samchain/econo-pairs-v1 huggingface dataset:
In Germany, it is a widely held belief that last Thursday, the ECB changed its monetary policy paradigm, that it is no longer the orthodoxy of the Bundesbank, as promised at the time the euro was created. The German audience should acknowledge that it is not a question of a different monetary paradigm. We need to deliver on our primary mandate, which is price stability in the medium term. This is a strategy which we inherited from the Bundesbank. Only the instruments are new. This could not have been foreseen in 1992, but in the Treaty it is nevertheless clear that the ECB can conduct monetary policy by means of asset purchases. And yet the Germans are still concerned. They are rightly concerned about the possible side effects of QE: the creation of asset bubbles and reduced incentives for countries to initiate reforms and reduce their debt. However, the response cannot be to ask the central bank to internalise these unwanted consequences. We have a narrow mandate. Instead, we need strong prudential policies and, in terms of fiscal policy, the strict application of the Stability and Growth Pact. But was it necessary to humiliate the Bundesbank? No such thing occurred. There was unanimity in the Governing Council that asset purchases are a legitimate monetary policy instrument. And then we discussed when to use it and whether the situation was bad enough to decide to use it.

We will really try hard to explain that what we are doing is in the interest of the euro area, Germany included. 2  BIS central bankers’ speeches  In your book, you talk about the isolation of the central banks. Do you feel that strongly at the moment? Central banks are independent, but they are not isolated. In Europe, however, we need a coherent approach across monetary policy, fiscal policy and structural reform policy, as emphasised by President Draghi at the Jackson Hole conference (at the end of August [ed.]). The understandable instinct of the governments is to respond to their voters. This is never easy and it becomes even more difficult in an environment of low growth and high unemployment. But our plea to the governments is to always remember Europe’s common interest, because the actions of one affect all the others. That is why they must be coordinated. Do you feel more mature, at the ECB, after last Thursday? This is not about being mature, but about providing the right answers to a new situation, as the ECB has always done throughout the crisis. Now, with asset purchases, we are like the other central banks, but with an instrument that is adapted to our specific environment, i.e. an environment which does not foresee a common fiscal policy. We are conducting QE in our own way. BIS central bankers’ speeches  3
For example, a firm with a strong traditional lending franchise with appropriate risk management can both build capital organically through retained earnings and serve its customers through the efficient provision of financial services. Similarly, a firm that diversifies into a broader portfolio of financial products may reap the benefits of economies of scope and diversification, while better serving its clients’ needs. This would support both enhanced safety and soundness and the broader objective of effective financial intermediation. There may be times, however, when these two objectives appear to contradict. For example, a firm holding a large buffer of low return, highly liquid assets might be stronger from a liquidity perspective, but might have less lending capacity. Similarly, greater oversight and controls around a particular activity may lower the associated risk, but could also reduce the provision of that financial service. Finally, higher levels of capital may increase the weighted average cost of funding, which could prompt banks to reduce the supply of certain financial services. The latter 5 2/7  BIS central bankers' speeches  point remains an area of active research without a strong consensus.5 This suggests the potential for a trade-off between resilience and intermediation, implying an “optimal” level of capital. This simple, static framing, however, is incomplete and requires further elaboration in terms of the policy horizon and a broad perspective on costs and benefits.

On the other hand, it would make greater demands of our analysis, in order to understand the various steps in an ongoing process of change, whether we put the label of ‘new’ or ‘new and old’ on parts of this process. 5  BIS Review 93/2000
Edwin Schooling Latter will talk more to these issues this afternoon. Having put in place the foundations for a decisive switch in swaps liquidity to SONIA, the next challenge for derivatives markets is to accelerate transition in futures and non-linear products. In preparation for the provision of a robust forward-looking sterling term rate, many banks are now streaming executable SONIA swap prices to regulated trading venues. Having the inter-dealer market able to trade SONIA in a single click is a key building block to helping firms hedge with the smallest friction possible. The Working Group will be considering what more needs to be done to drive transition in these markets over the coming months. 11  www.bankofengland.co.uk/-/media/boe/files/speech/2019/join-the-revolution-why-it-makes-business-sense-to-move-on-from-liborspeech-by-andrew-hauser.pdf 5  All speeches are available online at www.bankofengland.co.uk/news/speeches  5  Progress in sterling markets: cash instruments and lending  If derivatives are well on their way, the big challenge for 2020 is to drive transition in the sterling cash markets – and in particular to hit the market’s target of no new issuance of term LIBOR-linked cash instruments after Q3. We know it can be done. SONIA has quickly become the default reference rate for floating-rate notes and securitisations – accounting for around 85% of new issuance across the two markets in the second half of 2019. But these are predominantly wholesale transactions, involving a relatively small number of experienced counterparties.

We have taken into account that an interest rate change will affect the krone exchange rate. It is assumed that monetary policy credibility remains intact. Developments in the krone exchange rate have a considerable impact on inflation in a small economy such as Norway. Our analyses, which are based on relationships in the Norwegian economy over the past 20-30 years, indicate that it takes some time for the effects of a lasting change in the exchange rate to pass through to consumer price inflation. The effect seems to be strongest the second year and then shows a gradual decline. A sustained appreciation of the effective krone exchange rate of 5% could reduce the rise in consumer prices by a quarter percentage point the first year, by close to half a 2 percentage point the second year and about a quarter percentage point the third year . Our analyses indicate that a sustained increase in wage growth of 1 percentage point will, in isolation, push up consumer price inflation by a quarter percentage point the first year and half a percentage point the second year. The mandate implies that the interest rate must be adapted to the outlook for the Norwegian economy. If it appears that inflation will be higher than 2½% with unchanged interest rates, the interest rate will be increased. If it appears that inflation will be lower than 2½% with unchanged interest rates, the interest rate will be reduced. This orientation of monetary policy will normally also contribute to stabilising output and employment.
At the same time, the more they underestimate the risks they are taking in purchasing assets or in taking out or granting loans for this purpose. Alan Greenspan and Robert Shiller coined the phrase ‘irrational exuberance’ to describe situations when investors, in their enthusiasm, ignore the investment risks. 16 What creates these distorted expectations? Research in economic history and behavioural economics provides some explanations. The self-reinforcing dynamics between economic upturn, low interest rates, the rise in asset prices, and credit growth can induce market participants to feel justified in their optimism and their expectations of price developments. Government representatives, too, are often infected by this optimism. Who can predict the future? Perhaps there has indeed been a structural change in the economy. In other words: During an upturn, everyone finds ostensibly good reasons why a rise in asset prices and credit volume makes perfect sense and is fundamentally justified – despite historical experience to the contrary. 17 The feeling that this time really is different is something that I experienced at first hand myself, when I lived and worked in Washington DC from 1998 to 2006. Local real estate prices during this period recorded average annual growth rates of some 15%. During our stay there, we kept asking ourselves as a family – should we rent or buy? Our answer was always the same: Rent, because these annual price increases cannot be sustainable. However, this argument became ever weaker with each new year of sharp price rises.

This would cause a slowdown of economic growth and put the prices of goods and services under pressure. If this downward pressure on prices were to continue for a prolonged period, price stability would be jeopardised. The low reference rate maintained by the SNB is therefore necessary from a monetary policy perspective in the context of the low interest rate environment worldwide and the strong Swiss franc. At the same time, the persistently low interest rate environment presents risks to financial stability. This applies first and foremost to the real estate and mortgage markets. Like global interest rates, mortgage rates in Switzerland have been on a downward trend for some 25 years. Consequently, significant imbalances have built up on the real estate and mortgage markets. This is evident when we look at the developments in both markets since 2000 (cf. slide 20). On an inflation-adjusted basis, prices for single-family houses have risen by more than 50% overall. The volume of outstanding mortgages has almost doubled over the same period. These strong rises on their own do not prove the build-up of imbalances – the increases can be partly explained by fundamentals such as solid population growth. Since 2000, this has amounted to approximately 18%. A growing population produces a demand for more housing. As land for building development is limited, this puts upward pressure on real estate prices. At the same time, demand for mortgage loans grows. 21  20  Both structural and cyclical reasons can cause this downward trend, cf., e.g., Danthine (2013).
Low-income workers in emerging markets, for example, may find it more difficult to adapt, given weaker safety nets and fewer financial resources available to deal with adverse economic shocks. The bigger the adjustment process, the more the gains from trade will tend to be eroded. While the rise in the skill premium from trade liberalization has been well established for both developed and developing countries, determining the aggregate impact of trade on jobs has been more challenging. To date, the evidence has been mixed. We need further research in this area to determine with more confidence a reasonable range of estimates for these employment effects. Although evidence of the extent to which jobs have been lost due to global trade is inconclusive, job losses that are attributed to trade tend to be viewed differently. That is, they are seen as having been “lost to foreigners” and are often viewed as a consequence of the policy decision to liberalize trade in the first place. The challenge of adjusting to open trade is a serious issue that has not received the degree of attention it fully deserves. This may partly reflect the fact that the burden has been borne unequally and spread out over a long time period. It also may reflect the fact that the winners from trade have often tended to have a stronger voice than those who have been the losers. Research has documented that the effects on individuals of job dislocation—including those resulting from trade—can be significant and long lasting.

Increasing specialization brings real economic benefits, but can also leave workers more exposed to shifts in demand for their services, potentially on short notice. These issues are not going away, especially as emerging market economies take on a larger role in the global economy and automation continues apace. If we are to maintain a more open trade regime, globalization must be socially and politically sustainable. For that to be the case, we have to provide greater support to those who are hurt by trade. Policies should include more assistance with job retraining, help with job search and mobility, and broader unemployment support.8 We also need to do more research into what measures have been effective in economies 5/8  BIS central bankers' speeches  around the world, and we should encourage greater experimentation with new approaches. Getting the balance right between providing assistance and making sure that individuals hurt by trade can get back on their feet and achieve their earning potential will be a challenge, and we need a better understanding of what actually works. More generally, we need to do a better job positioning our workforce to cope with globalization and technological change. Improvements across a range of areas—including not only education and training, but also the business regulatory environment and infrastructure investment—could support greater worker mobility. These measures would also promote higher productivity growth. While the scope and scale of issues differ substantially by country, many of these issues may also be relevant in Brazil.
Therefore, the euro area is currently battling a fiscal crisis in some member countries, a competitiveness and current account crisis in the region as a whole, a deep banking crisis in some countries, and a fragile banking system in many others, which would be exacerbated if the sovereign debt crisis should end in default by any of the countries concerned. A currency crisis as such is not part of the problem, however, any more than it was in the US. As is discussed further in Chapters 16 and 25, a number of reforms have already been adopted in response to the shortcomings in the design of the euro area, but it is not certain that they will suffice to preserve the currency union in its current form. Forecasting near-term developments in the euro area crisis is beyond the scope of this report, however. The results of the reforms made to date have not yet been fully tested. If they prove inadequate, the crisis could be amplified and, in the worst-case scenario, could have severe repercussions for the future of the euro area in its current form. If they are successful, the reforms could strengthen the eurozone. The outcome has yet to be determined.

The present report therefore does not discuss those options in as much detail. In Chapter 3, however, is an in-depth discussion of Icelanders’ experience with independent monetary policy and a floating exchange rate. The strategy formulated in coming months must take into account this material if all options are to be considered. It is also necessary to examine which prudential rules would be applied in order to reduce the risks related to domestic financial institutions’ foreign assets and liabilities and the risks related to unrestricted capital flows. These rules are discussed in a newly published Central Bank report entitled Prudential rules following capital controls. That report discusses the limitations on liquidity and foreign exchange risk and the restrictions on domestic financial firms’ international operations that must be in place if movement of capital  BIS central bankers’ speeches  1  is unrestricted in other respects, particularly if Iceland retains its own currency. The discussion below also takes account of these two publications. 1 1.2  Iceland’s experience with its own currency  Iceland has had its own currency since 1885, maintaining parity with the Danish krone until June 1922, when it was devalued by 23%, followed by a temporary float (see Chapter 12). It can be said that the króna came into existence as an independent currency at that time. The experience with it has been mixed, and efforts to preserve the value of the currency have been largely unsuccessful.
For those groups comprising a series of regional subgroups in a hub-and-spokes structure, there may be intermediate holding companies for each region. The preference of some of the regional authorities might be for a SPE resolution of ‘their’ subgroup. In other words, a MPE resolution strategy can incorporate SPE resolution being planned for some parts of the group. The precise approach applied to the different regional/local subsidiaries would be a matter for the relevant host authorities. But it should not be a mad scramble. Under the FSB KAs, the home authority for the group has the important role of ensuring that the operation is well co-ordinated and not competitive. Preconditions for SPE and MPE resolutions There is obviously a lot to be said about how to apply the two headline strategic options for resolving SIFIs. The FSB plans to finalise its Guidance on implementation before the summer holidays and so decently ahead of the Summit of G20 Leaders in September.

‘Bailin’ is a verb not a noun. Orderly resolution will not be achieved by drafting term sheets. 6  BIS central bankers’ speeches  Looking back on the 2007–2009 part of the crisis, those precepts should have been in place anyway. In the UK, it was alarming that many medium-sized domestic banks had been allowed to hold each other’s bonds in what were purportedly ‘liquidity’ portfolios.9 Contagion (2): the creditor hierarchy and depositor preference Preparations for bailin, and even more the recent reconstruction of Cypriot banks, have heightened awareness of the prospect of creditors of distressed banks losing money, prompting calls for clarity about the relative standing of different types of creditor. Who stands where in the creditor hierarchy affects the loss they incur in the event of default, and therefore their behaviour before default, including the return they demand to compensate for risk and whether they flee at the first signs of the firm weakening. Insured depositors are insured, pure and simple – they are covered by the relevant Deposit Guarantee Scheme. The details of the resolution regime do not affect that.10 Nor does preference for insured deposits affect those depositors directly.
Consider, for example, the lines of funding aimed at bank lending to the real economy, known by the acronym TLTROs. They supported bank lending to the real economy. Banks that borrowed from the ECB and lent to the economy more than a pre-specified lending benchmark also benefited from a negative interest rate on their funding. What role did the negative interest rates play? They were important for enhancing the asset purchase programme and for forward guidance. They are an essential instrument in our toolbox that supports very favourable financial conditions, and therefore the economy. This led to improvements in the credit portfolio of banks. It also stimulated the demand for loans of households and firms. Was the impact on savers one of the reasons for the negative reaction? For those savers that do not want to take risks and therefore keep their assets in savings accounts, it is an issue. But it is important to look at the overall situation, and to take into account the impact of our measures on growth and jobs. Young people who need to borrow have benefited and, in general, the important thing for them is to find jobs. Our measures have supported economic activity and job creation. Has the policy of monetary tightening of the Federal Reserve System (Fed) put pressure on the decisions of the ECB? There is no pressure. We are in a different situation. The Fed and the ECB are at two different stages of their monetary policy cycles.

We think that the underlying strength of the economy gives grounds that inflation convergence will continue in the period ahead, even after a gradual winding down of net asset purchases. What is that confidence based on? There is a path of gradual improvement towards our inflation aim, as the euro area economy will continue to grow above potential. Increasing pressure on the utilisation of resources, notably in the labour market, will continue to support inflation over the medium term. Is the ECB comfortable with the recent projection pointing to annual inflation of 1.7% over the period to 2020, clearly below the 2% aim for these three years? The Eurosystem staff projections are only one element of our assessment. What is crucial is that we see a sustained path of adjustment of inflation towards levels that are below, but close to, 2%. Over the projection period, the contribution of energy to inflation declines, and inflation excluding energy and food gradually rises, as capacity constraints become increasingly binding. What the ECB anticipated last week was the halving of asset purchases between October and December. But there was a proviso: the measure was subject to data confirming the medium-term inflation outlook. What does this mean in practice? Our baseline scenario is that the euro area expansion will continue in the period ahead. But new uncertainties have arisen in 2018.