samchain/econo-pairs-v1 huggingface dataset:
Andrew G Haldane: Curbing the credit cycle Speech presented by Andrew G Haldane, Executive Director, Financial Stability, Bank of England, at the Columbia University Center on Capitalism and Society Annual Conference, New York, 20 November 2010. *  *  *  The speech was prepared by Messrs David Aikman, Andrew G Haldane and Benjamin Nelson. The views are not necessarily those of the Bank of England. We are grateful to Piergiorgio Alessandri, Richard Barwell, Salina Ladha, Roland Meeks, Victoria Saporta and Alan Taylor for comments. Thanks to Vijay Balle and Clare Rogowski for excellent research assistance and to Moritz Schularick and Alan Taylor for making their data available to us. 1. Introduction  Credit lies at the heart of crises. Credit booms sow the seeds of subsequent credit crunches. This is a key lesson of past financial crashes, manias and panics (Minsky (1986), Kindleberger (1978), Rogoff and Reinhart (2009)). It was a lesson painfully re-taught to policymakers during the most recent financial crisis. This time’s credit cycle has been particularly severe and synchronous. In 2006, private sector credit across the UK, US and euro area rose by around 10%. During 2009, private credit in these countries fell by around 2%. 1 The knock-on consequences for real growth were equally severe and synchronous. Peak to trough, G7 real output fell by 3.6% during the Great Recession. In response, there have been widespread calls for remedial policy action. These proposals come in various stripes.

This implied an economic framework built around price stability, competition regulation and budgetary discipline – in Eucken’s words, the perfect “economic constitution”.2 This thinking had a strong influence on the design of the post-war social market economy in Germany, and is seen by some as the foundation for German economic success in that period. Interestingly, as many developing countries transitioned from planned to market economies in the 1980s and 1990s, there was something of a large-scale social experiment of the ordoliberals’ views outside of Germany. Several transition economies followed the macroeconomic policy recommendations of the so-called Washington Consensus, which emphasised the laissez-faire side of liberalism – decentralization, deregulation and privatization – while downplaying the legal and institutional underpinnings of a wellfunctioning market economy. The “poster boy” for this approach was Chile in the 1980s under the influence Augusto Pinochet and German immigrants connected to his regime, together with the so-called “Chicago Boys.”3 While quite striking results were achieved initially, leading Milton Friedman to refer to “the miracle of Chile”, financial speculation and foreign debt quickly built up behind the scenes. Moreover, privatisation allowed formerly public monopolies to become private monopolies – precisely what market-oriented reforms were supposed to avoid. The speculation bubble then burst in 1982, after which economic policy changed track. A similar pattern was observable in other transition economies. Russia, for example, privatised and liberalised extensively following the collapse of the U.S.S.R.
The scale of the systemic changeover is tremendous, roughly on a par with our earlier change to driving on the right-hand side of the road. A fundamental principle for the work is that, as far as possible, all those concerned are to find their own solutions to the problems posed by EMU. The Riksbank is responsible for the changeover in the financial sector. To this end we have set up a body called SIFS (the Swedish acronym for Consultation and Information to the Financial Sector). One result to date is a report, published a few days ago, on the situation as regards the euro in Sweden’s financial sector. Good progress has been made in the preparatory work. Timetables and suitable solutions have been established in a number of fields. The Riksbank considers that the financial BIS Review 14/1997  -5-  sector can manage a changeover to the euro on 1st January 1999. Participation from a later date can facilitate the preparatory work in certain respects and complicate it in others. The worst alternative is a long period of uncertainty; that would entail a costly duplication of systems in many fields. I should like to end with some examples of changes that will occur and be of importance for the financial markets. 1. Monetary policy A single currency presupposes a single monetary policy. In EMU this will be implemented by the ECB. In this context the national central banks will function as “operative arms”, acting on instructions from the ECB.

But this presupposes that, instead of again remaining outside, we participate in the contexts where developments are constructed. Opportunities and risks The idea behind a single currency in Europe is simple. One currency is better than many - it makes things work more efficiently. Eliminating the need to exchange currencies reduces transaction costs. The exchange rate stability facilitates trade and investment. A single currency makes price comparisons and economic estimates easier, not least for small and  BIS Review 14/1997  -2-  medium-sized companies. More direct price comparisons should lead in turn to stronger competition and downward pressure on prices, to the benefit of consumers. But risks are also involved when a single currency is introduced in so many countries with geographical, cultural and institutional differences. The Calmfors report has highlighted the insurance argument. I agree that this is an important point against EMU and therefore warrants particular attention. Monetary and exchange rate policy can be used as a kind of insurance against major, unforeseeable shocks in a single country. Without it, large adjustments may be required in other parts of the economy. However, when Calmfors and others claim that country-specific shocks have been more frequent in the Swedish economy than in the EU’s core countries, they are on uncertain ground. There are many indications that the shocks in Sweden have been occasioned above all by domestic economic policy and other institutional conditions, in the labour market and in wage formation.
The risks of a setback in economic activity should not be underestimated either. As we Executive Board members pointed out, we are always prepared to make monetary policy even more expansionary if we assess that the upturn in inflation is threatened. But even if the focus of the debate in Sweden is now of necessity on current monetary policy, we must not lose sight of the longer perspective. There is a lively international debate on whether, and if so how, inflation targeting should be changed in the wake of the financial crisis and the ensuing period of a long-drawn out economic recession, very low inflation and very expansionary monetary policy. What do the past eight years mean for the functioning of the economy and for monetary policy? Will we return to the way things looked before the financial crisis? It is important that we also take time in the Swedish debate to focus on these fundamental issues so that the discussions of our own monetary policy framework remain well-informed and productive. This is important not least for the external evaluation of monetary policy in Sweden now being carried out on behalf of the Riksdag Committee on Finance. There are many interesting question that are worth raising. One example that is of immediate interest in the Swedish debate is the question of whether monetary policy should have an explicit target for employment in addition to the target for inflation. This is one question that will be taken up in the external evaluation.

The Governor of the Bank of England, Mark Carney, has claimed during a hearing in the House of Lords that during long-term positive supply shocks there may be reason to adjust the inflation target downwards, but he emphasised that this was currently only hypothetical reasoning, see House of Lords (2015). The Bank of Canada investigated in 2011 whether the inflation target should be lowered, partly from the view that the problems with incomplete indexing of nominal contracts could decline further, see Côté (2014). However, this was dismissed on the grounds that the problems linked to the policy rate reaching its lower bound more often would be too severe. 11  For a more detailed review of the effects of digitisation on inflation, see the article “Digitisation and inflation” in Monetary Policy Report, February 2015. 12  Digitisation-related products have contributed for a long time to keeping down CPI inflation, but the effect has been relatively smaller in recent years than before. 4  BIS central bankers’ speeches  Another channel has an impact via the Internet and the matching and interplay between producers and consumers. Increased competition via e-commerce and greater opportunities for consumers to compare products make it more difficult for companies to raise their prices. A third possible channel is linked to new technology being used to replace labour. Although there have been fears that “technology will take away jobs” ever since the industrial revolution in the 18th century, they have not been realised.
This will be done on the basis of examinations of the Swedish economy by the EU Commission and the European Central Bank (ECB). Those assessments will be discussed by the finance ministers of the member states, who will then hear the opinions of the EU Parliament and the heads of state or of government before arriving at their decision. When that decision has been made, the member states must also agree on the time that Sweden should have for completing the necessary preparations. The countries that participated from the start have been given a transitional period of over three years from the euro’s introduction in January 1999 until it completely replaces the national currencies not later than June 2002. That a similar arrangement would apply for Sweden is, however, not certain. If we consider that our preparations can be completed more quickly, perhaps we could ask for a shorter interval. 1  BIS Review 96/1999  Do we meet the entry criteria? The Commission and the ECB will be examining the Swedish economy with reference to the criteria that were included in the Maastricht Treaty. Those criteria are for inflation, long-term interest rates, the exchange rate, the government budget balance and government debt. There are also specific requirements as regards central bank legislation. The principle of equal treatment will apply; that is, the basis for the assessments is to be the same as for the initial group of euro participants. That means that some conclusions can probably be drawn from the examinations in May 1998.

The first concerns the continuity of the research and discussion processes in the respective areas of central bank cooperation. Continuity helps keep track of the emphases and priorities of regional members and promotes effectiveness of the ongoing collaboration efforts. The second aspect concerns the need to follow through cooperative initiatives that have been agreed upon by central banks in the region. The follow-through can be done effectively through intensified, and perhaps more conveniently organised, dialogue and information sharing. The third aspect concerns the approach towards central bank cooperation. There are many areas of common areas of interest among regional central banks, including monetary and financial stability, payment systems and reserve management, to name just a few. In short, there is a need to organise central bank cooperation in a more focused, coordinated and dedicated manner in order to pursue our common interests. 2  BIS Review 61/2006  Today, with the World Bank experts and policy-makers, regulators and private-sector participants of the region gathering here, the conference will offer us a good opportunity to exchange views on what is needed to further promote regional cooperation and financial integration in Asia. We will also cover more specific subjects including the broadening and deepening of securities markets, the development of securitization and derivative markets, and the role of the contractual savings and asset management industries in the development of capital markets.
First I want to refer to the origin of this financial crisis and its linkage with monetary policy. Some arguments point out that the current crisis was originated by monetary policy mistakes, particularly in the United States, where low interest rates are blamed for the housing bubble and subsequent financial meltdown. Some have even claimed that inflation targeting regimes are inadequate, because monetary policy should also aim at controlling asset price inflation. And this is precisely the second point in my presentation, that is, whether interest rates should react to asset price movements or not, and what is the role played by the exchange rate. BIS Review 68/2009  1  To sum up, and insisting on a point I have made before, there are many cases of countries that lowered their interest rates substantially without triggering any housing bubbles. There are also cases of countries with very low interest rates where home prices soared, but still their financial systems did not end up in a financial disaster like they did in some developed economies. This crisis, or at least the magnitude it has reached, is the result of financial fragility and we, in Latin America, are well aware that when a cyclical downturn is combined with a financial crisis, the impact is magnified. Central banks generally have two objectives: price-level stability and financial stability. Recent history reminds us that we cannot pursue both with one single instrument, the interest rate.

I am not saying that attention must not be paid to the exchange rate beyond its effects on inflation. Excessive deviation from its long-term fundamentals may create problems in terms of resource allocation and the business cycle. The exchange rate should be influenced through accumulating or reducing reserves. Some conditions must be met, however, in order for this to be effective and convenient. In the first place, it must be consistent with the inflation target, in order for the intervention not to threaten the credibility of the monetary policy. Secondly, to safeguard monetary policy independence, once the intervention is announced it must be implemented mechanically. All this shields the conduct of monetary policy, typically carried out in regular pre-established meetings, from the extraordinary decision of buying or not buying foreign currency. In particular, the sterilization of intervention decisions permits to preserve both the credibility and the independent management of monetary policy. Finally, and because of this sterilization requisite, the cost of intervention must be properly considered, because it entails a quasi-fiscal component that could be significant. In any case, to the extent that the decision to intervene is taken because of evident real exchange rate misalignments, the risk of suffering quasi-fiscal costs should be limited. Intervention would occur within the context of an extraordinary episode where the central bank would estimate that there are sufficient elements to evaluate that the current exchange rate dynamics are unsustainable and the market is not properly internalizing the long-term prospects of the real exchange rate.
It may therefore seem premature to draw lessons from the crisis for the future conduct of monetary policy in normal times. But normal times will surely return in due course. And it is natural to ask whether the events of the past three years point to fundamental flaws in our policy frameworks. The crisis was perhaps all the more remarkable because it occurred after such a long period of relatively steady growth and low and stable inflation – the Great Moderation. While the causes of the Great Moderation are open to debate, most policy makers probably put some of that improved macroeconomic performance down to better policy. That was reflected in a consensus – at least in the Anglo-Saxon world – as to the ingredients of a successful policy framework and was mirrored in an equivalent consensus in the academic literature on monetary policy, synthesising the rigour of dynamic general equilibrium modelling with the empirical realism of sticky-price Keynesian thinking, best exemplified in the magisterial contribution of Woodford (2003). This pre-crisis set of beliefs was reflected in many of the contributions to this annual conference in the years leading up to the crisis and so might aptly be christened the “Jackson Hole” consensus; the volume New Challenges for Monetary Policy from the conference that took place here eleven years ago represents as good a reflection as any of that paradigm. Broadly speaking, this Jackson Hole consensus consisted of the following ingredients: 1. Automatic stabilisers aside, fiscal policy was unsuitable as an instrument of macroeconomic demand management.

Ladies and Gentlemen, it is also our expectation that the bank will continue to support the SME sector in Zambia, as the SME sector is key to sustainable economic growth and development of the country. You will agree with me that SMEs have the potential to create many productive jobs and contribute significantly to our economy, if well supported. It is our expectation that Absa Group Limited, through Barclays Zambia, will continue with its efforts and strategies that promote financial system stability, support monetary policy, enhance financial inclusion and gender mainstreaming for sustainable development in line with the Bank of Zambia’s strategic objectives. Today, as we commission this site, it is my hope that the facility will be of highest standards and that the new premises will provide an environment for the provision of innovative financial solutions to the public as an endorsement of the Absa Group brand promise “Bringing Possibilities to Life.” Master of Ceremonies, distinguished guests, ladies and gentlemen, with these remarks, please join me in applauding the Board, management, and staff of Barclays Bank Zambia, and Absa Group Limited, for this initiative that will introduce convenience and world class banking services and facilities to its clientele. The timing of this project is also a good indication that the Absa Group is opportunity focused rather than challenges. We hope this will rub on to the other players in our economy as well. Thank you and God bless.
I want to stress two of them. The Single Resolution Mechanism, the second pillar of the Banking Union, has just successfully passed its first real test this summer with the orderly resolution of Banco Popular. However, there is still room for improvement in the coordination between the numerous institutions and authorities involved in these procedures. It means that every participant must know and very clearly understand its role in the process to ensure an efficient resolution. Second, Europe still suffers from overcapacity and cross-border consolidation is needed. In the United States, the top five banks have a market share of more than 40% while this figure is barely 20% in Europe. Given the new regulatory and supervisory framework I described earlier, we believe that the Banking Union should be considered – according to the criteria set up by the BCSB – as a single geographic area. Furthermore, we are reaching the point in Europe where facilitating healthy and well-designed cross-border mergers could actually improve financial stability. It would make banks better able to diversify their risks, achieve economies of scale and become more efficient. And as we have strengthened the single supervision and resolution of significant institutions, we should not fear the “too-big-to-fail” issue. Cross border consolidation would foster a more efficient allocation of savings towards productive investments in Europe and it would place European banks in a better position in terms of international competition.

2017, a turnaround year At this same time last year, I made the paradoxical wish that the euro area, despite all its electoral uncertainties would be "an area of relative stability". 2017 was supposed to be a year full of dangers in Europe; and yet, our continent, and France above all, has proven to be a beacon of hope and strong growth, whereas the United States has abdicated from its leadership role. Two figures illustrate this: that of GDP growth, which greatly exceeded forecasts in 2017 – it is expected to reach 1.9% in France according to our latest forecasts, with notably 280,000 net job creations, and 2.4% in the euro area, which is the highest rate since 2010; the other key factor is confidence, reflected notably by the confidence in the euro, 74% of euro area citizens – the highest figure since the outset –, 71% of French citizens, and as many as 81% of German citizens claim that they are attached to our single currency. The second positive element in 2017: the acceleration of reforms in France. This acceleration of reforms has changed the image of France in the eyes of Europe and the world, which is extremely positive. Lastly, in 2017 Basel III was finalised. Bankers – largely represented this evening – had expressed, alongside others, serious concerns. The agreement of 7 December 2017 is the best possible agreement for our country and for Europe, thanks to the particularly active commitment of French negotiators.