samchain/econo-pairs-v1 huggingface dataset:
Avoiding Economic Anxiety Speech given by Andy Haldane Chief Economist and Member of the Monetary Policy Committee (MPC)  Cheshire and Warrington LEP Economic Summit Webinar 30 September 2020  The views expressed here are not necessarily those of the Bank of England or the Monetary Policy Committee. I would like to thank Jack Meaning and Andre Moreira for their help in preparing the text. I would like to thank Andrew Bailey, Frances Cassidy, Alan Castle, Shiv Chowla, Liam Crowley-Reidy, Jon Cunliffe, Harvey Daniell, Pavandeep Dhami, Simon Hayes, Saurav Kamath, Zaar Khan, Simon Kirby, Nick Mclaren, Becky Maule, Shahid Nazir, Mette Nielsen, Douglas Rendle, Michael Saunders, Michal Stelmach and Jan Vlieghe for their comments. 1  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  Thank you for the invitation to speak at this Cheshire and Warrington Local Enterprise Partnership (LEP) Economic Summit. Through my colleague on the Industrial Strategy Council and former Chair of the LEP, Christine Gaskell, I know the excellent work the LEP does in supporting the local economy and community. That support has never been more important given the risks facing individuals, businesses and communities. Given those risks, I thought I would focus today on the economic outlook in the UK, updated in the light of events since the publication of the Bank’s Monetary Policy Report in August. Plenty has since happened. But one factor has remained the same: the extra-ordinary degree of uncertainty about the economic outlook.

A more recent example is the people fleeing from the war in Syria, and we are now seeing a similar development in connection with the war in Ukraine. Depending on the circumstances, war may also give rise to a period of sharply increased geopolitical uncertainty. This may mean that countries that are not directly involved in the war choose to arm themselves and thus increase public spending. However, greater uncertainty about the future may also mean that the private sector chooses to postpone investment and increases its precautionary saving. There are thus counteracting effects on aggregate demand and thereby on inflation. All in all, there are thus a number of different ways in which war can lead to inflation rising, both in individual countries and in the world economy as a whole. Four periods of high inflation since 1900 This is something that is quite clear when studying a longer time series for inflation. Figure 1 shows inflation in Sweden from 1900 onwards. Figure 1.
But the only entity with sufficient financial and managerial resource to absorb a large asset or liability portfolio, without suffering chronic indigestion, is another big bank. So it was during the crisis – for example, Bear Stearns was swallowed by JP Morgan Chase, Merrill Lynch by Bank of America and Washington Mutual by Citigroup. This makes for a rather uncomfortable evolutionary trajectory, with rising levels of banking concentration and ever-larger too-big-to-fail banks. Levels of banking concentration have risen in many countries since 2007, precisely because of such shot-gun marriages by oversized partners. In other words, resolving big banks may have helped yesterday’s too-big-tofail problem, but at the expense of worsening tomorrow’s. One way of avoiding this problem is to re-capitalise a bank by bailing-in its creditors, rather than transferring its assets. But resolution rules of this type are not problem-free either. Like all policy rules, they face what economists call a time-consistency problem. Whether a rule is followed in practice depends on the balance of costs and benefits at the time crisis strikes, not at the time the rule is written. That is why policy might in practice lack consistency over time – hence time-inconsistency. Consider that trade-off when a big, complex bank hits the rocks. On the one side is a simple, but certain, option – state bail-out. On the other is a complex, and less certain, option – resolution.

New Estimates of Returns to Scale for U.S. Banks.” Journal of Money, Credit, and Banking, 44(1), 171–199. 14  BIS central bankers’ speeches
And even if they could replicate them, humans might still prefer humans to carry them out. The future could see a world of work in which EQ rivals IQ for skill supremacy. Professions involving high degrees of personal and social interaction – such as health, caring, education and leisure – could see demand rise. Indeed, it is possible the balance between cognitive and social skills might alter significantly even among jobs which traditionally have been cognitively-intense. Take medicine. The doctor of the future might be valued far less for their clinical competence in diagnosing illness and prescribing solutions. In a world of individual medical records and data-hungry diagnostic algorithms, much of the process of diagnosis and prescription might fall to machine rather than human. Indeed, the UK Prime Minister has recently suggested a strategy to deliver just that. 60  But that is unlikely by itself to eradicate the need for doctors. Patients are still likely to want to discuss their diagnosis and prescription. And they will want this advice delivered personally and empathetically. In surveys of patient satisfaction it is a doctor’s bedside manner, rather than clinical competence, that matters most. 61  In future, that balance between social and clinical skills may shift further. And, most likely, those  social skills will be demanded from flesh-and-blood rather than robo-doctors. If both the nature of a career and the skills it requires are changing, does this carry implications for educational institutions? That seems likely.

Indeed, one of the key benefits of globalisation over the past several decades is that the freer flow of goods and services, people and capital, ideas and information, has served as a vehicle for the transmission and diffusion of new technologies across borders. Other things equal, this should have accelerated catch-up between countries operating at and inside the technological frontier. 65  Other things, however, have not been equal. Penetration rates of new technologies, once adopted, tell a different tale. They suggest that, over time, there has been a divergence between frontier and non-frontier countries. In other words, the intensity with which new technologies have been used has expanded more rapidly in frontier (especially Western) economies than in non-frontier (non-Western) ones. This will have retarded catch-up between the two blocs. It is a less encouraging story about the diffusion of innovation. With the intensive and extensive margins of diffusion pushing in opposite directions, which has won out? It seems to have been the forces of divergence: slower rates of penetration of new technologies have more than counter-balanced faster rates of adoption across countries. This has shown up in levels of productivity between frontier and non-frontier which, since around 1980, have if anything diverged. Chart 7 illustrates that. It compares levels of productivity across 44 countries since 1950 relative to the frontier country (the US). Convergence prior to 1980 has given way to divergence subsequently.
Though the initial effect of credit contraction was similar in the United States and the European Union (EU), its propagation was considerably different owing to the EU’s predominantly bankbased system of financing. The first banks to be hit in 2007 were obviously the ones that invested the most in related financial products that had by then lost much of their value. These banks were mostly located in Germany, France and Netherlands, countries with comparably strong fiscal positions. Then, starting in 2008, it was the turn of several Spanish and Irish banks, which were overexposed to the collapsing domestic real estate market. Governments across the globe stepped in to shore up their banking systems. The European Commission estimates that in the EU, public sector aid provided in 2008 was around 5% and in 2009 around 9% of EU GDP. 5 The direct net fiscal costs of financial sector support in the United States between 2007 and 2009 are estimated to be at around 5% of GDP.6 Up until that point, sovereign debt had been considered as effectively risk free, regardless of the rating of the sovereign. The Greek crisis destroyed that illusion, and induced a general repricing of risk in the EU. This repricing of sovereign and other risks, combined with the drying up of funding markets, in turn affected other countries’ banks which, having little exposure to either toxic financial products or to real estate, had been immune up until that point. Banks in, for example, Italy and Portugal were overly exposed to their fragile sovereigns.

It has probably not been since the 1970s that we find such widespread reports of purely physical production constraints, for example now in the form of shortages of rigs and other equipment in the petroleum industry or shortages of plank, concrete and insulation in the construction industry. 2  BIS Review 28/2007  Unemployment has fallen markedly over the past year. The pace of decline and the level of unemployment are reminiscent of two earlier cyclical peaks, one in the mid-1980s and the one that began at the end of the 1990s and continued into the present decade. Both booms culminated in sharply accelerating cost and wage inflation. Supply-side shocks to the Norwegian economy The combination of strong growth, high capacity utilisation and low inflation is a reflection of favourable global developments and a number of positive supply-side shocks to the Norwegian economy. The global expansion of recent years has resulted in strong growth in Norwegian export industries. Employment has increased and unemployment has declined. The favourable labour market has boosted household optimism and supported private consumption. Strong demand growth and solid profitability have also paved the way for growth in business fixed investment in Norway. So far, the weakening of the US housing market has not had pronounced spill over effects. Growth in China and India is strong and the euro area is experiencing a broad-based upturn. Global growth is probably less dependent on demand for goods and services in the US than was the case earlier.
And, of course, there could be further shocks in either direction. So it is important to use whatever cross-checks on our projections that we can. One way to do that is to look for any nominal indicators that might signal risks of persistently above target inflation in the medium term, such as money or wage growth. Underlying money growth is currently just over 1% on an annual basis. And underlying wage growth is around 2%. There are some tentative signs that money and wage growth are rising, but neither of these figures are even close to being consistent with above-target inflation in the medium term. Taking these indicators together with the degree of slack in the economy – and given some of the factors likely to restrain growth in the UK and in Europe – the economics of the situation does suggest that inflation should fall back from its current high point. But there are risks on both sides. BIS Review 91/2010  7  On the one hand we need to be sensitive to the risk of tightening policy prematurely, stifling the nascent recovery. In that case, some of the flexible response to the recession could be swept away, delivering higher unemployment, more company failures and the risk of inflation significantly undershooting the target. The risk of deflation – which prompted the start of the MPC’s asset purchases in 2009 – may have faded, but it hasn’t gone away and would require greater efforts to deal with, if it materialised now.

Following this workshop, the results of these research works will feed into the decision making process and help the Bank of Albania to make more informed decisions and improve its models and the efficiency of policy-making. For this reason, I encourage and invite you all to ask questions, to comment and to assess our work with your opinions and academic proficiency, to challenge our findings and methodologies. The nature of our research is undoubtedly influenced by our main mission and prevailing concerns. It is for that reason that the majority of our research focuses on monetary policy, price and financial stability, models related to them and the economic events that affect them the most. Some of the trends that we will discuss today are global and fundamental in nature. They may not have reached our economies, yet, but they will definitely have a significant impact on our real economy and financial system in the future. For example, new technologies, such as crypto currencies, Artificial Intelligence and machine learning, which represent a major challenge, not only for central banks, will have various implications for monetary and financial stability. Research related to these new technologies will be beneficial for both advanced and developing countries. Unexpected, sometimes new, global or regional events can shock a domestic economy such that authorities need to intervene with what they already know and have experienced. It is important to understand the short and long-term implications of the adopted policies in these new environments.
This fault-line lies at the heart of the imbalance between privatised returns and socialised risks. Only in banking do control rights and incentive wrongs combine so uncomfortably. That calls for fundamental reform. Post-crisis that has been recognised, as regulatory reform has come thick and fast. These reforms are unquestionably a step in the right direction. But if they are not to reappear, deep-rooted incentive problems in banking need to be tackled at  1  US Treasury (2011). BIS central bankers’ speeches  1  source. I wish to argue there is unfinished business before these incentives are properly aligned with the public good. Limited liability In the first half of the 19th century, the business and governance of banking was relatively simple. By the mid-19th century, the United Kingdom had around 500 banks and 700 building societies. Most of the former operated as unlimited liability partnerships, the latter as mutually-owned co-operatives.2 Financial sector assets represented less than 50% of annual GDP and the largest banks had assets of less than 5% of GDP. Bank balance sheets were heavily cushioned. Equity capital often accounted for as much as a half of all liabilities, while cash and liquid securities frequently accounted for as much as 30% of banks’ assets. Banking was a low-concentration, low-leverage, high-liquidity business. A broadly-similar pattern was evident across banking systems in the United States and in Europe. This governance and balance sheet structure was mutually compatible.

Ladies and Gentlemen, it is in this regard that the Bank of Zambia and Professor Collier with the support of the UK Department for International Development partnered to hold this international symposium whose objectives include: (i)  enhancing understanding of advantages of central bank independence among central bankers, Government, banks, non-bank financial institutions, the business community, academics and other stakeholders;  (ii)  drawing lessons and sharing experiences of central bank independence in developed, emerging and developing countries;  (iii)  appreciating the political, economic and legal aspects of operationalising greater independence for central banks; and  (iv)  exploring ways of enhancing fiscal and monetary coordination. Ladies and Gentlemen, the selection of papers to be presented and discussed at this Symposium will provide a platform for sharing ideas required for practical solutions aimed at improving the Bank’s service delivery. As we tackle issues of inflation, exchange rates, and other key macroeconomic indicators, let us use this forum to outline some of the past developments and challenges that lie ahead of us as we aim to taking Zambia’s financial sector to higher heights. Lastly, let me say that while we can all learn from what other central banks have done, each country should establish the legal framework for its central bank, and allow for its evolution, in ways which best fit that country’s own history and institutions. I have no doubt that the symposium will be thought-provoking and highly participatory.
From 1986 to 1992 Norway had a fixed exchange rate system with a defined central rate with fluctuation margins. This system was abandoned in 1992 after extensive speculation against the krone during the period of unrest in European exchange markets. Following the decision to allow the krone to float on 10 December 1992, the guidelines for monetary policy were revised. Monetary policy was subsequently oriented towards exchange rate stability, but without stipulating a central rate with fluctuation margins. The krone depreciated slightly immediately after the crisis, but then remained stable without extensive use of Norges Bank’s instruments. Since 1996, the exchange rate has fluctuated more widely. There may be several reasons for this. During part of this period, the government budget has not contributed sufficiently to smoothing growth in domestic demand and production. Wage inflation in 1997 and  BIS Review 121/1999  6  1998 was higher than in other countries. Turbulence in international financial markets has also had an important contagion effect on the krone. In addition, oil revenues have fluctuated, which may have affected investors’ expectations regarding future developments in the Norwegian economy.

We are issuing new guidelines on compensation practices so that financial sector employees are rewarded for long-term performance and discouraged from excessive risk-taking. And we are working with foreign regulators to develop more robust international standards for bank liquidity. We are working to make the tri-party repo system more robust and reducing settlement risk by facilitating the settlement of over-the-counter derivatives trades on central counterparties (CCPs). But more needs to be done and much of this requires action by Congress. Congress is now considering several proposals for comprehensive regulatory reform, proposals that merit careful study and debate. Let me offer some general thoughts on the principles that should guide how we approach reform. First, it’s important to take a clear-eyed and comprehensive view of the financial system we have today. As I’ve already suggested, if there is one overriding lesson to be drawn from the events of the past 18 months, it is that the financial system is just that: a system, and a very complex one at that. The operational, liquidity and credit interdependencies that characterize contemporary financial markets and institutions mean that the well-being of any one segment of the system is inextricably linked to the well-being of the system as a whole. Because of this, our approach to reform must be guided by a coherent sense of the system as a whole, not merely by a focus on some of its component parts, as important as they may be.
This involves imposing a levy on the incomes of the working population and transferring these funds to pensioners, either through redistribution in the present (pay-as-you-go system) or via a capital funding system which benefits future generations of senior citizens. Thus, demographic ageing means that the working population is obliged to shoulder ever greater levies. If, at the same time, the global creation of wealth progresses slowly, the responsibility of financing old age pensions is going to impose an increasing social burden. Thus, it is not only necessary to improve our economic efficiency, we also need to be careful not to impede these efforts through inappropriate measures. We must allow the invisible hand of competition to bring about the most efficient allocation of our resources possible in both the domestic and the foreign arenas. Consequently, we need to do more with the resources at our disposal. At the same time, we need to make sure we have access to better quality resources. This means taking a longer-term approach to our system of education. The conditions within which our economy operates also play an important role. Growth in investment activity not only allows us to create new jobs but also, and above all, to accelerate productivity advances – both of these factors encourage growth and help to achieve a better financial basis for our old age pension scheme. There are three reasons why the Swiss National Bank is concerned about demographic developments and growth.

Jean-Pierre Roth: The population is ageing - we cannot wait any longer! Summary of a speech by Mr Jean-Pierre Roth, Chairman of the Governing Board of the Swiss National Bank, at the Association suisse des actuaires, Basel, 17 June 2005. The complete speech can be found in French on the Swiss National Bank’s website (www.snb.ch). *  *  *  Like other developed countries, Switzerland has been hard hit by the phenomenon of demographic ageing. It is putting our old age pension scheme to a severe test. The ageing of the population is also impacting on our ability to innovate, our potential to achieve productivity gains and our competitive dynamism in a globalised and demographically diversified world. This is why measures need to be put in place quickly. At the heart of this demographic challenge lies the need to enhance the productivity of our economy as well as our productive capacity. It is all the more important to secure favourable growth conditions because the ageing of the population in itself could impact negatively upon our capacity for growth – which is under strain already now. Increasing the productivity of our economy and the pace of growth is essential if we wish to maintain our system of social security. At the macroeconomic level, the financing of old age pensions works according to a simple principle.