samchain/econo-pairs-v1 huggingface dataset:
There are challenges to measuring the return on capital. Following the literature, we measure it in national accounts data as the gross operating surplus (the output of the firm minus their labour costs and capital depreciation), per unit of capital, adjusted for capital gains. Reis (2021) shows a similar pattern across a series of alternative measures of the return on capital using US data. See Bailey et al. (2022) for more details. 17. In reality, firms borrow at a premium over the risk-free rate capturing, among others things, the riskiness or uncertainty of the investment project and intermediaries’ risk aversion. Some (for example Broadbent, 2016; Vlieghe, 2017; and Melolinna et al., 2018) have discussed how changes in these factors may have increased the premium, in particular since the global financial crisis. Others argued that, since intangible assets are more risky, this premium has increased as the economy has become more intangible intensive (Haskel and Westlake, 2022). Such an increase would imply that funding costs have not declined in line with risk-free rates, so that the rise in the wedge that we consider here would partially reflect a rise in firms’ borrowing costs. However, as described in more in detail in (Bailey et al, 2022), the results documented below are robust to adjusting the estimated wedge for firms’ funding costs. 18. The accompanying paper looks at the period from the early 1970s (Bailey at al., 2022). The dynamics of the wedge followed a U-shaped pattern: falling from the 1970s to the 1990s and then rising.

It is thus also in the interest of the central banks to do what they can in various ways to avoid a situation where the economy goes into recession because of a burst bubble. The costs of the most recent financial crisis have been so high that it is difficult to claim that there would not have been any potential gains in preventing the financial bubble from arising. I mentioned at the beginning of my speech that the most recent financial turbulence is the greatest since the Depression and that the downturn in the world economy is the largest since the Second World War. Unemployment in the United States, for instance, has risen from around 4 per cent to more than 10 per cent in just over two years. The percentage of US households experiencing payment problems is the largest ever noted and millions of households have been forced – and probably further millions of households will be forced – to hand over their home to the lender for compulsory sale. In Sweden unemployment has risen much less during the same period, but it is now at just over 8 per cent, the highest level noted for more than 10 years. A further argument in favour of central banks preventing excesses in asset prices is the risk of what is known as moral hazard.
Mr Bäckström elucidates the economic situation in Sweden and describes the consequences it may have for future monetary policy  Speech given by Mr Urban Bäckström, Governor of the Sveriges Riksbank at Föreningssparbanken, Ulricehamn on 1 September 1999. *  *  *  First a word of thanks for the invitation to visit Ulricehamn and talk about something that is close to the heart of a Riksbank governor, namely Sweden’s economic situation. I shall be describing the situation as I see it and saying something about the consequences it may have for future monetary policy. Unexpectedly strong trend The new statistics in recent months show that economic activity is stronger than most forecasters had foreseen as recently as in the spring. The growth of both domestic and external demand has been higher than expected. Relative to the first half of 1998, the GDP growth rate for the first six months of this year is an estimated 3.7%. Most observers are in the process of revising their forecasts upwards, if they have not already done so. In the Inflation Report last June the Riksbank judged that growth this year would reach 2.5%, followed by 3% next year as well as in 2001. When the Executive Board discussed monetary policy on 12 August, however, our assessment was that this year’s growth rate would be 3.5%. We also saw grounds for an upward revision of growth in the next two years, though the prospects for that period are more uncertain.

A point worth noting is that, if they continue, today’s higher market interest rates will have a direct impact on inflation from household interest expenditure, just as the recent years’ steeply falling interest rates had a sharp downward effect on inflation. In that case, the higher interest expenditure would pull CPI inflation upwards fairly rapidly towards the targeted rate and above inflation’s underlying rate (UNDIX). Monetary policy would then face the same situation, albeit in reverse, as on so many occasions in the recent past. An attempt to counter the tendency by tightening the monetary stance would accentuate the direct impact and add to the increase in CPI inflation. That is why it is inflation excluding transitory factors that is the focal point for monetary policy. Central issues for monetary policy in an upward phase About a fortnight ago the Executive Board of the Riksbank confirmed that the stronger growth can lead to increased price pressure. Monetary policy may accordingly need to be conducted in a less expansionary direction in the future. But the Board also emphasised that the Swedish economy is not yet in such a situation. The trade-off between inflation and growth is uncertain and earlier relationships therefore have to be tested in the light of new information. I consider that this conclusion still holds. When the Riksbank begins to talk of a less expansionary monetary stance, I can imagine it raises a number of questions. I should like to take this opportunity of discussing some of them.
If total saving is higher than domestic investment, some of the saving must be invested in foreign assets and thus used for investment abroad. If, on the other hand, total saving is not sufficient to cover domestic investment, the county will have to borrow from other countries (from private or public sources). This means that countries with a current account surplus can invest in or lend to others, while countries with a deficit borrow from abroad. In theory, capital should flow from more developed countries to emerging economies, as the return on capital should be higher there. This is also largely what we saw in Europe before the crisis – countries in southern and eastern Europe had current account deficits, while countries like Germany and Sweden had surpluses. Figure 1 shows current accounts, private net capital and GDP growth for eastern and central Europe. Many of these relatively rapidlygrowing countries experienced a rapid expansion of credit, which contributed to the build-up of substantial current account deficits in the years before the crisis. 6 These countries then experienced steep falls in GDP during the crisis, which raises some doubts about whether the capital flows were really motivated by high returns. At the global level, however, there are many cases where less-developed countries, such as China, are lending to developed countries, such as the United States and the United Kingdom. 4  This speech is largely based on a paper I have written together with Henrik Braconier, see Braconier and Ekholm, 2011.

The agreed wage increases came out at an average of around 3.5 per cent a year during the agreement period 1995-1997, while the average rate of wage increase was just over 5 per cent. The increase in productivity during the same period was 1.8 per cent a year. Wage development was thus scarcely compatible with the inflation target of 2 per cent. At the same time, open unemployment remained high. During the wage agreement period 1995-1997 open employment was over 8 per cent. The bargaining rounds in 1995 cannot therefore be considered a success from the economy's point of view. In 1998 it was time for the next round of central wage agreement bargaining. By then CPI inflation had fallen. The Riksbank also raised its repo rate at the end of 1997, partly due to the risk of rising wage inflation. The 1998 bargaining round took place during the aftermath of the Asia crisis, while the krona appreciated significantly, which probably had a subduing effect on wage demands in the export industry. These negotiations entailed the herald of a new "Saltsjöbaden spirit" in the Swedish labour market with the signing of the 1997 Industrial Agreement by twelve employers' associations and seven  BIS Review 63/2002  1  1  trade unions in industry. The Industrial Agreement, which covered approximately 600 000 employees and ran for a period of three years, was meant to provide a foundation for a good wage development by promoting industrial development, profitability and competitiveness.
Work is in train on stress testing, on loss allocation and on disclosure requirements, as well as on ensuring consistent application of the Principles for Financial Market Infrastructures (PFMIs) which set regulatory expectations for CCPs at a global level. All of this is important not only in its own right, but also to provide the market – the users of CCPs – with the tools and incentives to monitor resilience and drive effective risk management in CCPs themselves. To encourage competition between CCPs on resilience, not cost. •  At the same time, the first line of defence for a CCP lies in the resilience of its members. Ongoing work to raise the prudential standards for banks on capital and liquidity, among other areas, should greatly reduce the risk of CCPs having to deal with a failing clearing member. And the progress I mentioned before on G-SIB resolution should help to ensure that, where a firm does fail, its payment and delivery obligations to the CCP continue to be met. I should add as an aside that there is more still to be done internationally in terms of removing technical and other obstacles to maintaining continuity of access to CCPs and other FMIs in the context of bank resolution. That continuity is not just essential to the bank in resolution but may also be critical for clients. If there is doubt about continued access to clearing services from a bank in resolution, clients may look to migrate rapidly to another provider.

It could also similarly arise from a determination that there is no realistic prospect of a successful auction to return to a matched book or that the CCP’s own rules to allocate losses or tear up contracts are either not yet available to it or will undermine financial stability or the objective of continuity through full tear-up and closure of the service. So – in line with the Key Attributes – it needs to be possible to place the CCP into resolution before its loss allocation rules are exhausted. These are all examples of entry into resolution caused by clearing member default. But nondefault losses could also bring a CCP down and it is certainly possible that a breach of a CCP’s regulatory requirements with no reasonable likelihood of replenishing its capital would present a trigger point for intervention. I have mentioned the incompatibility of full-tear up with the objective of continuity. But an intervention by a resolution authority cannot by itself guarantee a successful auction. To do so, may still require partial tear-up and forced allocation and these would seem to be necessary tools in any resolution toolkit for a CCP. How losses are then allocated upon tear-up again  4  BIS central bankers’ speeches  goes to the question of the timing of intervention and whether the tear-up takes place before the resources available to a CCP have been exhausted or after it.
If actual and expected inflation vary less, this will entail fewer variations in real interest rates and real exchange rates. This may, in turn, allow for the more stable development of demand and, thereby, the real economy. Well-anchored inflation expectations also make it easier for monetary policy to  BIS Review 68/2010  5  stabilise the economy. Unless households and companies immediately adjust their inflation expectations upwards, a minor increase in the interest rate will be enough to prevent an inflationary impulse from becoming entrenched. And when substantial interest rate changes become less necessary, fluctuations in the real economy become less extensive than when inflation expectations are poorly anchored. One way of putting it is that well-anchored inflation expectations make it easier for central banks to take consideration of the real economy. For Sweden’s part, one important explanation for the increased macroeconomic stability is probably also that inflation targeting – together with a more long-term focus for fiscal policy – spelled the end of the uneven “stop-go” policy entailed by the many devaluations of the 1970s and 1980s. Quite simply, the stabilisation policy has shown more orderliness. To sum up, the manner in which monetary policy is conducted across the world has thus changed quite extensively in the last fifteen to twenty years. Within both the central bank world and among academic researchers, a great deal of effort has been expended upon attempting to find a solution for how monetary policy best should be formulated. These efforts have also borne fruit.

The presence of a liquidity risk reduced confidence in the Swedish banking system in general and led to a disruption to the Swedish financial system. If the banks had internalised this liquidity risk, lending in the Baltic would probably have been less extensive. One circumstance that may be worth taking into account here is that the credit market, in practice, is not entirely homogenous. One distinction that can be made is to view the credit market as being divided into a corporate market and a household market. In the recent period in Sweden, we have seen ample evidence of the great variance in developments between these two sectors (Figure 9). 16  BIS Review 68/2010  Figure 9 Lending to companies and households Percentage of GDP 80  80 Lending to companies  75  75 Lending to households  70  70  65  65  60  60  55  55  50  50  45  45  40 Dec-06  40 Jun-07  Dec-07  Jun-08  Dec-08  Jun-09  Source: The Riksbank  Even if certain factors affecting the lending rate are common to these two sectors, for example the policy rate, other factors can be sector specific. In other words, there is no common interest rate for the corporate sector and the household sector. Consequently, no single equation can be used to describe the lending rate for all sectors in the economy.
When liquidity was abundant, asset values were high and marked-to-market profits were high. Now that liquidity is scarce and asset values lower, mark-to-market losses and write-downs are high. The widespread use of credit ratings in valuing assets and managing counterparty credit risk has also had an impact. Credit rating agencies try to rate through the cycle. And for corporate ratings they may well succeed. But for some structured finance products, such as re-securitisations of sub-prime backed securities they (like many others) misjudged the impact of a downturn in the cycle and the non linearity of returns. As a result, there have been wholesale downgrades of the credit ratings of structured securities over the past 12 months. The problem for the financial system is that these ratings are often hard-wired into decision making. Certain classes of investors are forced to sell assets when they lose a AAA or investment grade rating. Remuneration structures have also amplified risk taking in the upswing. Two features of remuneration in the financial industry are that they are asymmetric (there is unlimited upside for high performance but a floor on the downside) and tend to be based on short-term targets. The asymmetry in reward creates an incentive to gamble and short-term performance targets encourage traders to follow rather than counter a deviation from longrun fundamentals. Even where the incentives were paid in options linked to the medium-term performance of the employer, the apparent rewards have been highly cyclical.

John Gieve: The financial cycle and the UK economy Speech by Sir John Gieve, Deputy Governor of the Bank of England, at the London Stock Exchange, London, 18 July 2008. *  *  *  Introduction These are troubled times for both the City and the economy more widely. After 15 years of unbroken growth and low inflation, the prospect for the rest of this year is uncomfortable: inflation will continue to rise sharply while growth tails off and unemployment picks up. And the downturn is particularly pronounced in the banking sector. While the acute concerns about funding that emerged last summer have ebbed a little since March, worries about future losses, profitability, and even the viability of some business models, have been growing on both sides of the Atlantic, leading to sharp falls in most equity prices and, in the UK, to difficulties in bank rights issues. This morning I want to say a little about the challenges this sets the MPC in the short term but also to address some of the longer term lessons of the credit crunch. Global imbalances and the credit crunch One of the striking aspects of this downturn is that it started – at least in Europe – in the financial sector. The level of defaults on lending to households and companies is still very low.
These protections mean that the coffee shop where I tapped my phone this morning does not need to worry that the value of my payment will change materially vis-à-vis the sterling-denominated price of the coffee by the time it reaches the shop’s bank account. And, when the payment arrives in the coffee shop’s account, the shop has a clear right to withdraw these funds, in sterling, and receive the same amount that was deposited. They also mean that, as a payments regulator, I don’t currently need to worry about large fluctuations in the money flowing through UK payments systems. I can instead rely on my colleagues in the Bank’s monetary policy and prudential regulation areas to do their jobs. Absent additional regulation, stablecoins may not offer these protections. Regulation of stablecoins will therefore need to be broader than the regulation of current payment chains. At minimum, where stablecoins are used in systemic payment chains as money-like instruments they should meet standards of stability and protections of holders’ rights equivalent to those expected of commercial bank money. It is tempting to view questions about the stability of value of the ‘money’ flowing through payment systems as a new issue – but in fact it is one of the oldest issues in economics. Indeed fifteenth century China’s leap backwards in payments was motivated by precisely this issue. Failure to properly ensure the stability of value led to the collapse and elimination of the innovation in payments.

Given this combination of immediate physical risks and prospective transition risks, the Bank of England has become increasingly active consistent with our financial stability and prudential mandates. In 2015, we examined the impact of climate change on the UK insurance industry.6 General insurers and reinsurers are on the front line of managing the physical risks from climate change, and they have responded by developing their modelling and forecasting capabilities, improving exposure management, and then adapting coverage and pricing accordingly. One of the lessons they have taken on board is that yesterday’s tail risk is closer to today’s central scenario. Sadly, with respect to climate, history repeats not as farce but as tragedy, with growing frequency. Despite the sophistication of insurers, there are some gaps in their risk management. The Bank is increasingly focused on cognitive dissonance in some insurers whose careful management of climate risks on the liability side of their balance sheets is not always matched by similar considerations on the asset side. With that in mind, we expect firms to consider stress testing and scenario analysis as part of their assessment of the impact of climate risk on their balance sheet and broader business strategy. This will also be reflected in our own market-wide insurance stress test exercises. For banks, the financial risks from climate change have tended to be beyond their planning horizons.
Honoured guests: The news that WOW Air has discontinued operations broke this morning. With that, a part of the risk facing the Icelandic economy in the recent past has materialised. Last autumn, the Central Bank conducted a scenario analysis providing for the potential collapse of WOW. It was clear that the impact on the economy would depend to a substantial degree on how quickly, and to what extent, other airlines would step into the breach. The analysis was based on WOW Air’s size and operations in 2017. The WOW Air that closed shop this morning is about half that size, according to a very rough estimate. Nevertheless, it is clear that WOW’s collapse will have a negative impact on GDP growth, particularly in 2019. It is unlikely that this alone will push Iceland into a contraction this year, though. On the other hand, this shock comes on the heels of others, such as the failed capelin season. In addition there are risks that have not yet materialised, including the possibility that wage settlements will be out of line with price stability and the repercussions of a disorderly Brexit. If these risks do materialise, a temporary contraction cannot be ruled out. In this context, it matters greatly that we are now more resilient and better able to mitigate shocks than perhaps at any time in our history. I have already mentioned many of these strengths here today.

Even if our economies are slowing down, no recession lies on the horizon. Some lessons so far for the euro area The crisis is clearly not over and all the consequences of accumulated financial imbalances have not unravelled yet. However, after more than seven months, I think it is already possible to take stock of what we have learnt so far. My concluding remarks will draw tentative lessons along three main lines. 1. As regards liquidity management first, it should be emphasized that close cooperation between central banks, and notably between the ECB and the Fed has been crucial for dampening the effects of the protracted confidence crisis that has frozen up international money markets. Our coordinated actions with the Fed and other major central banks, notably to provide euro area resident banks with US dollars under swap agreements with the Fed, have clearly demonstrated our determination to act collectively to restore normal liquidity conditions in the interbank markets. Enhancing swift and complete information exchanges between central banks, and also between central banks and supervisors is certainly a continuing priority. I have to say that the French model of bank supervision, where the supervisors are inside the central bank, has shown once more its advantages in the current context. 2. As regards monetary policy, I want to stress that even a flexible policy – as inspired by risk management considerations à la Miskin – can only be implemented if needed when inflation expectations remain appropriately anchored to the central bank’s objective.