samchain/econo-pairs-v1 huggingface dataset:
Closer to home in this country, the Euro area economy is a good deal better placed to withstand the US slowdown, although we are all bound to be affected to some degree. For most of last year the Euro area economy performed relatively strongly, with overall output growth well above trend, and unemployment in the area as a whole continuing to fall from its earlier chronically high level. A problem, of course, was the persistent weakness of the Euro in foreign exchange markets, despite strong "fundamentals" in terms of conventional analysis. This was largely the result of an outflow of capital, much of it drawn into the US by the magnetic attraction of prospective corporate earnings growth – and apparently continuing despite the US slowdown. The euro's weakness gave rise to widespread – but in my view unjustified – criticism of the ECB. The task of a central bank operating an independent monetary policy is necessarily a limited task, not least because it effectively has only one instrument – its control over short-term interest rates. Its role – as I said earlier – is essentially, to use that instrument to influence aggregate demand in the economy, with the aim of keeping demand broadly in line with the supply-side capacity of the economy. The measure of its success is consistently low inflation. Against that criterion the ECB has been relatively successful.

If the saving is intended for use in future retirement, one effect of the falling real interest rates may moreover be that many people need to save even more to reach their saving targets. Can the long-term real interest rate in Sweden deviate from international levels? On a global level, total saving is adjusted to coincide with the total investment need. But this adjustment does not occur automatically; it depends on how 18 [24]  households and companies choose to distribute their resources over time. In the long run, it is the real interest rate that is adjusted so that saving and investment become the same. This does not mean that saving must necessarily be the same as investment in individual economies. In Sweden, for instance, we can both save and invest abroad at the same time as foreigners can save and invest in Sweden. The difference between saving and investment in an economy is measured by the current account. Swedish saving has for a long time exceeded investment, which has resulted in a surplus that has been invested abroad and given rise to relatively large surpluses in the current account. One of the advantages with the free movement of capital is that we have been able to save abroad and in this way obtain a better return than at home. In the long run, the return should even out and real interest rates in various countries and regions converge towards a common longterm interest rate level.
Lately, the “dark side” of financial integration has increasingly come into focus. The global financial crisis was a vivid demonstration of what happens when the system flips over from stable to instability. And the prescribed treatment has created increasingly serious side-effects ever since. With monetary policy in advanced economies having been kept at ultra loose levels for over 5 years and still further unconventional monetary stimulus being embarked upon in some cases, the repercussions on the rest of the world are testing the limits of macroeconomic management, especially for emerging market countries. Large capital inflows have lowered long-term yields and compressed risk spreads across a wide range of asset classes, contributing to increased risk-taking. The marked rise in the co-movement of asset prices across countries, particularly in bond yields, is making it harder for policies to achieve desired financial conditions domestically. At the same time, upward pressure on exchange rates risks undermining export competitiveness, complicating the trade-offs between macroeconomic stabilization and financial stability. And should inflows reverse abruptly, the resulting asset price and exchange rate swings could induce broad contagion effects that prove disruptive to economic activity. In all this, the underlying concern is that integration has amplified the vulnerability of domestic financial conditions to external shocks, while limiting the effectiveness of the tools that policymakers have for addressing those shocks. This is not solely an emerging market problem. Indeed, the degree of co-movement in bond yields appears to be even stronger for advanced economies.

We have made good forecasts for all variables, with the exception of productivity, one year ahead. This is reflected in the fact that we have made more accurate forecasts than the time series model and also in the fact that the correlations are relatively high between forecasts and outcomes. In addition, the bias is small for all variables one year ahead. We have a forecasting memory two years ahead for both employment and inflation. Although the correlations between forecasts and outcomes are weak one year ahead, they nevertheless show a clear relationship. On the other hand, the study implies poor forecasting memory for GDP and productivity two years ahead. The correlations between the forecasts and outcomes are also weak for these variables two years ahead. We have seen that the  6  BIS Review 138/2007  bias is larger for most variables two years ahead. GDP and inflation have been overestimated slightly during the period studied, and employment and productivity have been under-estimated. Our inflation forecasts, particularly those for CPIX, have good qualities such as high correlation with outcomes and long forecasting memories. It is worth pointing out that this is the variable that is most important for monetary policy. At the same time, the uncertainty band shows that probability that inflation will be within the Riksbank’s tolerance interval of 1-3 per cent two years ahead is only around 75 per cent, despite our forecast being that it will be two per cent.
17  I refer here to the concept of “limited access social orders”, see North, D., J. Wallis and B. Weingast (2009). Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History, Cambridge University Press. BIS central bankers’ speeches  5  At European level, we need to provide a framework that supports and incentivises the introduction of such national policies. This is the role of economic union in the euro area, the “E” of EMU. I would stress, however, that economic union does not mean defining a single economic model across all countries. On the contrary, its purpose is to create the conditions for each country to identify and develop its comparative advantage. Paradoxically, it is only by encouraging difference – comparative advantage – that the euro area can achieve convergence – that is, a more even distribution of economic outcomes. Avoiding re-nationalisation and protectionism Let me finally address the third lesson learnt from East Asia. Europe needs to avoid protectionist temptations and calls for re-nationalisation. Protectionism and beggar-thyneighbour policies would lead to further losses of welfare at both European and global level. Fortunately, there has been no significant surge in barriers to global trade in recent years – unlike during the Great Depression – thanks to global and regional policy coordination. These efforts remain important. Barriers to trade in goods and services cannot be raised within Europe thanks to our Single Market and competition rules which are enshrined in European laws, but the Single Market can be further enhanced.

In my view, there are similarities that yield useful policy lessons for the euro area. But there are also differences that need to be kept in mind. What can we learn from the Asian crisis? What are the parallels between the Asian crisis in 1997–1998 and the euro area crisis? The economies of emerging Asia were characterised by buoyant growth and a brisk expansion of credit (see Chart 1). This rise in debt was facilitated by considerable inflows of foreign capital, which financed significant external deficits (see Chart 2). This led to growing financial imbalances, and in particular to currency and maturity mismatches on the balance sheets of local banks. In addition, the economic boom prevailing at that time was accompanied by a loss of competitiveness of the region’s export sector. Investors typically under-priced potential risks as they had overly optimistic expectations of the medium-term growth prospects. They did not identify systemic vulnerabilities such as the risk of sudden stops in capital flows or of twin crises of the banking system and the balance of payments, which eventually materialised.1 Except for currency mismatches, similar developments were evident in the euro area before 2009 – if not at the regional level, at least in those countries that later ran into financial difficulties. It was widely believed that sudden stops in capital flows, not to mention twin  1  See Calvo, G. (1998). “Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops”, Journal of Applied Economics 1(1), pp.
Mr. Chairman, in a strange and a paradoxical sort of a way, it is somewhat “fortunate” that the current financial crisis shocked (and indeed, almost ruined) the worlds financial system, at the present stage of evolution of the worldwide financial landscape. If, on the other hand, this crisis had not impacted us at this time of history and consequently we had happily progressed at the same pace for a further 10 years or so, and then in 2017 or 2018 this shock had hit us, can anyone imagine the magnitude of the disaster at that time? In fact, I am quite sure that, if that eventuality had taken place, this crisis would have been too much for the world’s financial system to bear, and the resulting catastrophe would have crippled the world’s financial systems, as well as the world’s political, security and social systems with disastrous consequences. Perhaps some keen film maker might even consider doing a simulation of such a scenario, and then making a gripping and horror filled movie, allowing those of us with horror appetites to experience such a dreadful tragedy! Mr. Chairman, while we are putting into effect various initiatives to improve our processes and procedures to respond to the crises, we must also be conscious that we should not throw the baby out with the soiled bath water. Yes, the bath water has been terribly muddied and needs to be replenished. However, at the same time we must realize that the baby although rather dirty, is still quite wonderful.

The pace of the further steps will take into account actual activity and inflation data with optionality and gradualism, but we should at least move towards the neutral rate ii. And let me stress this: we will carefully monitor developments in the effective exchange rate, as a significant driver of imported inflation. A euro that is too weak would go against our price stability objective. More structurally, a key question is whether we are heading towards a fragmented International Financial System, at the expense of smooth trade and financial transactions? Despite the challenges, (I) we shouldn’t abandon, as a “creative frontier” on the horizon, the idea of cooperative multilateral International Financial System and (II) we should definitely develop the international role of the euro as a realistic step forward. ** I. We shouldn’t abandon, as a “creative frontier”, the idea of a cooperative multilateral International Financial System  Page 2 sur 7 1. The reasons why the topic of a renewed IFS has progressively faded to the background Since the 1970s, not much has happened to the international financial system. While the Bretton Woods system with fixed exchange rates and a gold anchor disappeared when the convertibility of the USD into gold came to end, the new international monetary system remained based on the USD. This dollar-based system gradually incorporated greater exchange rate flexibility. It allowed for a boom in trade and capital flows.
The ECB and the National Central Banks of the Eurosystem are finalising a new projection exercise, whose results will be published in early June. That will be the time to assess the effects that this first-quarter figure and all the new information compiled since the last exercise may have exerted on the baseline scenario for GDP growth in the coming quarters. As you know, in any event, the procedural rules for the ECB Governing Council set a brief period immediately before each of the monetary policy meetings in which the members, myself among them, must not make any statement that may be interpreted as pre-judging in any way the outcome of the meeting. You will therefore understand if I abstain from making any further assessment in relation to this scenario. In terms of employment, last year also saw a turnaround and the job destruction phase in the euro area touched bottom in the second quarter. But the still-moderate recovery has not yet provided for significant improvements in employment levels, meaning that hours worked in the labour market remain far below the historical average and unemployment rates are at a high. On the prices front, sluggish demand and labour market slack are strongly influencing areawide inflation developments. The growth rate of the Harmonised Index of Consumer Prices has stood at a level below 1% since October 2013, with figures that have generally tended to surprise on the downside.

As in the case of activity, the results of the projection exercise under way will allow for calibration of the effects on the current price scenarios and, in particular, on the risk – flagged by the ECB Council at its recent meetings – that the area may become immersed in a prolonged period of too-low inflation. Turning to the Spanish economy, we are all mindful that the crisis that broke in mid-2008 was of unprecedented depth and extent in our recent history and caused acute losses in activity and employment. Fortunately, since the second half of 2013, the Spanish economy has perceptibly been experiencing a recovery, which began with positive, moderate quarter-onquarter rates of change in GDP as from 2013 Q3 and which has continued in 2014 to date. This recent improvement in activity rests on a broad set of factors: some, such as the drastic correction of the external imbalance, have been helping underpin production for some time; others, such as the progressive normalisation of the financial environment, are more recent. BIS central bankers’ speeches  1  Here, both the easing of grave uncertainty, which at one point threatened the current configuration of the euro area, and the restoration of confidence in our banking system following the restructuring and recapitalisation drive undertaken, which culminated in January, have proved decisive. Against this background, the contributions to activity of external demand and national demand are being re-balanced.
Indeed, the most commonly used measure of policy uncertainty has generally been more elevated for the UK than the equivalent measures for Europe and the US, although it has fallen back sharply from its post referendum peaks (Slide 5). In periods of elevated uncertainty, businesses may be reluctant to undertake investment and prefer to 6  employ more labour, which is easier to reverse, as I suggested in a speech in November last year. And a range of survey results suggest that Brexit related uncertainty is an important factor weighing on investment in the UK, despite otherwise favourable conditions for capital expenditure globally and domestically. Fourth, the slowing in UK productivity growth since the crisis has primarily reflected slower growth of high-productivity companies. As discussed in the MPC’s latest Inflation Report, productivity growth varies widely between companies, and has tended to come from those companies at the frontier of the productivity 7  distribution. That remains the case, but the slowing in productivity growth since the crisis reflects slower growth of the top end of that distribution. I am just comparing the distributions of productivity pre and post-crisis, so these aren’t necessarily the same companies becoming less productive. The outlook That’s productivity growth over the past. What then of the outlook for productivity (Slide 6)? Ahead of the MPC’s February meeting, we conducted our annual stocktake of the supply side of the economy.

We have to turn to Alexis de Tocqueville in order to attempt to bring back the patience of enduring effort to our history: “[The French Revolution] took the world by surprise; yet it was the mere natural result of very long labours, the sudden and violent termination of a task which had successively engaged ten generations of men”.1 The example of our neighbours, from Germany to Spain, is today nevertheless illuminating in this respect: reforms work in Europe. They are the way, the only way, to make compatible our European social model, which is legitimate, and economic growth, which is essential in order to reduce unemployment and to finance our future. Today, I will focus my talk on other no less important reforms, implemented in a particularly disrupted context: the financial regulations introduced in the wake of the 2007–2009 crisis. Is there any need to recall the disastrous consequences that this crisis inflicted on the real economy, the social dramas, and the democratic fragmentation with the rise of populism? Financial stability is therefore a common good that needs to be guaranteed. It is one of the three core tasks of the Banque de France, alongside monetary strategy and services to the economy. We have been striving to achieve it in the international bodies that coordinated the financial reforms after the crisis. The urgency of the situation required rapid and effective action, and as early as April 2009, the G20 launched a global concerted action plan.
To address the risk factors mentioned above appropriately, it is necessary to embrace a gradual change towards a growth pattern that is better balanced and more squarely based on those expenditure items that most contribute to building the economy’s productive potential and competitiveness. The economic authorities can contribute to this by focusing the available economic policy instruments on sustained macroeconomic stability, market flexibility and higher potential growth. In the case of fiscal policy, a primary role must continue to be played by budgetary stability to prevent demand-side pressures from exacerbating the existing risks, particularly in the present circumstances of monetary conditions that are overly generous given the degree of firmness prevailing in domestic spending. Consequently, the restrictive fiscal policy stance should be maintained and the budget balance further improved, in step with the foreseeable firming of the recovery. This stance is also needed to meet the medium- and long-term challenges to public finances. Here, the possibility that the current pace of revenue growth may not be sustainable in the future, the probable rise in financial expenditure (which has so far assisted consolidation), the foreseeable cutback in European funds from 2007 onwards and, in the longer term, the uncertainties over the sustainability of the pension system, are factors that strengthen the case for surpluses in public finances in good times to stave off the reappearance of major imbalances in the future.

It is crucial that investment in equipment should gain in momentum and that its greater vigour be accompanied by more expansionary, export-led net external demand. The improvement in these components would then provide for a situation in which the necessary moderation in household spending, especially on house purchases, did not lead to a loss of dynamism. It should not be forgotten that some of the factors behind the buoyancy of expenditure may tend to lose steam or even disappear The most patent case here is that of the prolonged expansionary influence exerted by lower interest rates. The current scenario of exceptionally low interest rates is the result of a very particular economic situation at the European and international level. And although EMU membership ensures moderation in rates, it is likely these will return to more neutral levels as the recovery in the area takes hold. Nor is it conceivable that the exceptional intensity of employment generation per unit of output in recent years can become a permanent feature. Probably, once the labour market has been fully adjusted to a situation of price and wage stability and to a more flexible regulatory framework, the relationship between job creation and growth in the economy will resume a pattern more in step with long-term trends.
Shops will be in the firing line when the euro notes and coins are introduced. Cashiers will have to handle kronor and euro side by side for a time and customers BIS Review 41/1997  -4-  will no doubt have many questions about prices and conversion rates. Besides calling for resources as well as training, this will require a good deal of adjustment in retail trade. I shall now consider some of the foreseeable changes and also take this opportunity of commenting on the requirements formulated by the Research Institute for a changeover to euro. Banknotes and coins The Madrid meeting in 1995 agreed that euro notes and coins are to be introduced at the latest by 1st January 2002. Many people have reacted to an introduction at the turn of a year, which is when retailing tends to be most hectic. The agreement, however, stipulates 1st January 2002 as the latest date, so perhaps a start might be made in the autumn of 2001. The alternative of spring 2002 has also be mentioned. This matter is still being discussed; the Riksbank shares the trade's opinion that the turn of a year should be avoided and is therefore working for another date. The timing of the practical changeover arrangements is to be decided by each country; for Sweden the Riksbank hopes that it can be managed in a much shorter period than the maximum of six months. The public will be informed in good time about how the changeover is to be carried out.

This reduces the probability that a negative event will trigger a severe financial crisis. It is not optimal to be fully insured against crises because the insurance premium would be too high. But the financial crisis demonstrated that the imbalances ahead of the crisis were unsustainable and that they could have been reduced through regulatory improvements. The reason that this did not occur may be that the risk had taken on the form of several interwoven imbalances that no single authority had the power to correct. Banking and financial market regulation will be enhanced in Norway and abroad. The Basel Committee on Banking Supervision and the Financial Stability Board (FSB), as mandated by the G20, will soon issue recommendations for strengthening regulation of banks’ capital and liquidity management. In the UK, the regulatory authorities have already drawn up new banking regulation. A natural consequence of the financial crisis is that increased weight is given to ensuring system-wide stability and not only the stability of individual banks. Other important questions are whether systemically important banks should be subject to tighter regulation and how to reduce the procyclicality of bank behaviour. BIS Review 163/2009  3  Recommendations from the Basel Committee and the FSB will be examined by national authorities that will subsequently adopt new regulation. In a world with a global financial market, there are limits to how far a single country go it alone. International coordination is important for new regulations to have the intended effect.