samchain/econo-pairs-v1 huggingface dataset:
As I have mentioned before, the medium-term stabilisation of existing government debt levels at around 60% (with inflation at 2%) was consistent with running a headline deficit of around 3% of GDP (see left-hand side figure in slide 4). In the current context, however, the observed prevalence of negative r-g differentials (see the right-hand figure in slide 4) would be consistent with government debt levels stabilising at a higher percentage of output. Given this situation, it is legitimate to ask whether a government debt level above 60% is now the correct figure? The question is not easy to answer, and it will depend on national considerations (the economic fundamentals in the medium-term, the vulnerabilities and resilience of the economy) and, of course, the prevailing financial and monetary conditions. Moreover, the current high levels of government debt evidence the difficulties of transitioning to the medium-term debt anchors. At present, converging towards a debtto-GDP ratio of 60% would require a substantial fiscal effort over a prolonged time frame. Using the historical average values of real growth, inflation and interest rates, the euro area would need to maintain a fiscal surplus of 1.1% of GDP over 20 years in order to reduce the debt ratio to 60% (see left-hand side figure in slide 5). This is substantially higher than the average primary deficit of 0.4% of GDP observed since 1995. For this constant fiscal effort to be at more plausible values, the macroeconomic environment would need to be far more favourable than it has been in recent decades.

And, in this regard, the link between the access to funds and the implementation of reforms should be seen as a crucial incentive. Allow me to also highlight the importance of insisting on a European, medium-term, economic growth-enhancing agenda. In this context, recent energy market developments and the global value chain bottlenecks highlight the importance of reflecting on the principles and way forward for achieving a European “strategic autonomy”. EU-wide structural policies promoting European integration and strengthening the single market will also make our economy more competitive internationally. The Important Projects of Common European Interest, developing new batteries and microelectronics, and those under way in the fields of Hydrogen and Cloud Infrastructure and Services, supported by NGEU funds, are good examples of this. Nevertheless, while it is important to promote these developments from a 8  European perspective, we should also keep in mind that increasing the scale of these projects might generate divergences across Member States. In order to make this compatible with a level playing field and to extract the advantages of economies of scale, it is therefore necessary to fundamentally improve our risk-sharing mechanisms and move further and faster towards a frictionless single market, both for capital and for labour. Banking union and capital markets union The final elements of reform I would like to mention today relate to the completion of the banking and capital markets unions.
Notably, the 1994 cycle was associated with a large increase in U.S. long-term bond yields, and appears to represent a case in which there was a considerable gap between what the Fed did in terms of monetary policy tightening relative to initial market expectations. A similar gap was apparent during the taper tantrum in the spring of 2013, when our attempts to provide guidance about the potential tapering of asset purchases ended up confusing market participants, causing many to anticipate an earlier start and more rapid rollout of actual policy rate hikes. These episodes are reminders of the importance of transparency and clear messaging in how the Fed is evaluating the evolving economic landscape, a point I’ll return to shortly. Third, the stance of Fed policy will be far from the only factor affecting external financial conditions for EMEs. Even as the FOMC considers the appropriate timing and pace of moving to a less accommodative policy stance, the ECB and the Bank of Japan are implementing additional easing measures. As a result, external conditions will remain more supportive than would be indicated by a narrow focus on Fed policy alone. Finally, EME fundamentals are likely to be the most important determinant of how their financial conditions respond to Fed policy normalization. This was one of the key lessons of the taper tantrum. At first, market pressure was somewhat indiscriminant across countries.

While the focus of this Summit will be on Islamic finance, it is inevitable that the discussions today will touch on the recent developments in Europe, given the potential impact it may have on the rest of the world and the need to implement strategies and policies for coping with the consequences of these developments. While the financial solutions being implemented in managing the crisis and the measures being introduced to mitigate the impact of the crisis by the rest of the world is important, it can only provide temporary relief. It is the structural policies and reforms that are more challenging to undertake that will ensure fundamental financial stability and a long lasting self sustaining economic recovery. My remarks today will focus on the changes in the Islamic financial landscape and its increased potential to contribute to sustainable growth, increased international connectivity following the increased pace of internationalisation of Islamic finance and new developments to achieve financial stability in the Islamic financial system. The changing financial landscape and the accelerated expansion in Islamic finance have also resulted in changes in the nature of the supporting ancillary services, including education that is being provided for the business and financial sectors. Islamic finance and fostering sustainable growth As the Islamic financial system evolves to become more diversified and more comprehensive to meet the changing requirements of the real economy, it is increasing its potential to fostering sustainable growth.
The unemployment rate is modestly lower and private non-farm payroll growth a bit higher than earlier in 2012, which is certainly welcome. However, other important indicators including the employment-to-population ratio and job-finding rates are essentially unchanged (Exhibit 10). This suggests that the labor market is far from healthy. Moreover, our policy is based on the outlook for the labor market, not the level of employment or unemployment today. In this context I note that the recent improvement in payroll employment growth, which gets much of the attention, is out-sized relative to the growth rate of economic activity that supports it. We have seen this movie before. When this happened in 2011 and 2012, employment growth subsequently slowed (see Exhibit 11). 8  It avoids the ambiguity of what a change in the forward rate guidance would signal. Is the date being moved out, for example, because the FOMC wants to provide additional accommodation or is the move just due to deterioration in the economic forecast? 9  I draw a distinction here between efficacy and benefit. In my view, the benefit of additional accommodation would diminish as we get closer to our dual mandate objectives and become more confident in the forecast of a strengthening recovery, even if the assessment of the efficacy and cost of the tool were unchanged. 10  Of course, this expectation assumes no new information on efficacy and costs emerges that fundamentally changes my assessment of the merits of the program.

Such expectations are even greater on Islamic finance given that the professed values of this industry are driven by the principles of Shariah which promote fairness, equality and justice. It is from this perspective that Islamic finance practitioners are duty-bound to observe the norms of high ethical conduct to uphold the values and the sanctity of Shariah. The need is even more now, given the increasing complexities faced by Islamic finance brought about by more competition and evolving regulatory requirements, more offerings of sophisticated products and growing cross-border activities. In Malaysia, it has always been our priority from the beginning to develop talent in Islamic finance as we recognise that quality talent is a crucial prerequisite for the continued success of the industry. There has been significant investment in capacity building, in line with our strategic approach in realising the visions of talent development outlined in the Financial Sector Master Plan and the Financial Sector Blueprint. To elevate the next stage of growth would require talents with different levels of technical competency and capabilities. The knowledge of yesterday might be useful for tomorrow, but more likely, would not be sufficient to meet future challenges. It is with this realisation that we should strategically implement a plan of action to develop true professionals who would lead the industry to the next stage of development, and recognised and respected as authorities in their chosen fields. These professionals should produce results that exceed expectations. They should also possess the highest degree of integrity in personal and business dealings.
Yesterday we learnt that inflation in May rose to 3.3%. In line with our remit, I sent an open letter to the Chancellor. As I said in my letter, inflation is set to increase further over the next few months. Oil prices have doubled since the beginning of last year, and, in real terms, are now as high as they were in the 1970s. And further sharp increases in domestic gas and electricity prices are probably on their way. So what should the Monetary Policy Committee do in the face of this rise in inflation? The immediate cause of the current pickup in inflation is increases in food and energy prices relative to other prices. They are caused by the pressure of demand on the supply of food and energy in the world as a whole. Part of that pressure may well reflect expansionary monetary policy in the world as a whole. But the rise in commodity prices cannot, by itself, generate sustained inflation in the United Kingdom unless we allow it to. We will not. So although inflation in the UK will rise in the short term, inflation will then fall back. That means that the rate of increase of other prices and domestic costs, notably pay, must remain low. The MPC does not take that for granted. Surveys – including our own – indicate that expectations of inflation have risen, meaning that inflation is likely to have some tendency to persist.

Without a clear guide to the objective of monetary policy, and a credible commitment to meeting it, any rise in inflation might become a self-fulfilling and generalised increase in prices and wages. And surely the lesson of the past fifty years is that, when inflation becomes embedded, the cost of getting it back down again is a prolonged period of sluggish output and high unemployment. Price stability – returning inflation to the target – is a precondition for sustained growth, not an alternative. We are in the most challenging period since the MPC was set up in 1997. But we have the right framework in place to ensure that inflation returns to the target and growth recovers. The stormy waters we are navigating now make for an uncomfortable passage compared with the calm conditions of the nice decade. Our inflation performance then was surprising not so much because inflation was low, but because it was so remarkably stable. Neither inflation nor growth are likely to be as stable in the future. But even if inflation proves to be more variable, it will not be systematically either higher or lower than the target. The right framework is essential if we are to maintain low inflation and steady growth. But there are two recent developments in our economy at present that no monetary policy, whatever the framework, can prevent. The first is the impact on living standards of rising food and energy prices. These prices have risen relative to most other prices.
This is also the reason for not only looking at monetary developments and introducing the second pillar in our strategy. This pillar is a broadly based assessment of the outlook BIS Review 4/2000  4  for price developments and risks to price stability. In this context, a host of indicators is analysed, such as interest rates, the output gap, exchange rates, wage developments, developments in public finance, asset prices and surveys of consumer and business confidence. The Eurosystem also examines forecasts of the economic outlook and produces such forecasts itself. They are one piece of information in the second pillar. On the basis of both pillars, central bank interest rates are set at the level which is deemed to be appropriate to maintain price stability in the medium term. Defining the appropriate stance of monetary policy for an area the size of the euro area remains particularly challenging. On the other hand, experience over the last year has clearly demonstrated that there are no insuperable impediments to the conduct of a truly single monetary policy for the euro area. This is underpinned by the proven ability of the Eurosystem to act decisively, noted by its decisions to cut interest rates in April and to raise them in November. At the same time, this is also evidenced by the prevailing climate of price stability, with price increases of around 1% for the euro area on an average annual basis.

4  Including from a new independent evaluation office that reports directly to the non-executive Chairman. 6  BIS central bankers’ speeches  market participants take liquidity for granted and crowd into trades in anticipation of central bank action. The Bank is keenly alert to such risks. The FPC and the FSB are currently analysing these issues and welcome perspectives on whether the market, regulation or both should adjust for the good of the system. Conclusion With the main building blocks of reform in place, now is the time to take stock. It’s vital that we – public authorities and private market participants – work together to reverse the tide of ethical drift. This cannot be a one-off exercise. We need continuous engagement so that market infrastructure keeps pace with market innovation. That’s why the Bank is announcing that it will hold an Open Forum this Autumn which will bring together all stakeholders in FICC markets. Our goal is to discuss the prospects for market functioning, where regulations might overlap or conflict, and whether enough has been done to build the real markets the UK deserves. To prompt an open discussion, we are publishing a detailed paper which reviews these issues and draws out such questions. 5 Everyone has an interest in the future of financial markets, so I would strongly encourage you to engage with our Open Forum process online and at the conference itself. An Open and Accountable Bank welcomes your input.
The flood of closures, almost amounting to a panic, caused a further widening of interest rate spreads. LTCM’s situation deteriorated rapidly; by the end of September the fund had lost almost 90 per cent of its capital in the course of nine months. The U.S. Federal Reserve had initiated a meeting with some of LTCM’s counterparties and on 23 September fourteen banks with claims on the fund agreed to take over LTCM as a joint venture and try to wind up the positions in a more orderly manner. The Federal Reserve’s motivation for initiating a solution to the problem was not the sizeable losses that might have been incurred by many of the banks concerned. Its concern instead was the financial system in general. If the banks that had provided loans were to close their large positions spontaneously in a market that was already illiquid and turbulent, other agents who were not directly involved would be hit. The steep price fall would probably have paralysed  BIS Review 23/1999  6  the financial markets for a time and this might have triggered a vicious circle of declining confidence and further closures—the Fed perceived a large systemic risk. The ultimate consideration was, of course, the potential hazard for the global economy. It is difficult to say what might have happened if the Federal Reserve had not acted. The banks that were involved had a strong interest in achieving a controlled settlement of their commitments and would probably have acted at some stage.

•  This is unfortunate because equity financing is the best way to share risks and opportunities, as well as to support innovation. “Catch-up” growth, as in many Emerging Markets, can be financed by debt. But an economy standing at the technological frontier, as in the U.S. or hopefully as in Europe, is better financed by equity: as innovation is more risky, its funding must have an upside. •  The Commission’s Innobarometer survey suggests that funding is the main barrier for promoting R&D and innovation in Europe. What can we actually do? Among others, taxation policies could be revised in favor of equity funding. Innovative schemes also need to be developed at European level, such as European venture capital funds, in order to support the creation and growth of new businesses. Furthermore, a Financing and Investment union is about strengthening the euro area. Short term banking flows have risen after the introduction of the Euro, but the financial crisis demonstrated that the capital markets’ channel of risk sharing was still underdeveloped in the  8  BIS central bankers’ speeches  euro area. From the reality of financial fragmentation and its negative economic consequences, we can draw one obvious conclusion: equity financing is clearly the instrument that best allows to smooth asymmetric shocks in a Monetary Union. Its benefits are many (ECB Financial Integration Report 2016): it is less volatile that debt financing and it enhances the companies’ resilience to adverse conditions.
A study carried out a few years ago found that all of the four major Swedish banks were among the ten banks in Europe with the highest percentage of encumbered assets.8 After the financial crisis, we can also see that Swedish banks are mortgaging more of their assets than before. The matching between lending and funding may also comprise a risk, both with regard to maturity and currency. In Sweden, the matching between maturities is relatively poor.9 I therefore take a positive view of the plans to introduce new rules to improve matching between maturities for lending and funding. We should be able to create more stability with longer maturities for the banks’ funding. I said at the start that I would keep to the stability and systemic-risk perspective, and have therefore not discussed the level of household indebtedness or the relationship to household assets. This would require a speech that was twice as long! My message is that household indebtedness is at a high level and that we have constructed a housing funding model that has made us sensitive to shocks. We need to have firmly established confidence in the Swedish housing market and the marker for covered bonds from both Swedish and foreign financiers, to ensure that our model functions properly. I am well aware that the risks linked to household indebtedness and the housing market entail very complex questions. I also know that rapid and drastic changes risk leading to severe and dramatic adjustments of debts and housing prices.

Naturally, we wish to avoid this. But at the same time, I think it is important to begin to take action. In the long run, it is no sustainable for debts to continue increasing at the same pace as today. So why does the Riksbank care about household indebtedness? The Riksbank is concerned about household indebtedness partly because international confidence in the Swedish housing and mortgage markets are necessary conditions for our financial system to function smoothly. Financial developments in turn are linked to developments in the real economy. The indebtedness of Swedish households can thus affect the Riksbank’s conditions to carry out its statutory tasks, price stability and financial stability. It is therefore important that the Riksbank continues to follow developments, analyses and highlights risks linked to household indebtedness. 8  See Barclays 2012. (Over-promising? Encumbrance at European Banks, Barclays Capital Equity Research. 9  See Financial Stability Report 2013:2, Sveriges Riksbank. 8  BIS central bankers’ speeches
On Banco de España estimates,3 a hypothetical suspension of energy imports from Russia would have an impact on the EU economy of between 2.5% and 4.2% of GDP in the first year, depending on the assumptions as to European economies’ ability to replace Russian 1  See V. Gunnella, V. Jarvis, R. Morris and M. Tóth (2022), Natural gas dependence and risks to euro area activity, ECB Economic Bulletin, Issue 1/2022. 2  The fact that natural gas can adapt to fluctuations in energy demand makes it a key marginal energy resource in electricity generation. See M. Pacce, I. Sánchez and M. Suárez-Varela (2021), Recent developments in Spanish retail electricity prices: the role played by the cost of CO2 emission allowances and higher gas prices, Banco de España Occasional Paper No 2120. 3  See J. Quintana (2022), “Economic consequences of a hypothetical suspension of Russia-EU trade”, Analytical Articles, Economic Bulletin 2/2022, Banco de España. 1  energy imports. By country, the estimated impact is between 1.9% and 3.4% for Germany, between 1.2% and 2% for France, and between 2.3% and 3.9% for Italy. The estimated impact on the Spanish economy is between 0.8% and 1.4% of GDP. These should be considered short-term impacts, which will lessen as the ability to replace Russian energy imports increases. The latest euro area indicators flag a clear economic worsening, as the effects of the full economic reopening fade These recessionary forces are not yet reflected in the euro area economic data for the first half of the year.

Like the MPC, it has external members, drawn from outside the Bank’s executive team, a published record of its meetings and a regular Financial Stability Report to explain how it is using its powers to achieve its statutory objectives. There is substantial cross-membership between these two Committees to ensure effective policy co-ordination. But though the institutional set up for the Financial Policy Committee mirrors that of the Monetary Policy Committee, the nature of its task is different. The Monetary Policy Committee is, in the main, engaged with guiding the economy towards the best achievable path for output consistent with keeping inflation at target – or with bringing it back to target. In the jargon – which some of you in the logistics field, for example, may be familiar with – the problem is one of “optimal control” or “dynamic programming”. What setting for interest rates is consistent, looking forward, with the best central outlook for the economy? The Financial Policy Committee’s job is really about identifying risks and preventing them from crystallising. This is not just about the most likely and visible risks. What we learned in the financial crisis was that the financial system, has a myriad of connections and actors and a phenomenal ability to change and adapt. It needs to be thought of as a complex “ecosystem”. At times of stress, it can behave in very extreme ways – or break down altogether. In such a world, it is not enough to know that every individual part is managing its own risk.