samchain/econo-pairs-v1 huggingface dataset:
As a result of the normalisation of bank lending in 2021 that I mentioned earlier, and the start of the economic recovery, in the last stretch of 2021 the gap continued to correct, after widening at the onset of the pandemic. This process is expected to continue into the coming quarters, but the gap is still quite large. In this respect it is important to note that, against the backdrop of the crisis caused by the pandemic, the growth in the credit-to-GDP gap is associated with the sharp drop in GDP (the denominator in the credit-to-GDP ratio) in 2020 and with the measures taken to support the flow of credit to the economy (the numerator in the ratio), which drove its strong growth in that year. Accordingly, it does not reflect exuberant credit dynamics. Likewise, credit intensity and the debt service ratio, which are complementary indicators to identify cyclical risk, stand at moderate levels. Looking forward, our projections expect the credit-to-GDP gap to continue to correct in the coming quarters. Yet further acceleration in inflation and increasing downside risks to growth make for greater uncertainty. In particular, we need to ensure in the coming 4  Moreover, in the case of the loan-to-income (LTI) ratio, which measures the relationship between the mortgage principal and the borrower’s income at mortgage origination, the LTI ratios in most new mortgage loans were either low (LTI less than 3 times) or high (LTI over 4.5 times).

Thus, while the overall impact on businesses stands at slightly over 2 pp, it is expected to top 5 pp in the three most affected sectors.22 For households, given that energy expenditure accounts for a larger proportion of the consumption of lower-income households, the price rises seen in 2020 and 2021 will hit this group the hardest. More broadly, the Financial Stability Report also sets out the results of banking industry stress tests for two potential stress scenarios (dubbed “adverse” and “severe”) for the period 2022-2023. The use of this type of extreme scenarios, which are plausible but have a relatively low probability of occurring, is consistent with the goals of prudential regulation, which require that banks have sufficient capital to absorb unexpected losses. The adverse scenario simulates an increase in energy prices in addition to that seen in early 2022, and a greater persistence of international trade bottlenecks. The impact on prices would accelerate the monetary policy response, while also entailing a worsening of financial conditions. Meanwhile, under the severe scenario, the price shocks are slightly more significant than under the adverse one, while including a more marked worsening of households’ and firms’ confidence, triggering further falls in the main domestic demand variables (consumption and investment). 21  Specifically, increases of 22% and 25% in average price levels for 2022 and 2023, compared with the price used in the December projections.
This argument is strengthened by the fact that there do not appear to be any signs of overheating in the service sector in the form of a shortage of labour and excessive wage increases. Conclusion: An extended repo rate path better stabilises inflation and resource utilisation It is possible to reduce the monetary policy decision to the following questions: When should we begin to increase the repo rate from its current level of 0.25 per cent – in July, September or December of 2010? Which of these alternatives stabilises inflation and resource utilisation best? An extended repo-rate path with a repo rate of 0.25 per cent to December 2010 stabilises both inflation and resource utilisation better than the repo-rate path in the main scenario. It poses no problems to financial stability. There is therefore a very strong argument for an extended repo-rate path. In my view there are no strong counterarguments. In fact, I cannot really see any valid counterarguments at all. References Bill 1997/98:40, Riksbankens ställning. Finansinspektionen (2010), “Den svenska bolånemarknaden och bankernas kreditgivning,” www.fi.se. Kohn, Donald L. (2006), “Monetary Policy and Asset Prices”, speech held on 16 March 2006, www.federalreserve.gov. 9  Kohn (2006, 2008). 10  Questions regarding the significance of asset prices for monetary policy and of the monetary policy conclusions to be drawn from the financial crisis are discussed further in Svensson (2010a, b). See also Kohn (2009). 10  BIS Review 60/2010  Kohn, Donald L. (2008), “Monetary Policy and Asset Prices”, speech held on 19 November 2008, www.federalreserve.gov.

Forecasts for the CPIF, the output gap and the hours-worked gap in the main scenario and in the extended repo-rate path, for expected and unexpected deviations. Source: The Riksbank  We can also see that the extended repo-rate path provides a higher level of CPIF inflation closer to the target and a higher level of resource utilisation closer to normal for both the output gap and the hours-worked gap. This applies irrespective of the assumption of whether the extended repo-rate path is credible or not but to a greater degree if it is credible. Figure 3: Different forecasts of resource utilisation Resource utilization is usually measured as so-called output gaps or hours-worked gaps. These gaps are calculated as the differences between actual and “potential” levels. These measures of resource utilisation are uncertain. However, according to all available measurements, there is no doubt that resource utilisation is and will remain very low during the forecast period. Other forecasters’ output gap forecasts are shown in Figure 3. Several of the forecasts from other forecasters indicate an even lower level of resource utilisation than the measure published by the Riksbank. points, in output of 0.38 (0.22) per cent and in hours worked of 0.40 (0.24) per cent. The increase then abates over time. 6  BIS Review 60/2010  Figure 3. Different forecasts of resource utilisation  Sources: The Riksbank, National Institute of Economic Research, European Commission, OECD, IMF, and the Ministry of Finance.
Overall, they find that optimal capital levels for the US banking system can range from 13% to 25%. The Costs of Higher Capital Requirements  The costs of higher bank capital requirements arise from potentially tighter credit supply conditions. Banks may adjust to the need to fund themselves with more equity by tightening lending rates and restricting loan volumes. The LEI study assumed that each percentage point increase in the capital ratio would raise loan spreads by around 13 basis points. That translated into a fall in GDP of around 0.1% relative to trend.17  What have we learned about these costs since the LEI study? Cecchetti (2014) documents how banks have adjusted their balance sheets and credit provision since the introduction of Basel III. He finds that banks increased their capital ratios significantly, by over 4 percentage points on average, across his sample. Net interest margins and profitability fell. But with the exception of European banks, banks’ assets increased, their lending spreads narrowed, lending standards eased, and the ratio of bank credit-to-GDP went up. 14  This calculation is based on the marginal condition for optimal capital reported earlier. We parameterise the crisis probability and severity functions as follows: 𝛾 = exp(𝛽0 + 𝛽1 𝑘)⁄(1 + exp(𝛽0 + 𝛽1 𝑘)); ∆= 𝜃0 + 𝜃1 𝑘. The model is calibrated to deliver an optimal capital ratio of around 18% when 𝜃1 = 0, i.e. the LEI case.

Aikman et al (2014) discuss where the classification of failure departs from Laeven and Valencia (2010). 23  All speeches are available online at www.bankofengland.co.uk/speeches  23  instrument if policymakers have a low tolerance for failure. That matters if, for example, the costs of higher capital requirements increase non-linearly (Greenwood et al (2017)). These points are also evident if we assess individually the performance of the RWCR and NSFR. Chart 18 and Table 3 below show that hit rates of 80 or 90% can only be achieved with high false alarm rates and stringent calibrations of these metrics. Overall, each metric individually does somewhat worse than the leverage ratio in balancing hit and false alarm rates. And similar results hold when the loan to deposit (LTD) ratio is considered instead of the NSFR in the wider sample (Chart 19).
The second important development, less widely discussed, yet which may be of equal significance, is a radical change in the focus of the IMF’s surveillance work. In institutional terms this change in focus is highlighted by the creation of a new Capital Markets Division in the Fund, which prepares a regular Global Financial Stability Report. That document, which has attracted too little international attention so far, is a brave attempt by the Fund’s staff, reinforced by new recruits from the financial markets under Gerd Hausler, late of Dresdner Bank, to focus attention on potential sources of financial instability in institutions and markets. That means, at times, drawing attention to weaknesses in the banking and insurance systems even of G7 countries, which has hitherto been difficult territory for the IMF. Yet it is important for it to do so, not wholly because of the potential benefit for G7 countries themselves, but also to show that developed countries are taking the medicine which they now impose on others. This is because the second major change at the IMF has been the rapid expansion of its work on financial regulation. The Fund is now committed to preparing financial sector assessments (FSAPs) of member countries, and indeed of some non-members too, such as the significant offshore financial centres. These assessments review the effectiveness of regulatory structures, financial regulation and adherence to internationally accepted financial sector core standards and codes.

After the onset of the global financial and economic crisis the franc appreciated by 17% vis-à-vis the euro in 2010 alone, driven by the reallocation of global capital on a massive scale. This has fuelled deflationary risks and slowed economic growth. To counter these effects, massive unilateral interventions were conducted, leading de facto to a closer alignment of monetary conditions with those in the euro area. This points to the conclusion that in a multipolar world having appropriate domestic macroeconomic policies is not sufficient to absorb external shocks. Unless a country or an economic region also has a deep and liquid capital market and its size is sufficient to absorb large capital flows, it is bound to become subordinate to the existing poles, or to be squeezed between them. The prosperity of the euro area countries is inextricably linked to the success of the euro. The euro: a unique construct The euro is the only major currency that is not issued by a single sovereign state, but by a union of states. As this is a totally unprecedented monetary framework, it is fair to ask whether it has what is needed to become one of the poles of the new system – in other words, is it sufficiently robust to ensure sound economic policies at the euro area level and in the individual countries, and does it have a large and deep financial market? Decisions are about to be taken on strengthening the governance of the euro area with a view to achieving these objectives.
The focus of that work was on operating regimes to target the fed funds rate. Basically, it considered several variants of corridor and floor systems. The financial crisis interrupted this work, and it was not completed as had been intended. The lessons from the crisis suggest that the implementation framework needs to be considered more broadly. For example, in the 2008 work, we did not think about the zero bound very much. 8  See Christopher Jackson and Joseph Noss, “A Heterogeneous Agent Model for Assessing the Effects of Capital Regulation on the Interbank Money Market under a Corridor System,” Bank of England Working Papers, no. 548, September 2015, as well as Morten L. Bech and Todd Keister, “Liquidity Regulation and the Implementation of Monetary Policy,” BIS Working Papers, no. 432, October 2013. See also Bank for International Settlements Committee on the Global Financial System and Markets Committee, “Regulatory Change and Monetary Policy,” CGFS Papers, no. 54, May 2015. 9  See Jim Clouse, Jane Ihrig, Elizabeth Klee, and Han Chen, “The Federal Reserve’s Tools for Policy Normalization in a Preferred Habitat Model of Financial Markets,” Board of Governors of the Federal Reserve System Finance and Economics Discussion Series, no. 2014–83, October 2014. 10  See Ben Lester and Roc Armenter, “Excess Reserves and Monetary Policy Normalization,” Federal Reserve Bank of Philadelphia working paper no. 15–35, August 2015. 11  For example, Marvin Goodfriend and Robert G. King argued in 1988 that “today’s financial markets provide a highly efficient means of allocating credit privately.

On the basis of such considerations, we find that it is difficult to make a case for central bank lending and the regulatory and supervisory activities that support it.” See “Financial Deregulation, Monetary Policy, and Central Banking,” Federal Reserve Bank of Richmond Economic Review, May-June 1988. 12  For example, the work prepared by Federal Reserve staff in 2008 to assess possible use of the authority to pay interest on reserves (IOR) did not deal with the fact that some institutions cannot earn IOR, so it did not contemplate that this rate may not serve as a firm floor; see http://www.federalreserve.gov/foia/files/ 20080411.IoR.FOMC.Options.paper.public.pdf. More recent work explicitly considers frictions that limit the effectiveness of IOR to serve as a floor and explores other tools that can support money market interest rates. See, for example, Antoine Martin, James McAndrews, Ali Palida, and David Skeie, “Federal Reserve Tools for Managing Rates and Reserves,” Federal Reserve Bank of New York Staff Reports, no. 642, September 2013. 13  In the case of the United States, more research on the relationship between the Eurodollar rate, the federal funds rate, and the repo rate could provide insights on the functioning of our money markets. 14  See Matthew Osborne, “Monetary Policy and Volatility in the Sterling Money Market,” paper presented at the Bank of England-Federal Reserve Bank of New York conference, “Money Markets and Monetary Policy Implementation,” November 16–17, 2015.
Eventually Swiss consumers themselves would follow suit, so that Switzerland would be de facto integrated into the eurozone. More than national pride would be hurt by such an “euroization” of the Swiss economy. For one thing, such a development would entail the loss of seigniorage income. With a monetary base of about 40 billion francs (25 billion euros), that is about 5,700 francs (3,500 euros) per person, seigniorage in our case is far from trivial. But much more seriously, the loss of monetary autonomy caused by a displacement of the Swiss franc by the euro would prevent the central bank from creating liquidity in case of need. To a large extent, the fears that we had reflect the more fundamental debate about fixed versus flexible exchange rates. Which foreign exchange regime is appropriate for a given country at a particular time? Although this view is not universally shared, many economists argue for a polar solution: either purely flexible exchange rates, or rigidly fixed ones. Intellectually, I tend to share this view, except that I would like to take it one step further: either purely flexible exchange rates, or monetary union. Rigidly fixed exchange rates do not constitute a polar case. In fact, they accumulate many shortcomings. Thus, fixed exchange rates have never been known to be fixed for very long. Fixed exchange rates are fixed until the day they change, and when they do change, they often do so brutally in an atmosphere of crisis, of pain, and of tears.

Emerging economies will enjoy  BIS central bankers’ speeches  3  sustainable growth in the years to come. Above all, in Europe, the community of nations are willing to face the extraordinary challenges they are confronted with and to build the lasting solutions needed towards greater integration within the Eurozone. Central banks are constantly cooperating in monitoring the situation and acting as they have done recently to provide dollar funding to international banks. This spirit of cohesion is a strong asset. It is deeply rooted in our dual role of preserving monetary and financial stability. BANQUE DE FRANCE is, for its part, strongly committed to overcome this challenge. Thank you. 4  BIS central bankers’ speeches
For regulation to respond dynamically to changing circumstances in order to preserve systemic stability, macroprudential policy is needed. In the United Kingdom, the primary objective of the new Bank of England Financial Policy Committee (FPC) is to protect and enhance the resilience of the UK financial system, with a subordinate objective of supporting growth and employment. As well as being able to make Recommendations to the UK prudential supervisors and securities regulators on anything relevant to stability, Parliament has given the FPC power to direct changes in capital requirements for banks. Macroprudential tools and system resilience In some ways, the effects of a temporary change in macroprudential capital requirements will be similar to a permanent change in the capital regime. An action to increase banks’ equity base by, say, 10% will increase their loss-absorbing capacity by 10%. That leaves the system better placed to cope with losses should they crystallise. As such, irrespective of whether the action dampens the boom phase of the credit cycle, it will reduce the severity of the bust. Fewer, if any, banks will fail; a tightening in credit supply is therefore less likely to become a full-blown credit crunch; the resulting slowdown in output growth should be less severe; the default rate on bank loan portfolios lower; and so on. I rehearse that because the primary objective of a macroprudential intervention – improving the financial system’s resilience – can be progressed even if the credit boom itself is not tempered much.

Resolution regimes: rolling back the implicit subsidy from the state The most fundamental effects prospectively flow from making orderly resolution credible for the largest and most complex firms. Funding costs for any banks where bailout was STILL confidently expected would be heavily subsidised, as in the past. Where there was uncertainty, there would tend to be somewhat subsidised funding combined with a bias to shorter-term financing which could run at signs of trouble. But such “regimes”, if they merit that description, are unsustainable. Policy is clear: taxpayers should not provide solvency support to banks. Instead, losses exceeding a bank’s equity base should fall on bondholders and other uninsured creditors, in line with the creditor hierarchy that would apply in bankruptcy.1 Other things being equal, exposing the holders of bank bonds to risk will tend to increase the overall cost of finance for banks during normal times compared with the past. Earning a fixed return but exposed to downside risk, investors in, especially, longer-term debt will be a source of market discipline. That is likely to incentivise banks to be better capitalised than in the past – through some combination of less levered balance sheets and less risky business activities. For society at large, the counterpart is that, with a lower probability of failure and credible plans in place to resolve banks without recourse to public funds, government bond yields should be lower than otherwise and the public finances more resilient.
and House of Lords, Central bank digital currencies: a solution in search of a problem? iv Lagarde, C. and Panetta, F. (2022), Key objectives of the digital euro i  ii

It is thus an important responsibility of a central bank to ensure that relevant new insights from academic research find their way into the actual conduct of monetary policy. The Eurosystem attempts to cope with this responsibility by fostering a constant intellectual exchange with the research community. The ECB organises great many seminars, conferences and workshops where the most recent research findings can be discussed, and invites leading scholars to visit and conduct research in the ECB, for example by means of the Wim Duisenberg Fellowship. Moreover, the ECB supports promising young researchers by funding five Lamfalussy Fellowships each year. The aim is to promote policy-relevant research that meets the highest academic standards. The ECB also leads and co-ordinates research efforts through Eurosystem research networks to obtain research output which is necessary for ECB decision-making but which is as of yet unavailable at universities or other research institutes. I will come back to activities of one such research network at the end of my remarks. Research by Nicholas Bloom analysing the effects of uncertainty shocks on the economy is a prime example of a policy-relevant research output. Published in Econometrica in 2009, it could not be more timely.1 The unprecedented level of uncertainty has been one of the key distinguishing features of the Great Recession. Economic uncertainty refers to an environment in which little or nothing is known about the future state of the economy.
When each use case is finished, and value has been delivered, lessons learnt can be applied to the next use case. To give a concrete example, an early use case we identified in last year’s review was data on lending for commercial real estate. Commercial real estate lending, or CRE, is an important sector for any central bank charged with guarding financial stability. Following the great financial crisis, Andy Haldane (then the Bank of England’s Executive Director for Financial Stability, now our Chief Economist), suggested that commercial property has contributed more to financial crises than any other area of industry outside of banking6. As Alex Brazier, his successor as Financial Stability ED subsequently put it, when commercial real estate catches a cold, the whole economy starts to shiver7. So we need good data on CRE lending. But the sector has a tradition of negotiated, paper contracts, and a lack of automation in how loans were agreed and managed. This has meant that accessing good quality data on the CRE market is difficult, both for regulators and for market participants. To help address this, industry participants are working on creating a central utility for accessing granular CRE data8. But creating this utility will mean firms need to share the data used to run their CRE businesses. And they will need a common way to identify and label core CRE data – for example a consistent way of labelling the ‘Loan amount’ of a CRE loan, or the loan’s ‘arrangement fees’.

This means: sustained momentum relative to trend; domestic cost growth resuming a path consistent with headline inflation at 2%; and core inflation measures moving notably towards the target. It is clear to me that, since last summer, progress has been insufficient along these dimensions to warrant a tightening of monetary policy. The world is weaker and UK growth has slowed. Due to the oil price collapse, inflation has fallen further and will likely remain very low for longer. This may mean modestly weaker cost growth through this year, with the likely path for inflation, both headline and core, softer as a result. In short, recent developments suggest that the firming in inflationary pressure we had expected will take longer to materialise. 23  In economic parlance, they are elements of a reaction function. One can think of a reaction function as akin to guide or policy rule relating the policy instrument to a set of macroeconomic variables. These are usually evaluated with respect to an “objective function” containing the policymaker’s target variables. For example, a flexible inflation targeting regime would be consistent with an objective function containing the deviation of inflation from its target and the deviation of a measure or measures of real activity from their equilibrium levels, weighted according to the policymaker’s preferences for stabilising one at the cost of another.