samchain/econo-pairs-v1 huggingface dataset:
Under this simple framework, in certain circumstances, the optimal policy balances overshoots of the inflation target with shortfalls of activity relative to potential, and vice versa for inflation undershoots. The relative size of these two deviations is governed by the strength with which higher output translates into higher inflation; and the preferences of the policymaker, or:  λ 𝜋𝑡 − 𝜋 ∗ = − (𝑦𝑡 − 𝑦𝑡∗ ) κ  4  All speeches are available online at www.bankofengland.co.uk/news/speeches  4  where κ is the slope of the Philips curve, the effect of the output gap on inflation. 3 From this, it is clear that the higher is lambda, the greater the weight placed on output stabilisation and the more a given shock is allowed to flow through to inflation. As lambda shrinks to zero, the policymaker forces all of the adjustment to a shock through the output gap in order to keep inflation very close to the target. The slope of the trade-off is also affected by that of the Phillips curve. When the Phillips curve is flatter, a given output gap results in a larger inflation over- or under-shoot. Intuitively, a flat Phillips curve raises the output costs associated with changing inflation. ·  ·  ·  ·  ·  Such inflation-targeting frameworks, adopted around the world, have been highly successful. Two decades prior to monetary policy independence in the UK, inflation averaged over 6% (Table 1). Since independence, it has been close to 2% and one-fifth as volatile.

On the other hand, long term interest rates are on the rise in industrial economies, mainly reflecting increased real rates rather than an increase in inflation expectation or of duration premiums. The increases in long-term interest rates may be indicating better growth prospects in the U.S. now that a soft landing is more likely. However, overall global financial conditions are very accommodating, with risks premium that, although beginning to rise, are very close to their record lows. This, despite the flight to quality phenomenon observed in the past several weeks as a result of perceived risk increase because of the market status of low-quality mortgage loans in the U.S. In any case, the levels of market volatility in emerging economies are significantly smaller than they have been in earlier episodes. The dollar has depreciated against the currencies of industrial economies, responding to the evolution of the business cycle. In the past few days, this has been aggravated by concern about how the U.S. housing market situation will unfold. The Chilean peso, similarly to currencies in the rest of emerging economies, has also appreciated against the U.S. dollar due to weakness of the latter. Exporting or import-substituting sectors that are selling their produce at a dollar price not too different from the price they were getting towards the end of 2001, have possibly endured a large loss of profitability. This is directly associated with the multilateral depreciation of somewhat more than 40% suffered by the dollar in the world since then.
This highlights the importance of funding metrics which consider the overall extent to which illiquid assets are supported by unstable sources of funding. If banks are running a high degree of structural maturity transformation, this increases the risk of failure. While one could envisage a range of possible structural funding metrics, including a loan-to-deposit ratio, the Basel III NSFR is designed with these risks in mind. The NSFR speaks directly to a market failure that arises from a market-wide loss of wholesale funding, the like of which was exhibited during the crisis. In this way, it may potentially reduce the probability of damaging asset fire-sales, liquidity hoarding and contractions in lending which may otherwise result. The NSFR is also likely to complement the leverage ratio in acting as a brake on too-rapid balance sheet expansion. The leverage ratio ensures that any such expansion is supported by higher capital. The NSFR ensures any such expansion is supported by more stable funding sources. None of this is to suggest that these risks could not be met with a different, and perhaps smaller, set of regulatory constraints. Cecchetti and Kashyap (2016) have recently argued that the LCR or NSFR may be redundant as one of the constraints is always slack in their simplified bank balance sheet model. Put differently, the existing system of financial regulation may be over-identified. On the other hand, the horizon for assessing banks’ liquidity risk may matter.

We achieve this by setting 𝛿 = 0.1, 𝛽0 = 0.5, 𝛽1 = −0.2, and 𝜃0 = 10, that is to say, a crisis reduces the level of GDP by 10% relative to baseline. If instead we set 𝜃1 = −0.1, such that each percentage point increase in capital reduced the GDP hit in a crisis by 0.1%, the optimal capital ratio increases to over 20%. 15 See Cunliffe (2017) and Bank of England (2017) for discussion of resolution. 16  This estimate is based on the difference in the estimated cost of crises across their sample depending on whether they occurred under more or less credible resolution regimes. 17 Admati and Hellwig (2013) have forcefully questioned the basis for assuming such costs, given that standard finance theory would predict that the cost of debt and equity funding for a bank will decline in response to an increase in its capital position. 13  All speeches are available online at www.bankofengland.co.uk/speeches  13  A recent paper from the BIS (Gambacorta and Shin (2016)) reaches a similar conclusion. It finds that banks with higher unweighted capital ratios have tended to have higher loan growth, with each one percentage point increase being associated with higher subsequent lending growth of 0.6 percentage points per year. This evidence is consistent with the macroeconomic costs of higher bank capital being lower than assumed in the Basel LEI study.
Many emerging economies have successfully applied the lessons learned in past financial crises, capitalizing them as increased financial resilience and a reduced impact on growth than developed countries. One feature of world financial markets’ behavior of the past few months has been the increase in long-term interest rates on public instruments. These movements can be linked to an environment of reduced risks and expected increases in fiscal debt certificates, and to the fact that, for the first time in several months, there is incipient debate about the convenience of a not-so-expansionary monetary policy, given the medium-term inflationary risks. In the local financial markets, the interest rates on long-term Central Bank notes have also risen— albeit with swings—above the levels that prevailed at the time of our May Report. The steepening of the yield curve coincides with what has occurred in international markets, and may be signaling an increase in the markets’ appetite for risk. It may also be that they respond to more idiosyncratic factors, especially because of the big momentum showed by the local bonds market this year to date. The pass-through of MPR cuts to lending rates in recent months has been evident. While the latest data suggest that it may have moderated, transmission should continue, particularly as macroeconomic uncertainties phase out. The annual growth rate of credit volume has slowed, in a context where lending standards are still tight and there is less demand for credit due to a more cautious attitude among economic agents.

But it was now nevertheless clear that it was a total renovation that was needed. 4 [16]  In the Swedish paper Dagens Nyheter on 20 November – the day after the defence of the fixed exchange rate was abandoned – it was announced that an expert group had been appointed with Professor Assar Lindbeck as chairman. The aim was to tackle the long-term economic problems and, in Assar's words, to try to answer the question: “What is it about the Swedish economy that makes it run out of control like this?”6 The group, which came to be called the Lindbeck Commission, was to present proposals for how to tackle problems, which Assar described as “the low growth rate, the exploding public expenditure, the budget deficits, the constant trends towards cost inflation and the slow productivity growth”. Necessary changes in the framework… Unfortunately, it often seems that a crisis is needed to bring about real and profound changes. The major changes in the economic policy frameworks that we made as a result of the crisis in the early 1990s are well known so I will only mention them briefly here. The inflation target Instead of defending a fixed exchange rate, the task of monetary policy from now on would be to keep inflation low and stable. In January 1993, the Riksbank announced that an inflation target of 2 per cent would enter into force with effect from 1 January 1995. Gradually, changes in the monetary policy framework confirmed the new order.
In exchange for receiving valuable operating benefits, a bank’s implicit codes of conduct-that is, its culture-must reflect the public dimension of the services that banks provide. Third, the reform of bank culture should aim to restore trust.7 The bedrock of the financial system is trust and the word credit derives from the Latin notion of believing or trusting. We saw seven years ago that the public’s trust is critical in a crisis. The repair of the financial system would not have been possible without public support. If another crisis were to happen tomorrow, would there be that support? A lack of trust-or, more accurately, low trustworthiness-also imposes day-to-day costs.8 For starters, there are fines. Then there are the legal costs in investigating allegations and defending lawsuits. Internal monitoring also becomes more expensive as rules become more extensive. Some might say that the proliferation of rules since the Financial Crisis is inversely proportional to a decline in the industry’s perceived trustworthiness. The choice between rules and standards depends on the trustworthiness of the regulated. A more flexible, standardsbased legal regime requires a degree of trustworthiness that, in recent years, banks have not demonstrated. Those are the measurable costs of low trustworthiness. There may be other, longer-term costs that are more difficult to price. Let me raise just two. If employees perceive a firm as  6  E. Gerald Corrigan, Are Banks Special?, Federal Reserve Bank of Minneapolis Annual Report, January 1983.

Notably, none of these recent episodes had anything to do with capital  1  William C. Dudley, Enhancing Financial Stability by Improving Culture in the Financial Services Industry, Remarks at the Workshop on Reforming Culture and Behavior in the Financial Services Industry, October 20, 2014. 2  Cf. William C. Dudley, Opening Remarks at Reforming Culture and Behavior in the Financial Services Industry: Workshop on Progress and Challenges, Federal Reserve Bank of New York, November 5, 2015, (“The banking scandals that followed the financial crisis are evidence that something fundamental is wrong. I would encourage each of you to consider not just specific examples of misconduct, but the patterns within them that point to underlying causes. I suspect we will see a strong overlap with those factors that contributed to the financial crisis.”). 3  SeeThomas C. Baxter, Jr., Reflections on the New Compliance Landscape, Remarks at The New Compliance Landscape: Increasing Roles – Increasing Risks Conference, July 24, 2014. 4  See Order Approving Stipulation and Consent Agreement, In re Make-Whole Payments and Related Bidding Strategies, No. IN 11–8-000, IN 13–5-000, U.S. Federal Energy Regulatory Commission (July 30, 2013). 5  See Baxter, supra n.3. BIS central bankers’ speeches  1  levels or liquidity ratios. The many post-Crisis reforms to bank balance sheets – including the Dodd-Frank Act and new standards developed by the Basel Committee on Bank Supervision and the Financial Stability Board-provided necessary bulwarks against systemic risks.
Regarding monetary policy, the Board estimates that the monetary stimulus will remain as it is and will begin to be reduced as macroeconomic conditions continue to drive the convergence of inflation to 3%. As a working assumption for the monetary policy rate, for the short term we assume a trajectory similar to that shown in the Financial Brokers Survey available at the close of this Report. For the medium term, the Board continues to estimate that the monetary policy rate stand around its neutral level towards 2020, which it believes to be between 4% and 4.5% (Figure 13). As usual, there are internal and external elements that could modify these projections. The same as in March, from the point of view of its impact on domestic activity, the balance of risks in the external scenario is biased to the downside. The main risk on this front continues to be an abrupt deterioration of external financial conditions, especially in a context in which markets seem to be more reactive to negative news. Developments in the United States economy are important in this area, particularly because a more marked increase in inflationary pressures may require a faster rise in the federal funds rate. Nor is it possible to rule out that in an environment of lower appetite for risk, news of different signs may result in increased volatility. Risks also persist coming from trade policy measures promoted by the United States, considering the renewed tensions with its main trading partners.

Measured in terms of velocity, after significant acceleration in the third quarter of last year, activity has moderated growth this year so far (Figure 1). In our baseline scenario, we project that the rate of expansion of final domestic demand will moderate further in the remainder of 2018. This will occur once the effect of the higher growth of more volatile items that have less capacity to permeate the rest of the economy dissipates, like the ones just mentioned. On the consumption side, this opinion assumes that the slowdown of the wage bill—given the behavior of employment and wages—limits the increase in household spending. In response to the traditional lag with which the labor market operates in the cycle, we can expect that the recovery of growth will translate into an increase in employment and greater growth of wages in the coming quarters (Figure 2). 1  On the investment side, gross fixed capital formation grew 3.6% annually in the first quarter, thanks to the construction and other works component that resumed positive expansion rates after almost two years. Plus, that machinery and equipment continues to be the most dynamic component of investment, with imports of capital goods that, as of May, excluding non-regular transportation, continued to improve. This, in a context where business expectations have returned to optimistic territory on aggregate (Figure 3). However, some numbers suggest that we cannot be sure yet that investment will be very dynamic, particularly because there we still see no significant change in the execution of large-scale projects.
Because the cost of abolishing institutions is high, the number of international groupings and institutions has proliferated in recent years. Many of them tread on each others toes. As a result, the IMF, World Bank and OECD, have all been bruised. Duplication of roles is wasteful of time, money and focus. Each institution should have one very clear remit, and focus on it. Of course, countries which play a role in one institution but not in another will have an incentive to build up the role of the former at the expense of the latter. So it is up to the member countries to limit the battle for turf. There are few examples where all these principles appear to have been followed. The World Trade Organisation has been an effective umpire of countries’ commitments about trade restrictions and comes close. But the example of the WTO highlights the importance, above all else, of clear commitments from nation states themselves. The failure of countries to conclude a multilateral trade round since the WTO was formed more than a decade ago is worrying. The Doha round has continued past its expected completion date and only a brave commentator would forecast eventual success. The fault does not lie with the WTO. Instead, it reflects the fact that national governments have not been willing to make the necessary commitments. BIS Review 126/2006  3  4. What do those principles mean for the IMF? With those principles in mind, I want to consider the challenge of reforming the IMF.

Conclusions  The meetings of the IMF in Washington and Singapore this year marked the beginning of an attempt to define more clearly the role of the Fund in the world economy. Whether that will prove successful is too early to tell. But the challenge is clear. Globalisation increases our dependence on each other. It is no longer sufficient to rely on the commitments made sixty years ago – the world has changed too much since then. It is up to the member countries to make a multilateral trading system work. As Joseph Conrad wrote a century ago in his great novel Nostromo, “Action is consolatory. It is the enemy of thought and the friend of flattering illusions”. The frenetic activity of international meetings and the flattering illusions of a stream of communiqués do not add up to a coherent set of commitments. Failure to reform the international institutions will condemn them to irrelevance and obscurity. We are at that point. If this generation fails, then the work of those who were “present at the creation” will have been undone. It is our duty to re-create the institutional framework that we inherited. BIS Review 126/2006  5  It will not be easy. But in case like Alice you are tempted to think that, “There’s no use trying; one can’t believe impossible things”, remember the Queen’s reply: “Why, sometimes I’ve believed as many as six impossible things before breakfast”. 6  BIS Review 126/2006
Our interest is in ensuring the safety and soundness of banks, the protection of insurance policy holders and the resilience of financial ecosystem as a whole to these changing risks. It is about activities not labels. That is why the Bank has been engaging with FinTech firms to understand better the financial stability risks that could emerge as banking is re-shaped. We will monitor those that arise along the transition path and those that could endure. Where firms or activities become systemic and risks to the real economy grow, they will come within the purview of the Bank’s responsibilities for the stability of the system as a whole. The Financial Policy Committee will continue to monitor the scope of the regulatory perimeter. Adjustments will follow if necessary. When FinTech companies fall within our remits, we will monitor them in the same proportionate way that we approach other firms – backed by analytics and judgement, taking action where appropriate. We are building a system that allows for orderly failures. Not just to end the blatant unfairness of Too Big to Fail, but also to foster industry dynamism and better outcomes for consumers. After all, ease of exit promotes ease of entry. We won’t discourage avatars by preserving dinosaurs. 5. Conclusion  Will FinTech mean a restoration, reformation, or revolution for finance? Through our regulatory approach, widening access to RTGS, and facilitating technological development, the Bank is helping to enable a sustainable FinTech reformation.

That comes about through a range of channels. For example, greater competition encourages UK firms to operate more efficiently. Access to larger export markets enables them to take more advantage of economies of scale. And the ability to trade allows the UK to specialise in sectors where it has a competitive advantage. To the extent that leaving the single market or the customs union makes it harder to do business with the EU, that will reduce the economy’s productive capacity. (Equally if leaving the EU allows the other economies to trade with and invest more openly in the UK then these same channels are likely to support UK productivity). We don’t know whether these long-run channels are already in operation. But it is possible that they have been contributing to reinforce the continued weakness of productivity growth. 6  In the short run what we do know is that uncertainty about the eventual outcome of the Brexit negotiations, and perhaps the expectation that Brexit will lower economic growth over time, has been depressing business investment. Businesses are waiting for more clarity before embarking on new capital projects, and that reduces their productive capacity relative to what it could have been, as well as hampering resource re-allocation across the economy. We see this most clearly in business surveys. Brexit has consistently ranked at or near the top of the list of 7  the risks identified in the Deloitte survey of Chief Financial Officers.
However, since the price of the high quality good or services lies above that average price the seller who has high quality items will withdraw from the market. Therefore only a market for medium and low quality goods will emerge. Consequently most buyers will be disappointed and the high quality suppliers will be frustrated. Ultimately this might even lead to an extinction of the market for those goods and services the quality of which cannot be correctly assessed by buyers. To eliminate this breakdown of market exchange due to adverse selection quality screening is required. Market utilities such as CSDs, ICSDs or CCPs contribute to soften the problem of adverse selection. Indeed, these utilities may monitor their participants by defining financial and technical criteria to be met permanently. This ensures a certain quality of the participants. For example I may refer to Central Counterparties who have long recognised the value-added of such a monitoring function. As you know, CCPs replace numerous bilateral counterparty risks that market participants face through a single counterparty risk towards itself. This transfer of risk tends to be efficient since the CCP is best positioned to monitor the risks of all the participants of the system. Another means to soften the problem of adverse selection is the provision of delivery-versus-payment mechanisms since they eliminate principal risk in securities settlement. All in all, market utilities that ensure a certain minimum quality of the participants and reduce principal risk contribute to limiting the damage of adverse selection.

More locally, FPC asked the FSA’s bank supervisors to ensure that banks’ liquidity management takes proper account of any maturity mismatches associated with using ETFs as a direct or indirect source of funding. Although the main bank sponsors of synthetic ETFs are not currently UK banks, there is a signal here for UK banks – and, in fact, one for our international peers too. As I explained at last Friday’s FPC press conference, this is part of a bigger issue around the use of collateral swaps or other similar transactions for funding. The authorities have not done enough, in my personal view, to encourage robust practices in repo and securities lending markets. That is likely to form part of the FSB’s work on shadow banking. The broader point here is that the FPC will try to nip incipient problems in the bud. If only someone had taken action to contain the mutation of securitisation a decade ago. On each of these fronts, the FPC is acting through the microregulator, the FSA. That is partly because the legislation has not yet passed, and so the statutory powers lie with the FSA. But, more basically, it is because macroprudential interventions will nearly always involve the systematic application of microregulatory instruments in the interests of the resilience of the system as a whole. In the future, that will sometimes involve the Financial Conduct Authority as well as the PRA.