samchain/econo-pairs-v1 huggingface dataset:
The Central Bank’s tight monetary stance has, on the other hand, brought results, as last November inflation dropped below the target of 2½ %. Old theories reappear Recently there has been extensive discussion concerning the Central Bank of Iceland, its policy and objectives. Now that inflation has been subdued, old theories to the effect that the Central Bank should pursue multiple objectives have once more come to the fore. The Bank is to ensure full employment, it should have specific exchange rate objectives and ensure economic growth. These views reflect considerable over-estimation of the power of the Central Bank and the instruments at its disposal. It is also an oversimplification to focus exclusively on interest rates, as many people do, and expect that further interest rate reduction will solve all the problems. The Central Bank has, over the past two years, cut its rates thirteen times, and the bank’s policy rate is currently 5.3%. While this is naturally a higher rate than in the Euro zone, the problems which have to be grappled with there include long-term economic stagnation and high unemployment, and the future is by no means bright. In Norway, on the other hand, the Central Bank rate is 6%, to take an example of a neighbouring industrialised country. The Central Bank of Iceland’s real policy rate is currently around 2¾% considering future prospects, which is slightly under current estimates of the equilibrium interest rate.

The government has decided to accelerate certain projects on which it will spend ISK 6 billion. Local authorities and other parties have announced measures aimed at the same objective. So it is clear that much has been done which can be expected to increase economic growth and reduce unemployment in the coming months. Ahead of us are the most extensive construction projects in Icelandic history, which will have a major impact on the economy in both the short and long term. They will require sound economic management. It is important to foresee early enough what effects this development could have if no  action were taken. It would be completely irresponsible to simply allow things to take their course as if nothing needed to be done to compensate for these developments, as has actually been proposed in some quarters recently. The Central Bank’s analysis of the proposed development indicates that, with appropriate economic management actions, it should be possible to maintain economic stability and keep inflation under control. The Central Bank of Iceland will do its utmost to achieve this, as it naturally bears an indisputable legal responsibility to do so.
37 In the setting of monetary policy, the Bank’s role from the end of the second world war through to the 1990s was as implementer, not decision-maker. The Bank had little, if any, independence in the setting of monetary targets or instruments. That changed progressively in the 1990s and decisively after 1997. Through the Bank of England Act 1998, the Bank was granted operational independence for the setting of monetary policy in the UK, to meet an inflation target set by government. Specifically, monetary policy came to be set by a nine-person Monetary Policy Committee (MPC), meeting monthly and comprising five Bank “internals” and four “externals”. 38 In the light of the crisis, the UK’s policy framework has been further changed. The Financial Services Act 2012 vested the Bank with further responsibilities, creating a new 10 person Financial Policy Committee (FPC), meeting quarterly to execute macro-prudential policy. The  31  Asch (1951). 32  Janis (1972, 1982). 33  Hughes and White (2010). 34  Kaplan (1964). 35  Tuckett (2011). 36  Janis (1982). 37  Capie, Goodhart and Schnadt (1994). 38  King (2010), Lambert (2005). BIS central bankers’ speeches  5  FPC sets regulatory policy to ensure the stability of the financial system as a whole. Like the MPC, it comprises both internals and externals. 39 The Financial Services Act also gave the Bank responsibility for micro-prudential supervision – ensuring the safety and soundness of individual financial firms.

It has been argued that targeting a 2% inflation rate results in this zero bound constraint binding too frequently, inhibiting the effectiveness of monetary policy. 47 A higher target would loosen that constraint. This academic debate may run for some time. On the financial stability side, the position is less straightforward. There is no single, easily observable or quantifiable target for systemic risk against which to hold the FPC and PRA to  45  Bernanke and Mishkin (1997) first coined this term in the context of inflation–targeting. 46  Shiller (1997). 47  Ball (2014). BIS central bankers’ speeches  7  account. And the public at large often do not have well-defined or strong attitudes towards financial stability – except, perhaps, when things go wrong. Since 2012, the Bank has been surveying the general public on how they believe the Bank has performed in protecting the financial system. Some reassurance can perhaps be taken from the fact that this has moved from a net dissatisfaction score of 13 in 2012 to a net satisfaction score of 40 today. 48 Nonetheless, by itself this approach falls well short of having a clear objective against which the FPC and PRA can periodically be assessed. The FPC has begun publishing a set of financial stability indicators against which it assesses systemic risk and is held to account.
The Bank of England – Financial Policy Committee and Prudential Regulation Authority – believe that a regime of concurrent stress testing of banks is an important part of the answer. Following a recommendation from the FPC earlier in the year, the Bank has today published a Discussion Paper setting out plans, to be implemented progressively over a number of years, for just such a stress-testing regime for the United Kingdom. In broad terms, each year the FPC would design a (set of) common scenario(s) that it judges the banking system needs to be able to survive; the PRA would apply those scenarios to the major banks, dealers and building societies, alongside more firm-specific scenarios; drawing on analysis from across the whole institution, Bank staff would analyse capital adequacy under stress drawing on a range of models, including firms’ own models. The results would inform judgments by the FPC and the PRA Board on whether remedial measures were needed. In some degree, both the stress scenarios and the results would be published. That very brief summary leaves a lot of questions unanswered, but suffice to say that we believe that a stress-testing regime can enhance the quality of the Bank’s macro and micro prudential supervision and, over time, underpin confidence in the banking system. In addition, I believe that a stress-testing regime will be very important for another reason: accountability to the public via Parliament.

The latter, where losses flow to the top of a financial group, are associated with Single-Point-of-Entry resolutions.3 The choice of how equity and gone-concern loss-absorbing capacity should be distributed across a group is, therefore, part and parcel of deciding its preferred resolution strategy. That was not understood as international banking policy was developed over recent decades, and sets up my next issue. Reconciling the Basel Concordat, the Core Principles of Banking Supervision, the Capital Accord, and resolution policy The development of international policy on resolution is, arguably, exposing an underlying need to reconcile the provisions of various international agreements in banking regulation and supervision. There are three that are relevant: the Concordat, the Core Principles and the Capital Accord. Bear with me for a moment while I set up the point I want to make. The Concordat4 establishes the division of labour amongst home and host authorities – the foundation stone of international co-operation amongst bank supervisors. First agreed in 1975 in the wake of the failure Herstatt, updated after Banco Ambrosiano in 1983 and again in 1992 following the closure of BCCI, the Concordat was most recently spring cleaned in 1996. It is premised upon “consolidated supervision” of a banking group as a whole. What that means is that so long as the host supervisors of local outlets of an international banking group are satisfied that the home supervisor is capable of supervising the consolidated group as a whole, the distribution of capital resources across the group, both within and across jurisdictions, can be unfettered.
Bank lending represented around 80% of capital flows to emerging markets during the 1970s. But by the end of the 1990s, FDI accounted for around 80% of emerging market capital flows, with portfolio equity accounting for much of the remainder. As Ken Rogoff, the new Economic Counsellor to the IMF, pointed out in 1999 there are still several biases towards debt rather than equity finance in capital flows to emerging markets. One of these is deposit insurance in both creditor and debtor countries which makes it more difficult for the authorities to avoid being seen as providing some implicit support to international loans by domestic banks. There is no easy answer to this problem, but a shared concern in both borrowing and lending countries is the implicit insurance which both sides are giving to large parts of the financial system. The moral hazard so created is not restricted to international lending, but it does affect the incentives for the form of investment in emerging markets. We need also to guard against institutional or regulatory mechanisms – both international and domestic – which favour  4  BIS Review 71/2001  short-term over longer-maturity capital flows. In the long run, the solution is for emerging markets to create legal structures and a stable economic policy environment that provide the confidence to support inward equity investment in their economies. 5. Finally, greater transparency allows better informed decisions by both borrowers and lenders, and reduces the risk of contagion by allowing markets to differentiate among borrowers.

The IMF should not attempt to impose a solution on borrowing countries. It should be willing to lend into arrears in circumstances where countries have chosen the route of a standstill and its associated conditions. But it should not create expectations that exceptional access is the norm. Conclusions Progress can be made only by closer co-operation between the developed and developing countries. The development of standards and codes, the design of IMF lending and the wider agenda of trade liberalisation and international co-operation are examples of the new partnership of which I have spoken. The closeness of the relationship between Britain and India is a compelling reason for our working together in the various international fora to improve the international financial system. In his final report to the British Government on the creation of the Bretton Woods system, Maynard Keynes wrote that "the excellence and closeness of our relations with the Indian delegation deserves special comment. Sir Chintaman Deshmukh handled his case with high dignity, ability and reasonableness; we always supported him on his interests and he always supported us on ours". Perhaps our joint work on international financial architecture will recall the common architectural heritage of the Bank of England and official buildings in New Delhi. Herbert Baker, who, with Lutyens, was responsible for the  8  BIS Review 71/2001  design of early New Delhi also rebuilt the Bank of England in the inter-war period.
Even the Basel II regulations, which will come into force in 2007, provide scope for regarding mortgage bonds covered by legislation on secured bonds as more creditworthy than mortgage bonds not covered by such legislation. However, the Swedish market for mortgage bonds is already a large, liquid market that has functioned well since its deregulation at the end of the 1980s. It is the third-largest mortgage bond market in Europe, after the German and Danish markets. After the Swedish government, Swedish mortgage institutions are the largest issuers in both the money and bond markets in Sweden. As much as around 40 per cent of all lending to the non-bank public is mediated via mortgage institutions, which largely finance their activities by issuing bonds and certificates in the securities markets. The market is dominated by five mortgage institutions, which together account for around 99 per cent of all borrowing. The four largest mortgage institutions are subsidiaries of the four largest Swedish banks, while the fifth, SBAB, is state-owned. The mortgage institutions’ annual reports show that as much as around 30 per cent of securities borrowing is carried out abroad, which suggests that there was already considerable interest among foreign players before the legislation on secured bonds was proposed. However, there are considerable differences between the institutions.

The results show that a significant part of the debt is accounted for by households that have both substantial assets and fairly sizable margins; not even a sharp increase in interest rates or unemployment would affect their ability to service debt to an extent where it would seriously increase the risks in lending to Swedish households. The risks in lending to the household sector therefore remain small, even when individual households are studied. Here it can be added that it was not the household sector that caused problems for the banks during the financial crisis of the early 1990s; despite the fact that the interest ratio rose to 11 per cent in 1991 and unemployment peaked during 1993 at 8.5 per cent. With regard to developments in house prices, the assessment is still that Swedish house valuations are relatively reasonable. Fundamentals such as rising disposable incomes and falling interest costs could to a large extent explain the observed price trend. The demand for housing is expected to grow more rapidly than the supply. However, developments in house prices in Sweden vary considerably from region to region. Prices in metropolitan regions have risen by a significantly larger amount than for the country as a whole, although prices in the Stockholm region have stagnated over the past two years. There has also been a steeper price rise for tenant-owned apartments than for single-family dwellings. It is difficult, at present, to envisage any tendencies towards imbalances that could lead to a substantial fall in prices.
Moreover, the attempt to examine and illustrate these relationships on the basis of the performance and the available empirical evidence for the European economy – in comparison with that of the US but also with the benefit of the different practices and experiences in European countries – did require some time for exposition; but, I believe, it has provided us with some useful conclusions of policy relevance. Let me end on an optimistic note. The European economy is currently experiencing robust economic growth which is expected to continue, benefiting from the ongoing strength of global economic activity, despite the slowdown of the US economy, but primarily relying on internal sources of growth, with domestic demand projected to expand at a solid pace. There are, of course, uncertainties and several risks surrounding this central and likely scenario. But, at the same time, there are encouraging signs that the supply-side of the European economy is responding positively to the reforms in markets and institutions implemented over the past few years. Productivity growth is picking up, employment is rising and the unemployment rate is projected to further decline. If future developments and further analysis confirm the indications of supply-side improvements, we can look forward to a gradual increase in the European economy’s potential for higher sustainable growth.

The theme of today’s seminar – “Strategies for the Development of Islamic Capital Markets” – is most timely and relevant to Hong Kong as we are about to introduce an enhanced legal framework as a first step to promote the sustainable development of Islamic finance and we are eager to learn the other key components to form a coherent strategy. We very much look forward to the insightful views of the distinguished speakers on the latest developments of the global Islamic capital markets, the prospects and opportunities that lie ahead, and further ideas to bring Islamic capital markets to the mainstream. Growing importance of Islamic finance in the global financial scene 4. Being an international financial centre, it is important for Hong Kong to embrace Islamic finance given its rising prominence in the global financial arena. The size of the global Islamic capital markets has expanded more than 10-fold since its early phase of development in the 1980s, reaching an estimated $ trillion at the end of 2012.1 With this critical mass, Islamic finance has become an integral part of the global financial system not only catering for the needs of Muslims, but also attracting other investors and fund raisers, regardless of race and religion. Reflecting the deepening sophistication of this market, we are seeing an increasing variety of products and services, ranging from Islamic banking products and sukuk, to Islamic equities, Islamic funds and takaful. 5. This remarkable market deepening process has not been retarded by the challenging financial landscape.
As I already said, we have the whole day to discuss these tricky issues thanks to our speakers who are not only prominent but also open and humble; I noticed and appreciated these qualities in their recent speeches exploring the new territory we are in. Instead, let me conclude on the limits of the scope for action by CBs. Indeed, I prefer to stress that central banks cannot be the only game in town and, more precisely, that monetary and macro-prudential policies are not conducted in a vacuum. Structural problems require structural answers; in particular, only structural reforms can raise potential growth; aggregate demand policies cannot provide a substitute. What they can do –and it’s precious— is to help better manage time. Speaking of managing time, I think mine is up now and I shall give the floor to Christian who can give us all the benefit of his experience and wisdom. Short bibliography: R. Baldwin, C. Teulings, 2014: Secular Stagnation: Facts, Causes and Cures, CEPR Press; in particular, Chapter 8 by O. Blanchard et al., Chapter 9 by R. Caballero and E. Farhi, Chapter 11 by R. Koo. BIS Annual Report, 2014: “Debt and Financial Cycle” (Chapter IV). O. Blanchard, E. Cerutti and L. Summers, 2015:“Inflation and Activity – Two Explorations and their Monetary Policy Implications”, IMF Working Paper No 15/230.

N. Chatelais, A. D. Gaye and Y. Kalantzis, May 2015: “Low inflation in the euro area: import prices and domestic slack”, Rue de la Banque 6, Banque de France (showing no clear-cut change in the slope of the Phillips curves in the Eurozone and France over the last 10 years). M. Draghi, the Economic Club of New York, Dec. 4, 2015, based on work by a Eurosystem task force, including BDF staff: http://www.ecb.europa.eu/press/key/date/2015/html/ sp151204.en.html. E. Engen, T. Laubach and D. Reifschneider, 2015: “The Macroeconomic Effects of the Federal Reserve’s Unconventional Monetary Policies”, Finance and Economic Discussion Series 2015-005. Board of Governors of the Federal Reserve System (and references therein). S. Guilloux-Nefussi, March 2015: “Globalization, Market Structure and the Flattening of the Phillips Curve”, Banque de France Working Paper No 539, (proposing a theoretical model explaining a possible flattening of the Phillips curve since the 90s). IMF Global Financial Stability Report, April 2013 (Chapter I). H. Rey, Nov. 2014: “Monetary Policy and the Global Financial Cycle”, BDF International Symposium on “Central Banking: The Way forward” and Jackson Hole Symposium Proceedings, Sept. 2013. 4  BIS central bankers’ speeches
Benoît Cœuré: Structural reforms – learning the right lessons from the crisis Keynote speech by Mr Benoît Cœuré, Member of the Executive Board of the European Central Bank, at the Bank of Latvia Economic Conference 2014, Riga, 17 October 2014. *  *  *  Summary One lesson that we learned after the financial crisis is that achieving sustainable economic growth is always about both demand and supply. Moreover, policies that support demand empower policies that support supply, and vice versa. In the post crisis environment of a large debt overhang, partly structural unemployment and weak productivity levels, supply-side policies can increase the effectiveness of demand-side policies and help empower demand. By raising potential growth they create more space for spending (governments, firms and households). Additionally, by reactivating/reskilling the workforce, they allow employment to respond faster to higher demand. Finally, they ensure that higher demand is channelled towards the right sectors. While their long-term positive effects are undisputed, structural reforms, especially in times when monetary policy is at the lower bound, are seen to have negative short-term effects through increasing real interest rates. However, structural reforms can be effective in the short run as they raise expectations of higher incomes and cause firms to increase investment today and bring forward the economic recovery. Achieving a positive short-term impact from structural reforms depends on both the pace and composition of reforms. First, instead of the traditionally gradual approach, reforms need to be frontloaded (as e.g. in Latvia).

This would mean taking the pain but missing out on the gain. And it would only make getting out the crisis harder. 24  8  See Eggertsson, G., and P. Krugman (2012), Debt, deleveraging and the liquidity trap: A Fisher-Minsky-Koo approach, Quarterly Journal of Economics, Vol. 127, No. 3 (August), 1469–1513. BIS central bankers’ speeches