samchain/econo-pairs-v1 huggingface dataset:
I have discussed the Riksbank’s forecasting ability in an earlier speech, on the basis of an analysis made at the Riksbank.5 I shall in this speech describe how I now view monetary policy and uncertainty, after six years at the Riksbank. Uncertainty in the Riksbank’s forecasts In this section I shall describe the uncertainty in the Riksbank’s forecasts. At the same time, I would like to emphasise that the aim is not to assert that the Riksbank’s forecasts are better or worse than anyone else’s. My assessment is that the Ministry of Finance, the National Institute of Economic Research and the Riksbank make forecasts of roughly the same quality seen over time. My aim is to describe the uncertainty and then to discuss how it should be dealt with in conducting monetary policy. At the Riksbank we regularly report the uncertainty in our forecasts. We do this in the form of scenarios that describe developments under different assumptions, in report texts when we run through different areas and in fan charts, which show how accurate the forecasts usually are. GDP and inflation – limited forecasting ability one year ahead, none at two and three years ahead The Monetary Policy Reports and Updates include, for instance, four standard figures that show the uncertainty of the forecasts. Three of them refer to GDP growth, CPI inflation and CPIF inflation. They show 50 per cent, 75 per cent and 90 per cent uncertainty bands for the forecasts of up to three years ahead (see Figures 3–5).

There were manifest conflicts of interest, originators and brokers had limited interest in ensuring continued monitoring of products and credit ratings were inflated, conveying a false sense of security. A euphoric bubble thus developed, based, in Alan Greenspan’s words, on “the complexity of the interactions of asset markets and the economy”, and which concealed a massive global under-pricing of risk. Market participants seem to have been aware of the growing risks but were unwilling to retrench. You might recall Citibank’s Chuck Prince’s memorable words during the onset of the crisis that “as long as the music is playing, you’ve got to get up and dance. We’re still dancing”. Market players failed to appreciate the speed at which demand could evaporate and risk aversion could increase. This soon resulted in record-high risk premia, seized-up interbank markets, acute liquidity and credit shortages, bank failures and a widespread loss of confidence. Meanwhile the high degree of financial market integration had created the premise for a simultaneous build-up of systemic risk. Financial institutions did not internalise the costs arising from the too-big-to-fail and too-interconnected syndrome. Central banks had been monitoring these trends, but it turned out that the regulatory tools were not designed to address systemic risk. Neither was the strength of the feedback loop between the financial  BIS Review 67/2010  1  system and the economy fully anticipated. Unfortunately, these all proved to be critical weaknesses.
Together with NUS, we will engage internationally renowned academics to lead and conduct research in Singapore in the areas of finance, international economics, monetary economics or public finance. Economic outlook Finally, on the economic outlook. More recent data, including the advanced estimates released by MTI, showed that the Singapore economy had rebounded strongly in the second quarter. This recovery has to be seen in the context of the sharp retraction in economic activity which took place during Q4 2008 and Q1 2009. As such, businesses have started to rebuild inventories to levels that are more sustainable and consistent with underlying demand, which has stabilized somewhat amidst easing financial conditions. In the domestic financial sector, several areas of activities posted gains in the second quarter. Improved sentiment has buoyed stock market turnover, while the latest figures for May showed that domestic non-bank loans remained firm. Nevertheless, much still depends on the strength of final demand in the G3. Given that there remain stresses in the global financial system and job markets in the major economies continue to weaken, the domestic economy is likely to witness slow and uneven growth, rather than sharp and decisive recovery. For the economy as a whole, MTI has revised the official growth forecast for 2009 to between -6% and -4%. In tandem with the weak demand and easing domestic costs, consumer price increases are expected to be muted. For the whole of 2009, CPI inflation is now expected to come in between -0.5% and 0.5%.

As trade collapsed towards the end of 2008 and into the first few months of this year, Asia’s export-reliant economies were hard-hit. Against this external backdrop, the Singapore economy contracted sharply, as our manufacturing, transport, logistics and wholesale trade industries were closely tied to global and regional trade flows. By the first quarter this year, the economy had posted an output loss of around 10% from its peak a year ago, the steepest decline in its history. The unprecedented global financial crisis has weighed heavily on financial markets worldwide, leading to severe declines in valuation across many asset classes amidst heightened market volatility. MAS’ investments were negatively affected by the crisis. As at the close of the financial year on 31 March 2009, MAS recorded a net loss of $ billion, about 3.5% of MAS’ average total assets. This compares with profits of $ billion in the previous year and $ billion in FY06. This severe crisis has therefore pared back about 80% of the gains in the preceding two years. The extent of loss has been mitigated as we raised the liquidity profile of our portfolio in the early part of 2008, in the face of greater uncertainties. With the broad based upturn in financial markets after the close of the financial year, the valuation of MAS’ foreign assets has improved and more than half of the losses have been recovered. Despite the severe global conditions, Singapore’s financial system has, by and large, weathered the crisis well.
NEMO can help us provide economic interpretations of observed developments. Changes in key variables such as GDP and inflation can be explained by factors such as productivity, competitiveness in labour and product markets and the propensity to save. In that respect, NEMO is quite different from the “weather forecasting models” I cited earlier, which provide little scope for interpretations based on economic theory. Chart: Effect of monetary policy shocks in the VAR models and in NEMO As indicated by the red line in the chart, NEMO provides a description of monetary policy that is broadly consistent with that derived from the VAR models9. In NEMO, an unexpected interest rate increase of 1 percentage point implies, in isolation, a decline in GDP of around 0.4 per cent around one year later. Inflation is reduced by about ¼ percentage point with a lag of around two years. Compared with the VAR models, NEMO is in the upper part of the area for GDP and in the lower part for inflation. NEMO is estimated from the mid-1990s and the results are also close to those derived from the VAR models that are estimated over the same time period. A model will never be able to provide an exact indication of how the interest rate should be set.

The ultimate assessment is, as mentioned, a result of Norges Bank’s professional  9  The estimation is based on a one percentage point increase in the interest rate, followed by a gradual reduction in line with the response pattern in the model. The analysis shows the impact of the interest rate increase on mainland GDP for Norway and inflation adjusted for tax changes and excluding energy products (CPI-ATE). 6  BIS central bankers’ speeches  judgement and will also capture considerations that are not sufficiently safeguarded by our models. As such, the models are only a tool. But, a model such as NEMO is a very useful tool for analysing developments and in interest rate setting. It helps us interpret and understand the dynamics of the Norwegian economy. The model apparatus is continually being developed. Among other things, we are exploring how financial markets and the linkage to the real estate market can be incorporated into such a model. Norges Bank’s response pattern expresses the assessments we make and how we set the interest rate to attain our objectives. We must use professional judgement and our experience of how the Norwegian economy functions. We attempt to incorporate our response pattern into NEMO by setting the interest rate in the model so as to stabilise inflation at target while reducing fluctuations in output and employment. The model can in this respect be a tool for ensuring consistency over time when we set the interest rate.
The sale to outside parties of credit risk packaged into new instruments helps, of course, to transfer the risk, but the credit risk still exists. While the transfer of risks to institutions or households that are better able to withstand them is a positive factor, and one of the structural explanations for the resilience of the banking sector during recent periods of stress, we should be conscious that this development may introduce some new risks into the system, such as operational risks, which require adequate treatment. Sellers of credit-related instruments face some degree of legal risk, for example, when new instruments are issued and their enforceability in courts has not yet been tested. Likewise, the creation and management of the new products can put strains on legacy risk measurement and management systems that were not intended to handle them, creating new possibilities for operations to fall short or even to fail in some way, creating losses. These advances in the technology and practice of risk management introduce unique opportunities for public authorities to promote greater stability. I’d like now to turn to the efforts that banking supervisors are undertaking to respond to these recent trends. This represents the next topic I’d like to address today. 5. The supervisory response: Basel II  Against this background of increasingly sophisticated risk management practices, heightened complexity in the financial markets and stronger interaction between the real and the financial economy, the Basel II process started more than 5 years ago.

Therefore, striking the right balance in terms of the interest rate differential is of the essence – after the substantial tightening undertaken so far, translating into money market rates increases by almost 200 bps (a normal development given the size of the inflation differential), it is probably wise to proceed more cautiously from now on. As such, the future action of the NBR is likely to depend on how the process of monetary policy normalisation will be unfolding in Europe. Policy normalisation is a question of “when”, not “if”. It will eventually gain momentum and the impact of major central banks’ policy reversals on emerging economies should not be underestimated. When the tide eventually hits, the extent of the damage depends on how vulnerable emerging economies are to external financing. A contained current account deficit, a long average maturity on public and private foreign currency debt and a proper policy mix will help limit the negative externalities. Summing up, keeping internal and external imbalances in check is the only way our economies will be able to cope with the strong volatility headwinds ahead of us. Indeed, it would be a shame if the necessary reforms were not undertaken now, while there is a window of opportunity. 14 May 2018, Bodrum, Turkey  3/3  BIS central bankers' speeches
The growth rate of total MFI credit to euro area residents remained broadly unchanged in that month. Turning to the second pillar, one issue under consideration was the likely further development in world economic activity and particularly real GDP growth in the euro area. Overall, the outlook for growth of the world economy remains favourable. In particular, as far as the decline in real GDP growth in the United States in the third quarter of 2000 is concerned, this may be seen as the first sign of an orderly slowdown towards more sustainable levels, in line with the projections currently available. More generally, the extended period of rising and high oil prices has increased the uncertainty surrounding the sustainability of recent growth trends. However, by contrast with previous periods of strong and prolonged increases in oil prices, the world economy is less dependent on oil today and inflationary pressures are still being contained. This should help to avoid any sustained negative effect on confidence, and thereby ensure that the impact of high oil prices on growth remains moderate over the medium term. Very much the same line of argument applies to the euro area. Euro area real GDP has been growing at a high rate for four consecutive quarters, including the second quarter of 2000. Some monthly indicators which extend into, or cover, the third quarter of this year point to a possible moderation in growth rates.

Those charged with managing the major financial institutions need to continue to make the investments necessary to stay abreast of change and to get as close to the frontier as possible. This reality makes it even more important that we in the supervisory community continue to look for ways to address aspects of the existing supervisory regime that impose unnecessary costs and burdens or that pull resources and attention away from potential sources of risk to the financial system. Thank you. 4  BIS Review 54/2006
These rules would add complexity to an already very complicated system, would require negotiating and monitoring the list of expenditure items to be excluded, and would have to be implemented without endangering fiscal sustainability. In any case, the challenges of the green and digital transitions exceed by far the fiscal space of national governments. Thus, a more efficient option would be to set up a common European financing instrument, covering the investments needed to meet common objectives, such as reaching net zero emissions and combating climate change. Joint funding arrangements would allow us to undertake large-scale programmes subject to common quality standards and to assess their compliance in a homogeneous manner, avoiding any excessive or highly unequal impact on national public finances and any disruptions in the single market. Lastly, the European Commission’s orientations miss an element that I firmly believe is essential for the success of any reform of the fiscal governance framework. I cannot conceive of a new EU fiscal rule framework without reforming the rest of the EU’s economic and financial governance framework. 9 This would entail, for instance, establishing a European unemployment insurance system and a central fiscal capacity. It should be noted that, under the current fiscal rules framework, it is not possible to ensure, at any given moment, that the aggregate stance of the national fiscal policies is appropriate for the euro area as a whole, which makes it hard to achieve a balanced fiscal and monetary policy mix.

However, this required estimating the cyclical position of the economy and the elasticity of public finances to the cycle, which have proven to be notoriously difficult to estimate in real time. In fact, evidence shows that in the case of the European Union, estimates of potential output are revised up to ten years after the first release. Second, while the current economic environment bears little resemblance to that of the 1990s, the reference values were included in the Treaty as if they were “structural permanent values” of the economies. These limits were calibrated on the basis of the average macroeconomic conditions at the end of the 1990s. But economies are subject to structural transformations over time, and such limits should therefore be updated. Third, despite its focus on fiscal sustainability, the framework did not prevent a general and consistent increase in public debt. Again, experience shows that this is to a large extent 2 For a more detailed discussion on the reform of the fiscal governance framework in the European Union, see Alloza, M., J. Andrés, P. Burriel, I. Kataryniuk, J. J. Pérez and J. L. Vega. (2021). “The reform of the European Union’s fiscal governance framework in a new macroeconomic environment”. Occasional Paper 2121. Banco de España. 3  related to a failure to comply with the rules, particularly in good times, which were not used to build up fiscal buffers for periods of economic distress. This is not surprising.
Evidence of the persistence of misperceptions can be seen in the imbalances in the world, and especially the European, economies. I do not mean to imply that when economic agents make these mistakes they are behaving irrationally. Rather that in a world of intrinsic uncertainty it is far from obvious how to make decisions. The assumption of rational expectations is very helpful for economists when trying to understand the implications of their own models – it is a discipline to prevent the drawing of arbitrary conclusions. In practice, however, households are on their own in a highly uncertain and complex world where they are learning from experience. When it comes to decisions about how much to spend and how much to save, expectations of future incomes are crucial. In the absence of a complete set of markets for future consumption goods – and labour – there is no mechanism to ensure that decisions today, and so the implied plans for tomorrow, will be consistent with the possibilities available in the future. If revisions to expectations of future incomes are uncorrelated across households, then aggregate spending will be relatively stable. The problem comes when many households have similarly over-optimistic views about the future. Aggregate spending and borrowing can then be unsustainably high and lead to an inevitable correction at an unpredictable date when reality dawns. Financial markets both reflect and propagate that common degree of optimism. Sentiment and animal spirits can change very quickly.

3  The unemployed also includes people who have been offered work starting within three months, assuming that they would have been able to work on the date of the survey or to start within 14 days. 4  Open unemployment is a definition used by the Swedish Public Employment Service to refer to jobseekers who are actively looking for work, who are able to enter the labour market immediately, and who are not participating in a labour market policy programme. 2  BIS central bankers’ speeches  However, it is not certain how actual unemployment is to be defined if the intention is to measure the spare capacity of the labour market. Youth unemployment can be taken as an example. In October 2007, Statistics Sweden went over to reporting unemployment according to an internationally-established standard. Full-time students who have looked for work and could have worked were now reported as unemployed. This change meant that unemployment in the age group 15–24 increased strongly, even though this group’s main activity was studying. The number of people unemployed in relation to the number of people in the labour force in the category young people was about 25 per cent in 2010. Using the previous reporting method, unemployment would have been 15 per cent.5 For total unemployment, the changed method meant that measured unemployment increased by about 2 percentage points. Neither is it clear how individuals participating in labour market policy programmes should be classified.
For example the National Payment Systems Act which was enacted in 2007 gives powers for the Bank of Zambia to regulate and oversee operations of payment systems to ensure the effectiveness, efficiency and safety of payment systems so as to promote the stability and safety of the Zambian financial system. Further, the Bank of Zambia through the National Payment Systems Vision and Strategy 2007–2011 and the Financial Sector Development Plan, has undertaken various activities that are focused on improving access to financial services for both the banked and unbanked population. You may recall the Topline findings by Finscope on our financial sector development systems and their recommendation to expand access to financial services to the unbanked population in remote areas. The launch of Airtel Money is expected to contribute positively to the financial inclusion agenda which in turn will have a positive impact on the economy at large. In addition, the Bank is in the process of putting in place Electronic Money Regulations that will ensure that e-money transactions are operated within safe, efficient and secure bounds. Distinguished guests, allow me to also comment on the recent B+ sovereign rating assigned to the country by world renowned rating agencies Standards and Poor and Fitch, as well as, the reclassification of Zambia as a middle income country by the World Bank. The rating and reclassification requires the central bank, the Zambian business community and Government to continue enhancing the financial system to ensure that it is robust and reaches the unbanked.

In the UK, the Investment Association is also finalising with its members a guide intended to assist firms navigate their own assessment of the Code’s requirements against existing requirements, for public release in early 2019. All of these should help firms looking for assistance in signing up. 9  https://www.fca.org.uk/about/recognised‐industry‐codes 8  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  8  But it is worth remembering too the cost of not supporting the Code: the heightened risk of returning to the doubt, uncertainty and collapse in trust in the operation of the FX and other core wholesale markets that we saw a decade ago, and the more restrictive regulation that would inevitably follow. The Code offers the opportunity for the market collectively to recognise its responsibilities in a fair, balanced and cost effective way in the interests of the users of the capital markets: your customers. Conclusions If there was one lesson of the Financial Crisis ten years ago, it was the importance of the market taking collective responsibility for raising and maintaining standards in financial markets, of which foreign exchange forms a vital part. Buy-side firms, as huge and growing players in those markets, have a vital role to play in that. By signing up to the Global Code, you signal a commitment not just to uphold those standards yourselves, but also to hold others to them – and in so doing help ensure the markets remain deep, liquid, safe and fair to everyone.