samchain/econo-pairs-v1 huggingface dataset:
Expected inflation Per cent 4  4 5 years ahead 2 years ahead 1 year ahead  3  3  2  2  1  1  0  0 96  00  04  08  12  Note. Average for all survey respondents. Source: TNS SIFO Prospera  6  BIS central bankers’ speeches  Resource utilisation remains lower than normal Resource utilisation has been lower than normal for in principle the entire period since the end of 2008, when demand for Swedish exports fell heavily in connection with the global financial crisis. At the same time, developments on the labour market have been better than expected in some aspects. Although unemployment has remained around 8 per cent since the middle of 2012, employment has increased and the employment rate has risen around half a percentage point since then. One question that sometimes arises is whether it is actually possible to bring down the current unemployment rate of 8 per cent with the aid of monetary policy. Matching on the labour market appears to have deteriorated and a larger percentage of the unemployed consist of groups that are on the periphery of the labour market. This could mean that structural unemployment is higher than before, and structural unemployment cannot be affected by monetary policy. However, my impression is that one can at least partly determine how much of unemployment is structural by looking at wage increases.

This type of monetary policy is known as leaning against the wind, and in this case the wind would be growth in household debt. Household indebtedness has affected the monetary policy assessment in Sweden in earlier periods, too, but it is primarily since autumn 2012 that it has explicitly been cited as a reason for a higher repo rate than is strictly justified by the prospects for inflation and resource utilisation.1 Although other central banks have also referred to high indebtedness and mentioned financial stability risks in connection with monetary policy decisions, few central banks have faced such a clear conflict of objectives as the Riksbank. What this entails is either to keep the repo rate higher to slow down the build-up of debt, or to keep it lower to bring up an inflation that has long been below target at the same time as resource utilisation has been low. Personally, I have been sceptical of the policy conducted, which has meant that I entered reservations against the decisions over a long period of time. Now that inflation has recently moved even further away from the target, the Executive Board has been able to agree on the monetary policy decisions. The repo rate was cut most recently in December last year and the repo-rate path was lowered. Why inflation has been so low is something of an open question. I believe that the policy conducted has been an important contributory factor. At the same time, I believe that its effects on household indebtedness have been minor.
As of 2011, fiscal deficits in the region have narrowed once more to an average of 1.1% of GDP. 35. Asian economies must continually recalibrate their monetary and fiscal policies, as external demand conditions and domestic cost pressures pull in opposite directions. Maintaining flexibility in macroeconomic policies must go hand-in-hand with reforms to strengthen domestic demand. Breaking new ground in macroprudential policies 36. The de-synchronisation of global macroeconomic cycles between the advanced economies and emerging market economies poses more challenges for the latter than the former. As long as monetary conditions in the advanced economies remain easy, emerging market economies face the risk of misallocated resources and disruptive capital flows, which in turn can affect both price stability and financial stability. 37. Low interest rates and abundant liquidity have contributed to asset price accelerations in some Asian countries, especially in real estate markets. Residential property prices in Korea, Taiwan, Hong Kong, and Singapore, for example, have increased by 35% on average since 2009, while nominal wages have risen by only 13%. 38. No doubt, increased capital flows to emerging market economies reflect the superior growth prospects of these economies. There is a structural rebalancing of global investment portfolios towards emerging markets in general, and Emerging Asia in particular. A multi-pronged policy response is needed to ensure that inflationary pressures remain contained in the face of this “wall of money” – including a gradual appreciation of nominal effective exchange rates.

Restoring market  BIS central bankers’ speeches  1  confidence, in turn, requires achieving fiscal sustainability while spurring economic growth. Some have described the task as akin to redesigning an aircraft in mid-flight amidst severe turbulence! 7. Nonetheless, important progress has been achieved and the situation today is visibly better than it was even six months ago. •  The European Central Bank’s Outright Monetary Transactions programme has materially reduced the tail risk of a disorderly breakup of the monetary union. •  Sovereign bond yields in Italy and Spain have come down, on average, some 200 basis points from their peak levels in the middle of last year. •  Bank deposits in the peripheral countries of Greece, Ireland, Portugal and Spain have shown signs of stabilisation. 8. But Europe remains mired in recession. There is still no compelling growth agenda. Domestic demand is weak amidst fiscal consolidation. Banks are not lending amidst an uncertain investment environment. And several structural issues remain unresolved. It will not take much to reignite financial market stresses. In short, the crisis in the Eurozone is not over. Japan: dealing with deflation, demographics, and a natural disaster 9. Japan has a different set of problems. Its economy has recovered less than two-thirds of the output lost during the crisis. It has fallen prey to weak external demand and is still reeling from the aftershocks of a major natural disaster. 10. Japan is caught in the pincer grip of prolonged deflation and unfavourable demographics.
In fact, the female participation rate is still far from its pre-pandemic levels, affected by the extra responsibilities on home care that many women have had to assume. This issue is examined in one of the boxes of this Report, and I will refer to it in more detail in a while (Figure 5). Since the previous Report, benefits for households and small businesses have been expanded and will be significantly increased with the measures recently approved by Congress within the framework of the “Common Minimums Agenda”. In the second half of April, the Government announced the strengthening of the middleclass bonus and the Emergency Family Income, together with a complementary bonus for those with empty pension fund accounts. Congress also approved a third withdrawal of pension savings, which includes an advance of benefits for pensioners with annuities. In the context of the Common Minimums Agenda, a substantial extension and expansion of transfers has just been approved, including an Emergency Family Income, which will be extended in amount and coverage, and will reach more than 15 million people over the next four months. In addition, the provision of subsidies and tax benefits for micro and small businesses is being discussed. These initiatives combined will push fiscal spending growth to around 25 percent in nominal terms in 2021, which compares to the 5 percent considered in the March Report.

In fact, private consumption is the fastest growing component of spending, with some of its categories, such as durable consumption, increasing at rates of 50 percent annually in the first quarter. The measures recently approved by Congress will intensify the boost to consumption, while fiscal expansion will be significantly higher than we expected in the March Report. In the projections I will be sharing with you in a few moments, we see a significant upward correction in growth for this year, to between 8.5 and 9.5 percent. This responds to the better performance recently combined with increased boost to expenditure, in the context of more favorable external conditions. In addition, this brings forward the expected closing of the wide activity gap caused by the Covid-19 crisis. Despite these advances and more positive prospects for recovery, the overall perception remains marked by the evolution of infections and quarantines, the significant lags in some sectors, labor market fragilities and persistently high uncertainty. In the financial market, long rates have risen more than their external counterparts, the stock market has fallen, and sovereign risk has shown moderate increases. Looking ahead, greater fiscal expansion and highly dynamic consumption will take pressure off the monetary impulse to support the recovery of the economy, so it should begin to moderate earlier than expected in the last Report. This will prevent an increase in inflation—currently at around 3.5 percent—from raising the cost of living and eroding the purchasing power of the households most affected by the crisis.
Such a consensus – which is today dominant within both academia and the policy-making community – developed in the wake of the major economic disruptions associated with the so-called Great Inflation of the 1970s. This world-wide monetary crisis cemented the contemporary agreement that pursuing price stability ought to be the fundamental goal of monetary policy. A third key principle is a logical consequence of the first two: since inflation reflects, to a large or even dominant extent, the economic agents’ inflation expectations, it follows that in  1  See Phelps (1968), Friedman (1968), and Lucas (1972a, b). BIS central bankers’ speeches  1  order to keep inflation under control it is of paramount importance to keep inflation expectations firmly anchored. As I will discuss later on, our success in firmly anchoring Euro area inflation expectations throughout the crisis proved very helpful in allowing us to fight the crisis’ contractionary shock. As I will argue, if inflation expectations had not been so firmly anchored, the management of the crisis would have been much more difficult and our policy responses much less effective than they were. The fourth principle of monetary policy not invalidated by the crisis is the ultimate monetary nature of inflation.

Even if you are right, consistently betting on that mispricing can drive you out of business if the majority of the other agents keep acting in such a way as to validate such mispricing. As in Keynes’ beauty-contest illustration, what matters for you is not so much to be right about fundamentals as to be right on what others will do. This position was best expressed just one month before the beginning of the crisis by Chuck Prince, then CEO of Citigroup, when, in an interview with the Financial Times, he stated that5 “[w]hen the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. […] At some point, the disruptive event will be so significant that instead of liquidity filling in, the liquidity will go the other way.”  4  See Shleifer and Vishny (1997). 5  See “Citigroup chief stays bullish on buy-outs”, by Michiyo Nakamoto and David Wighton, published in the Financial Times of July 9, 2007. 4  BIS central bankers’ speeches  Those words provide the strongest possible refutation of the notion that an asset price being out of line with fundamentals will by itself guarantee that such a misalignment automatically disappears.
There is research underway at the Bank of England which studies the effect of credit growth abroad on 4  financial stability at home, in particular, on the probability of experiencing a banking crisis . It finds that even when domestic credit growth is moderate, elevated credit growth abroad could result in financial instability at home for example by boosting cross-border lending, through spillovers into domestic asset prices or by creating the potential for contagion in the event of a banking crisis abroad. 5  In terms of magnitudes, a one standard deviation in foreign credit growth over five years increases the 6  probability of a domestic banking crisis by around 2 percentage points - a relatively large number given the  3  IMF (2016). Cesa-Bianchi et al. (forthcoming). 5 In this research, domestic credit growth is defined as credit extended by domestic banks to the private non-financial sector in a given country. Foreign credit growth is defined as the average of the growth in credit extended by domestic banks to the domestic private nonfinancial sector in all other countries. 6 On the basis of modelling and assumptions set out in Technical Appendix 1: Foreign credit growth and domestic financial stability. 4  3  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  3  7  overall frequency of these crises is about 3% .

The first is that although cross-border bank flows have plateaued, in many other ways the global financial system is as interconnected as ever, and that we need to be mindful of spillovers from elsewhere when setting policy. The second is that by acting in their domestic best interest, policymakers can often improve the global outcome. In short, we need to think globally, act locally. The need to think globally Let me start with some context. Evidence of a ‘global financial cycle’, which drives co-movements in asset prices, and pro-cyclical gross capital flows, has been well documented, for example by Helene Rey (2013) and by my colleague Kristin Forbes (2016). Global financial markets have become more correlated and common shocks play an important role. According to the IMF, around three-quarters of equity and foreign exchange returns in both advanced and emerging market economies are now attributable to international 3  factors. We have also observed an increase in the co-movement of domestic credit growth across countries over the last two decades (Chart 2). Elevated domestic credit growth has been found to be the best single predictor of banking crises (Drehmann et al (2011), Schularick and Taylor, 2012). However, banking crises come “in waves” (Reinhart and Rogoff, 2009; Laeven and Valencia, 2013), which, together with signs of greater correlation of credit growth across countries, suggests a role for external determinants and/or direct contagion.
This implements Bagehot’s prescription for mitigating systemic risk, that the central bank should as far as possible make clear in advance its preparedness to provide liquidity in stressed conditions. Referring to the central bank, he puts it thus: ‘The holders of the cash reserve must be ready not only to keep it for their own liabilities, but to advance it most freely for the liabilities of others. They must lend to merchants, to minor bankers, to “this man and that man”, whenever the security is good.’ The picture becomes more complex in the case of global firms that manage liquidity centrally. Such firms have liquidity needs in multiple currencies and locations. They may find it costly to hold enough liquid assets in every market in which they operate, and hence potentially face a mismatch between the location of their liquidity needs and that of their liquid assets. In response to this several central banks, notably those in Switzerland, Sweden, the UK, and the United States, have taken steps to allow the cross-border use of collateral in some or all of their routine lending activities. Others have taken the alternative route of attempting to reduce collateral costs for banks, and hence relax potential constraints, by accepting a range of less liquid and nonmarketable assets, while still controlling the credit quality of the assets involved. For example, the Eurosystem accepts a wide range of non-sovereign debt securities, including corporate bonds and asset-backed securities.

Avoiding or resolving liquidity problems is not just a matter of ensuring adequate aggregate liquidity; it also means ensuring that liquidity can be, and is, distributed effectively round the system. This was illustrated by the events of 9/11, when the US money market was temporarily unable to distribute liquidity to the banks that needed it. On that occasion, for example, the Federal Reserve injected considerable liquidity, more than $ via a combination of daylight overdrafts, discount window  BIS Review 79/2005  3  lending, and general market support. 9/11 also highlighted the importance of central banks being able to lend directly to solvent institutions facing a liquidity crisis. Under stressed conditions, and with the associated uncertainties, attempts by a perfectly sound bank to borrow unusually large amounts from the market, even against good quality collateral, have the potential to raise, or exacerbate, doubts about that bank’s solvency. But a solvent bank that is in need of liquidity can safely reveal its need to the central bank without precipitating a crisis in market confidence; uniquely, the latter is not at risk of experiencing a run, and so will not overreact in an effort to protect its own balance sheet. In many countries ‘automatic’ direct liquidity provision against pre-defined acceptable collateral is hard-wired into the operational framework for monetary policy implementation through so-called ‘standing facilities’. In the UK we are broadening the range of firms to whom we can supply liquidity in this way.
Secondly, ICT development leads to innovation growth in public services worldwide, which means that changes in public administration’s activities increasingly rarer show features of reproduction, and the public administration becomes ever more often a leader in the field of innovative services. In consequence, methods of a country’s actions and fulfilment of its functions are irrevocably directed at using such technologies, and adopt the form of e-strategy, e-policy, eregulations and e-services. With just a few exceptions, public administration in Poland has not contributed to increasing innovativeness and effectiveness of the private sector, but has been rather ball and chain. Communication between citizens, entrepreneurs and an authority takes place mainly on paper, and it is necessary to come in person, bring a form, sign a document, while in other countries, e-government bodies are available via a mobile phone. For example, would it not be easier and more cost-efficient for an entrepreneur, if such sufficed, to participate in a tender by submitting only a factual offer, and other documents would be automatically collected through communication between various public and private registers (such as the National Court Register, Social Insurance Institution, Central Statistical Office, the revenue or credit database etc.). There are countless examples where public administration’s activities might sizably increase the economy’s efficiency.

In the Financial Stability Forum, which is leading the international regulatory response to the crisis, we are also looking at the scope for “macro prudential” instruments to dampen the destabilising procyclicality in financial markets. To do this we need to do more than simply raise the minimum levels of capital and liquidity that regulators, rating agencies, or the markets require. We need to create reserves based on macroeconomic factors, which can be drawn down as the cycle turns down and have to be replenished on the upswing when profits are high. The system of dynamic provisioning in Spain seems to work effectively in that respect and may well offer a guide for the way forward. Conclusion To conclude, on monetary policy, we have one instrument, and one goal – ensuring that inflation stabilises at target in the medium-term. While we must remain vigilant for any signs of inflation expectations drifting upwards, the news on that front is encouraging. On the other side, the risk we must be careful not to underestimate is the deflationary consequences of the credit crisis. At the moment we are focused on the risk that the slowdown in the real economy will be amplified through a contraction in banks’ balance sheets. But we should also set in place longer term measures to prevent such financial imbalances from building up again in the next upswing. In my view the case for macro-prudential policies alongside monetary policy is compelling.
This suggests that market participants’ misgivings about prevailing uncertainties have dissipated somewhat, which is likely not least of all a consequence of monetary policy measures by major central banks. In addition, some investors appear to expect that central banks will continue to pursue expansionary monetary policies for the foreseeable future, with low interest rates and an ample supply of liquidity. In Switzerland, interest rates remain at a very low level. The yield on ten-year Swiss Confederation bonds declined to a new low at the beginning of December, at 0.39%. No other government has ever recorded nominal ten-year financing costs at such a low level. BIS central bankers’ speeches  1  Money market rates also continue to be very low. Interest rates on the repo market are predominantly negative. At 1 basis point, the three-month Libor lies only just above zero. Based on Libor futures contracts, the interest rate expectations of market participants are that the low rate environment will continue for the foreseeable future. Management of foreign currency investments Our foreign currency purchases in early summer to enforce the minimum exchange rate have resulted in high inflows to the SNB’s foreign currency holdings. These holdings have increased by CHF 167 billion since the beginning of the year to CHF 425 billion at the end of November. This is a direct consequence of our monetary policy. In the event that foreign currency purchases are necessary to implement the minimum exchange rate, our foreign currency reserves increase, and the balance sheet expands.

Incidents of the Libor being manipulated, whether already admitted or suspected, are problematic for the reputation of the banks involved, and for the financial sector as a whole. This discussion  2  BIS central bankers’ speeches  on the Libor is also significant for us, because we use the three-month Libor in the implementation of monetary policy. No Swiss franc Libor distortions relevant to monetary policy have thus far been ascertained. Furthermore, an SNB survey conducted among banks this year confirmed that the Libor remains an important variable for credit transactions, namely for mortgages. Of the banks surveyed, 80% indicated that they use the Libor as a benchmark for pricing loans. It also continues to play a key role in the pricing of financial products and derivatives. Neither the sharp decline in unsecured loans on the interbank market nor the incidents of manipulation have so far changed this. In July 2012, the Financial Services Authority (FSA) in the UK was commissioned to undertake a review on reforming the Libor. At the end of September, the working group convened for this purpose presented its findings in the Wheatley Review, which included a series of proposed measures. These aim to prevent further attempts at manipulation, and to restore confidence in the Libor. The report recommends, inter alia, that rate-setting processes and their oversight be improved, and that certain maturities and currencies be withdrawn. Under the proposals, the three-month Swiss franc Libor will continue to be determined.