samchain/econo-pairs-v1 huggingface dataset:
Simon M Potter: Trends in foreign exchange markets and the challenges ahead Remarks by Mr Simon M Potter, Executive Vice President of the Markets Group of the Federal Reserve Bank of New York, at the 2015 FX Week Conference, New York City, 14 July 2015. *  *  *  I would like to thank Robert Lerman and Jamie Pfeifer for their excellent assistance in the preparation of these remarks and colleagues in the global central bank community for numerous insightful comments and suggestions. Good morning. It’s a pleasure to be here. Let me extend my thanks to FX Week for the invitation to speak at this conference. Before I begin, I would like to note that my comments today reflect my own views and not necessarily those of the Federal Reserve Bank of New York. The ability of households, corporations, and sovereigns across the world to safely and efficiently exchange assets denominated in one currency for assets denominated in another is essential to a healthy and robust global economy. These transactions can occur for myriad reasons – to support the flow of goods, services, and investment across national boundaries, to diversify the savings of retirees, or to hedge risks associated with manufacturing a particular type of product.

Banking problems have afflicted both industrial and emerging market countries, including the US, which weathered the savings and loans and banking problems of the 1980s and early 1990s. Crises around the world have exacted a high price, with direct fiscal costs of associated resolutions typically starting at roughly 5 percent of GDP (in the US case, such costs ran more than $ billion). To these substantial sums, one must add the less quantifiable, but no less real, consequences for the economy and financial system. A weakened financial sector cannot serve its role as intermediary - as banks seek to repair their balance sheets, restrict new lending, and shore up capital - leading to diminished growth prospects. In a number of Asian countries today, exporters have difficulty obtaining trade financing from domestic banks, delaying the process of economic recovery and raising fears of a credit crunch in which even sound companies are driven into bankruptcy. Banking sector problems reduce depositor confidence in the banking system and can trigger capital flight. Banking system problems, significant in their own right, can cause distortions in monetary policy, render monetary policy tools less effective, and put at risk the integrity of the payments system. In an integrated international financial system, it is increasingly difficult to contain a banking crisis within a country’s borders. Finally, we must not forget the human consequences of a financial and broader economic crisis, which disproportionately fall on those least able to weather the storm.
Jean-Claude Trichet: Preserving financial stability in an increasingly globalised world Keynote speech by Mr Jean-Claude Trichet, Governor of the Banque de France, at the European Financial Markets Convention (EFMC 2001), Paris, 15 June 2001. *  *  *  Ladies and Gentlemen, It is a great pleasure for me to participate in this European Financial Markets Convention. The impressively dense program of the Convention illustrates that the integration of financial markets in Europe is a major and multi-dimensional challenge. The Banque de France and the Eurosystem have a strong interest in all these issues. In particular, a safe and efficient functioning of the clearing and settlement systems of the euro area is crucial for the stability and efficiency of the financial system and for the good implementation of monetary policy. The consolidation of the market infrastructure, currently underway, will contribute to reaching these objectives through the fostering of market liquidity and the reduction of transaction costs. There is however no single path for such a consolidation: it will be up to the market to select the way which best fits its needs, while it will be up to regulators and to the Eurosystem to make sure that the resulting infrastructure is adequately safe, efficient and reliable. I would like now to share with you some views from the broader perspective of financial globalisation.

The effects on the international financial system were thus slight, although the crises affecting both Asia and Russia led to extensive redistribution of wealth and political tumult in the countries concerned. There are probably several reasons why the effects were so limited. One is probably that economic policy has become more predictable in many countries in recent decades, with sound public finances and stable, low inflation. The markets should therefore be less sensitive to shocks. However, another reason is actually that the financial system has become more resilient. The fact that risks have a better spread makes the system more stable. The risks are also transferred to the agents who want them or should have them. There is also the fact that the banks have gained more experience of operating in deregulated financial markets. The development towards more market-based transactions means that banks can now concentrate on the risks they are best at managing. They have also become better at managing them, with well-developed risk management methods and models. So far, so good. A better spread for risks and improved risk management can contribute to better absorption of shocks to the financial system. On the other hand, there can be elements that increase the risk of more serious shocks that also spread throughout the whole system. …or have they become more prone to risk? One such tendency could be an increased propensity among market agents to take greater risks and to copy others’ actions.
The benefits of price stability, which are also important factors to the attainment of MDGs are: effective planning; lower investment costs; increased public and foreign investor confidence in the economy; improved external sector competitiveness; and accelerated economic growth needed to reduce poverty levels. (a)  Effective planning  When prices are stable, corporate institutions, governments, civil society and individuals are able to draw up their expenditure plans well into the future. In particular, companies will be  BIS Review 123/2007  1  able to reliably plan with some degree of certainty for their operations and long-term investment in fixed assets that will expand their production capacity and output and lead to increased employment as well as enhancement of incomes. Similarly, a government is able to make more accurate projections of revenues expected to be collected in future and thus more effectively plan its current and capital expenditures that are likely to benefit the poor. (b)  Lower cost of investment  Interest rates being the cost of funds will inhibit borrowing for investment if they are too high. Interest rates, therefore, are an important factor in attaining price stability. Low and stable interest rates, which are possible with the achievement of low inflation, create conducive credit conditions that improve accessibility and availability of credit to the productive sectors. Improved access to credit by the private sector will result in increased investment and production which ultimately leads to higher economic growth and improvement in standard of living.

With these few words, Mr Chairman, I would like to urge you, the participants, to be interactive in your discussions as this is one of the ways the workshop would add value to your knowledge and skills. I wish you fruitful discussions as you share your valuable experiences in macroeconomic analysis and modelling in support of Millennium Development Goals. I thank you for your attention. BIS Review 123/2007  3
Inflation expectations  Inflation expectations cannot be observed directly, but approximate measures can be derived indirectly in three different ways: asking a sample of consumers, surveying professional forecasters and extracting information from financial markets. Let me elaborate. The European Commission conducts a poll every month in which it seeks consumers’ opinions on inflation developments in the euro area, in particular their perceptions of current inflation developments and their expectations for the next 12 months. These two measures are plotted in Chart 10, together with actual inflation. Consumers’ expectations have declined strongly in recent months, reaching a record low in May (the survey started in 1985). Most respondents thought that prices would either remain unchanged or fall in the next 12 months. But this is not really the same as expecting deflation. The second way of measuring inflation expectations is via the ECB’s Survey of Professional Forecasters. It suggests that most respondents regard deflation as unlikely. In the second quarter of 2009, none of the 50 participants reported a negative point estimate for 2009, and two participants reported a point estimate below zero for 2010. Together with point estimates, participants are also asked to assess the likelihood of future inflation falling within given ranges. Averaging the individual responses provides a summary of their assessment. As Chart 11 shows, in the most recent survey, respondents assigned an overall 18% probability that annual inflation will be negative in 2009 (left side of the chart), which is significantly higher than in previous rounds.

At the ECB, many measures of monetary liquidity are investigated and assessed for the implied risks to price stability. It is worth mentioning in this context that the various measures should not be regarded as mutually exclusive but rather as providing an encompassing view. An obvious measure characterising the rate of monetary expansion consists of the annual growth rate of the broad monetary aggregate M3, a measure that tends to attract most attention in the public debate. 11  IMF (2003) “Deflation: Determinants, Risks, and Policy Options – Findings of an Interdepartmental Task Force”, p 15. 12  The steep drop in the growth rate in compensation per employee in 2009Q1 is mainly driven by strong downward developments in Germany, Italy, the Netherlands and Belgium. Note that, combined with the recent release of productivity growth (-3.6%), unit labour costs growth increased further, from 4.5% in 2008Q4 to 5.7% in 2009Q1, marking a new record high since the start of EMU. 13  See, for instance, McCandless, G. T. and W. E. Weber (1995), Some Monetary Facts, Federal Reserve of Minneapolis Review, Vol. 19, No. 3, pp. 2–11 or, for an alternative approach, Benati, L. (2009), Long Run Evidence on Money Growth and Inflation, ECB Working Paper, No 1027. 6  BIS Review 81/2009  As we can see in Chart 17, annual M3 growth decelerated further in the first quarter of 2009 compared with previous quarters.
Moreover, entry into the EU and reforms in the tax and social security systems helped create better conditions for economic growth. Today, Sweden's central government finances are healthy, there is a surplus in the current account, inflation expectations are anchored around the Riksbank's target of 2 per cent and unemployment has fallen to a level that is far below the European average. Potential growth The decisive factor for economic growth and thereby the resources available for wage increases, earnings or an expansion of the public sector is the economy's long-term production capacity. Another term for this is potential growth, which determines the rate at which the economy can grow without giving rise to inflationary pressures. So it is demand in the economy in relation to production capacity that to a large extent determines the future path for inflation. Potential growth is therefore of vital importance for monetary policy. In turn, the long-term production capacity is determined by how much we work (the labour supply) and how productive we are (productivity). The labour supply depends partly on the number of people that work and the number of hours each person works. Important factors here include the age structure in the economy and the number of people on sick leave. Productivity is partly dependent on investment and technological progress - for example that machinery becomes more modern or that it is employed more efficiently. Educational levels also affect productivity. Knowledge can be put into practice in production and increase opportunities to assimilate new ideas and innovations.

Ahead of the referendum, I believed that the advantages of a single currency in Europe outweighed the loss of a monetary policy adapted to a specific level of Swedish economic activity. The debate ahead of the referendum sometimes gave the impression that the monetary policy regimes in Sweden and the euro area are different. In actual fact our monetary policies are similar, as we both have an inflation target, a floating exchange rate and an independent central bank. One difference is that monetary policy in Sweden is based on Swedish conditions, while that in the euro area is based on average developments in prices and economic activity in the area as a whole. The Nordic countries have different economic-policy situations. Sweden, Finland and Denmark are members of the EU. But Norway and Iceland, who have chosen to remain outside the EU, also enjoy the four freedoms, i.e. free movement for capital, goods, services and labour, through the EEA Treaty. Finland has taken a step further in the EU cooperation by participating fully in EMU since 1999. Consequently, Finland no longer has its own currency and does not conduct a national monetary policy. Denmark has not introduced the euro but participates in the exchange rate mechanism, ERM II. This means that the Danish krone has a fixed exchange rate with the euro and that interest rates in practice track those of the euro area. In Norway monetary policy is now similar to that in Sweden, with an explicit domestic inflation target.
6  BIS Review 5/2010  Chart 2  Monetisation of economy* percent  40  35.9  35 30  29.9  34.5  32.2  25.6  25 20 15 10 5 0 2004  2005  2006  2007  2008 * M3/GDP  Source: National Bank of Romania, National Institute of Statistics  The exchange rate appreciated in both real and nominal terms. The domestic currency appreciated in nominal terms from nearly RON/EUR 4.1 in January 2004 to RON/EUR 3.1 in July 2007 (about 24 percent). Along with the relatively high fiscal dominance and the net debtor position of the National Bank of Romania (NBR), heavy capital inflows became a serious matter of concern in terms of implementing inflation targeting, i.e. the new monetary policy strategy adopted in August 2005. While boosting disinflation, the domestic currency appreciation was so strong that it tended to affect the external competitiveness of Romania. To this added the episodes of high volatility on the foreign exchange market. As in other CEE countries, foreign banks operating in Romania took funds from their euro area parent-banks. In 2004, nearly 72 percent of liabilities came from the euro area and 21 percent from the United Kingdom. During 2004–2008, foreign liabilities of the banks in Romania increased more than six times, from EUR 3.8 billion to EUR 24.5 billion. Such rises were reported across the entire maturity spectrum. The surge in banks’ foreign currency holdings and the appreciation of the domestic currency acted jointly towards boosting lending in foreign currency.

The longest cycle of synchronous, massive capital inflows lasted from 1975 to 1982 and was followed by the debt crisis. The heavy capital inflows resurfaced during the 1990–1993 period and were followed by debt restructuring in the emerging economies. Starting in 2002, a large number of countries were faced with massive capital inflows. The end of the capital flow bonanza overlapped the onset of the financial turmoil in July 2007. In Romania, this episode became more manifest in 2004 and came to an end in 2008. Next, I will elaborate on the causes generating synchronous, massive capital inflows in a relatively great number of countries and the key developments emerging when the countries are faced with heavy capital inflows. In so doing, I will show the stylised facts, as they can be elicited from literature (Calvo et al., 1993). Then I will describe the case of Romania and the major challenges to economic policies. Finally, I will resort to the results described in the literature to present in a stylised manner the implications on some macroeconomic variables in the event of a capital account worsening. I will draw on these results to show that the provisions under the arrangement signed with the EU and the IMF are in line with the results described in the literature. 1. Causes and effects of massive capital inflows  In recent years, one of the causes of massive capital inflows in emerging economies was excess liquidity.
Trading pits have given way to electronic trading engines in many jurisdictions. Central counterparties can no longer operate without sophisticated IT-based risk management systems. Technology has allowed exchanges to offer different types of instruments - equities, bonds, futures and options - on a single platform. It has enabled improvements in risk management processes, and open access by participants and alliance partners. BIS Review 22/2004  1  The cost of investments in technology, however, is high and can only be justified if it is supported by a large volume of trades. Shareholders will also demand that these exchanges earn competitive returns on their investments in technology. Small exchanges will thus, find it difficult to make the necessary investments to compete. This has been a key driver behind the formation of mega-exchanges, and will continue to fuel their drive for expansion. Another key driver is the need for economies of scale. Exchanges and clearing houses thrive on liquidity and scale. The likelihood of a cost efficient execution of a trader’s order is higher the larger the pool of traders on the same platform. Similarly, in the case of clearing houses, the benefits of netting and the efficiency of collateral management are greater the larger the number of counterparties using the facility. The pressure to seek economies of scale and competitive returns is accentuated for demutualised exchanges. Implications for regional exchanges Exchanges in this region are unlikely to be insulated from competitive pressures for long.

This fact has attracted the attention of analysts, who point to the confluence of various factors to explain why the response by wages to the fall in unemployment is not following the usual patterns. First, it is pointed out that the number of workers who are employed part-time, involuntarily, increased notably after the crisis and has scarcely fallen with the improvement in economic activity. 5/7  In parallel, there has also been an increase in the weight of some groups that are not included in the habitual definition of unemployment, such as economically inactive individuals whose reason for not seeking a job is because they believe they will not find one; or who do not seek a job for whatsoever reason, but are available and wish to find a job; or who, although they are seeking employment, are not available to immediately take up a new job. The measure of the unemployment rate that were to include these groups would, for the euro area as a whole, stand at around 18% of the labour force, practically double the habitually estimated rate. In terms of their influence on wage bargaining, these workers could exert downward pressure on wages. Additionally, the excess supply of unskilled labour, which in some cases is amplified by immigrant inflows, may also reduce upward pressure on wages; and, moreover, there is some evidence of changes in wage-setting mechanisms which, against a background of low growth in prices, would be setting greater store by past or actual inflation, as opposed to expected inflation.
Even during the property downturn in the second half of 1994 and 1995, the delinquency ratio remained low, at around 0.2%. 88 The contribution of the services sector to GDP is now about 85%. BIS Review 19/1998  -4leaders have clearly and repeatedly said that the RMB will not be devalued9. The cynics would of course immediately remind us that in the monetary history of the world, devaluations of currencies were frequently preceded by strong denials and that these matters are determined by market forces and not the words of government officials. But I hope the cynics would also spend a little time to look at the facts. 12. First, there are still capital controls in the Mainland of China. That makes the control of the exchange rate much easier. Indeed, the foreign exchange market in the Mainland of China is dominated by one large player sitting on about $ billion of foreign reserves and that is the State Administration of Foreign Exchange (SAFE) of the People’s Bank of China (PBoC). One simply cannot take a short position against the RMB and so technically the RMB is not exposed to speculative attacks. 13. Second, there are political and policy considerations for the Mainland of China to refrain from involving itself in competitive devaluation.

BIS Review 33/2001  3
3  BIS Review 56/1999  Monetary policy operates on the demand side of the economy, and essentially what we can hope to do – and what we are aiming to do - is to keep overall demand broadly and continuously in line with the underlying supply-side capacity of the economy to meet that demand. How close we come – on average and over time – to meeting the 2½% inflation target is in effect simply a measure of our success in achieving macro-economic stability in this wider sense. We cannot directly affect supply-side capacity – the underlying rate of growth that we can expect to sustain. But, by operating symmetrically – as we have shown that we do – we can provide an environment in which supply-side improvements (for example, more rapid productivity growth which apparently explains the stronger performance of the US economy in the past few years, but which we have yet to see in this country on anything like the same scale) have the best chance of feeding through into faster sustained output growth. And, to the extent that we are successful in maintaining macro-economic stability, that can help to improve our supply-side performance indirectly by lowering real long-term interest rates and encouraging better decision–making in the economy as a whole with less distortion from unnecessary erratic movements, particularly in nominal values. But we can only hope to maintain macro-economic stability for the economy as a whole.

A relatively weak stock-market trend in the 1960s and ’70s no doubt fed expectations of a favourable return in the future. Another factor was certainly that the real return on bank deposits had been negative at times in the 1970s. Moreover, the introduction of mutual funds with tax incentives in the late 1970s and their subsequent replacement by a national savings system presumably drew many people’s attention to the stock market. It is also conceivable that the rise of economic journalism in the 1970s and ’80s contributed to a greater interest in the stock market. Neither should the formation of the Shareholders Association and the Share Promotion Association in the 1960s and 1970s, respectively, be overlooked. More knowledge and information certainly contributed. However, the increased saving in shares is one item in a larger context, in Sweden as well as other western industrialised countries. I mentioned earlier that Swedish households have transferred much of their traditional saving from banks to other instruments. Thirty years ago, bank deposits and other very liquid assets with little risk made up almost 60 per cent of households’ financial wealth, as against less than 20 per cent today. The major part of this adjustment in financial portfolios has gone to shares but a good deal now takes the form of insurance saving. The trend towards forms of saving with a higher risk has been accentuated by new rules for insurance companies, permitting a high proportion of shares, although this is arranged more indirectly.