers’ speeches  It is possible that this simple arithmetic underestimates the impact of the falls in investment spending, particularly if the falls were concentrated in highly-productive forms of investment. Perhaps because in the face of the deep recession companies were less willing to undertake riskier, high-return investment projects, and the constraints on UK banks made them less willing to finance them.
At a time like the present, when governments around the world have been ready to adopt measures that were barely conceivable a few months ago, this is perhaps a lesson that has already been quickly learned. The region's recovery from the Asian financial crisis was nearly as rapid as the unfolding of the crisis itself, thanks to the vigorous measures taken by authorities in the region and the underlying momentum and vibrancy of the Asian economies. The experience of this shock generated a determination in the region to try to ensure that such a crisis did not happen again, and to strengthen financial systems against other forms of crisis. It would be complacent to suppose that we have been completely successful in these aims. We are, after all, in the midst of a serious financial crisis that no efforts by this region on its own could have prevented. The region’s financial systems may have been largely undamaged by the first wave of that crisis. But the second wave is now upon us, and this second wave may well carry greater risks to emerging markets. Even so, the determination among Asian economies in the aftermath of 1998 to build strength against future crises has placed this region in a much more resilient position. The raw resources for maintaining financial stability – foreign exchange reserves – have more than doubled in most of the economies in this region over the past decade.

Many economies have embarked on financial-sector reform, with the aim both of ensuring that the banking system is well capitalised and of promoting other forms of intermediation. Central banks have seen a strengthening of their capabilities and a clarification of their policies and roles. Most heartening of all, co-operation among central banks in the region has flourished. Many examples could be cited, from bilateral swap agreements to payment system linkages. 1  Zeti Akhtar Aziz: "Enhancing the Resilience and Stability of the Islamic Financial System": Governor's Keynote Address at the Islamic Financial Services Board and Institute of International Finance Conference, Kuala Lumpur, 20 November 2008. 2  BIS Review 12/2009  At the centre of this regional co-operation has been the work of EMEAP in facilitating practical co-operation in all areas of central bank activity, and particularly in surveillance and crisis management. I should add that these activities have benefited enormously from the wisdom and leadership of Governor Zeti and her colleagues. The Zeti Taskforce – the EMEAP taskforce on Regional Financial Co-operation – has laid out a comprehensive framework for enhancing central bank co-operation, which has been adopted by EMEAP as a blueprint for action. Calls were also made in the aftermath of the Asian financial crisis for a reform of the global financial architecture. Yet one of the great disappointments from those years, particularly when set against the real progress in regional co-operation, was the general absence of concrete measures on an international scale.
Some productive investments will naturally be highly innovative, and potentially also highly risky. Therefore, not all productive investments will be appropriate for annuity books. Those more risky assets may be appropriate for other substantial parts of the UK insurance balance sheet, such as with-profit, unit-linked, and shareholder funds. But the universe of productive investments will likely include long-term illiquid assets with secure cash flows that are a natural match for annuity liabilities. Reforms have been proposed in this area. These relate to assets with prepayment risk and/or subject to construction risk. These changes, combined with application process reforms to reduce administrative burden and approval time where possible, could unlock further opportunities for productive investment in MA portfolios. We have carefully considered the specific asset classes that insurance firms identified in HM Treasury’s Call for Evidence, and we believe these reform proposals address most of them. We remain open and ready to learn about any examples of others - the more specific the better. I want to be clear that the PRA is not doing industrial policy here: we are not seeking to tilt the playing field. What we are doing is removing disincentives that the existing regime unnecessarily places in the way of investment in productive assets that are suitable to back annuity liabilities – a levelling of the playing field. The valuation of liabilities Levelling the playing field is one thing – keeping it safe for the players, not to mention the crowd – is another altogether.

The MA and the risk margin between them are key determinants of the balance sheet valuation of most life insurance liabilities. Both play an important role, and there are independent cases for the reform of both. We have set out our main concerns with the existing MA framework, including in the recent discussion paper (DP) we published alongside HM Treasury’s Consultation Document [7]. These can be broadly summarised as  Page 5  1. the fundamental spread (FS) does not capture all retained risks and is generally low, 2. the FS is not sensitive to differences in risks between assets and 3. the FS does not adjust to shifts in the credit environment unless a default or downgrade has occurred. We have also expressed concern regarding the size of the risk margin, and its sensitivity to low interest rates. However, given the interaction between the MA and the risk margin on balance sheets, we cannot look at potential reforms in isolation. In order to maintain transfer values in line with observed prices, the calibration of changes have to be considered as a package. Undertaken in isolation, a large cut to the risk margin would fail this simple test, and would increase the risk that an insurer’s liabilities could not be transferred to a third party if it were to fail. This would expose policyholders to an unacceptable risk and would be incompatible with the fundamental principles behind the Solvency II regime.
Swedish participation should wait until these reforms had been implemented and unemployment had fallen. For similar reasons, the weak public finances might also heighten the risks associated with Swedish membership. In the ensuing debate, the stabilisation policy argument against EMU participation came to be called the insurance argument. By retaining a national monetary policy, Sweden could insure itself against the potentially major negative effects of a macroeconomic shock. At the same time, the report pointed out that participation in the monetary union could confer benefits from a more stable exchange rate. But the authors did not believe that such benefits would outweigh the advantages of retaining a national monetary policy. The Riksbank’s opinion The Riksbank did not agree with the report in every respect. The Governing Board considered, for instance, that it exaggerated the risks of an external shock hitting the Swedish economy alone. The Board noted that to a large extent the shocks in Sweden since the 1970s could be said to have been self-inflicted. The divergent cyclical pattern probably had to do with the direction of economic policy, where strong fiscal stimuli and repeated devaluations had generated high inflation and problems with costs. The Board also stated that the report exaggerated policy’s freedom of action in reality in an outsider position: it would not be possible for Sweden to implement a monetary policy that differed markedly from that in the monetary union.

The Riksbank believed this expenditure would be higher than estimated in the report and that small and medium-sized firms in particular would find it difficult. The Riksbank also drew attention to the risks of Sweden being discriminated against in various respects. One example was the disadvantageous terms for outsider countries in TARGET, the European payment system. Moreover, an outsider position for the time being would involve additional costs in various parts of the economy. Financial institutions, for instance, would have to operate twin systems in order to remain competitive. Negative long-term effects of remaining outside Such is the nature of the long-term effects that assessments of them are unlikely to change fundamentally in the course of a year or two. Still, there is new and additional information that may cast a somewhat different light on certain aspects. One major issue concerns the link between EMU and the single market. There is empirical evidence that the single market is exerting downward price pressure in the European Union. Some assessments suggest, moreover, that EMU may lead to a further price fall; figures as high as 10 to 15% have been mentioned. If the effects were to be of that magnitude, the welfare gains would be substantial. 3  BIS Review 92/1999  In practice, however, it is not easy to distinguish the parts that EMU and the single market are playing in price formation. Empirical data therefore have to be treated with caution.