samchain/econo-pairs-v1 huggingface dataset:
In both cases there were genuine and lasting changes in technology and the costs of supply as the development of IT improved credit scoring and allowed the distribution of securitised risk to a wider range of investors. However, there are clear signs, at least in unsecured credit for households, that the lenders overshot. It seems likely that something similar has been going on in some leveraged loan deals. The position in the biggest markets – the mortgage market and mainstream corporate lending – are less clear. How far recent growth rates in money supply and in asset prices reflect a credit supply cycle and, if so, where we are in the cycle are questions we have been discussing on the MPC. If we could be confident of the answers there would be a strong case for using monetary policy to help stabilise growth and inflation by “leaning into the wind” – that is, raising rates a little faster or further than we would otherwise have done on the upswing and reducing them quicker on the down swing. In practice the diagnosis is rarely clear cut. The sub prime losses and the impact of large investors are two factors complicating matters at the moment. Conclusion The old Chinese curse – “may he live in interesting times” – might be designed for central bankers. Our job is to keep things stable and boring. But there are limits in a rapidly changing world to what is possible.

There is no consensus on the effects that this recycling of foreign exchange reserves is having on global financial markets. The market for US Treasuries is exceptionally deep and liquid, but with foreign official investors 3 accounting in aggregate for around 30% of the total US Treasury debt market, some academic studies suggest that they may have kept the nominal yield on the 10-year US Treasury a hundred basis points lower than they would have been otherwise. 4 The perception that official buyers may well have different aims and risk appetites to other commercial investors could give them more influence in the markets. And, as with UK pension funds, they may genuinely alter the risk and term premia in some markets. Within these accumulating reserves, the growth of SWFs will alter, at least at the margin, the asset mix of official balance sheets. Over time that will tend to increase the price of riskier assets, like equities and corporate and emerging market bonds, compared to government bonds. The impact will be greater if there are concentrations of investment in particular asset classes or countries. More widely, the switch of reserve rich countries from lenders to owners of financial or real assets is also likely to lead to political tensions and pressures for protectionism.
These funds return to the region in the form of foreign direct investment and foreign portfolio investment. This global recycling also exposes Asian economies to volatile portfolio adjustments due to policy mistakes or shifts in the international economic environment. Currently, there are no deep, liquid and mature debt markets in Asia for the BIS Review 109/1997  intermediation process to function more efficiently. The process has begun in the last few years, and with the building of better financial infrastructure, this round of turmoil should add greater impetus to greater cooperation in building better regional financial intermediation. 13. As we all can see in hindsight, the risks involved in international capital flows are exacerbated when short-term capital flows are all attracted to the asset markets. This has led to asset bubbles, with all the painful consequences of asset price deflation. 14. But what is much more evident in Asia is that the process of hedging, arbitrage and “carry trade”, whereby arbitrageurs borrow in one market and invest in another market that offers higher interest rates, has created both regional and global contagion. Portfolio shifts mean that when asset prices change (and in this I would include: consumer prices, interest rates, exchange rates, debt and equity prices and property prices) funds will flow in and out to follow the “law of one price”. This suggests that open economies must adjust to global prices. The speed of such adjustments is only determined by the degree of openness of the domestic economy and financial markets.

But it is interesting that there has not been more interest from investment institutions with ostensibly long holding periods, which are largely unlevered and are not exposed to liquidity risk from borrowing short and lending long. What we commonly hear from contacts is that investment managers do not want to be caught out if asset prices fall further before they recover. But no one can seriously believe that they can spot the bottom of the market, and short-term horizons should not weigh heavily in longer-term investment institutions. All of which suggests that there may be structural impediments. Those could include some combination of the reasonable difficulty that some asset managers experience in assessing the quality of securitised assets; and mandates and accounting policies that may have the effect of shortening asset managers’ time horizons. The challenge for your own industry seems to have been slightly different. The managers of some money funds around the world, although I am sure not all of your members, joined in the “search for yield” by going down the credit spectrum and increasing maturity mismatch during the boom in credit markets. As those funds have moved back towards home base, shortening the maturity and increasing the liquidity of their assets, one effect has been a reduction in the net supply of term funding into the international banking system. That has been one of many contributors to the liquidity strains evident in money markets.
High tax rates promote tax planning and hamper the growth capacity of an economy. Low, broad-based tax rates are preferable to high tax rates with a narrow base. Norway made headway with the tax reform of 1992. There is still room for considerable improvement in the Norwegian system. Many public services are of considerable economic importance. Infrastructure, education, sound legislation and a solid judicial system are necessary for the economy to function and grow. Public services may be important in order to secure equality and security. At the same time, the public sector is so large that it affects the economy at large. This means that requirements concerning efficiency and adaptability must also apply to the public sector. Chart 18  Over a twenty year period, the number of employed in the health, care and education sectors increased by 240,000, which account for about 60% of the increase in overall employment in Norway. The number of employed in the health and care sector has more than doubled in 20 years. More people are now working in this sector than in the whole of manufacturing. Nevertheless, every day we receive reports of personnel shortages at hospitals, in elderly care or at schools. The authorities constantly signal increases in appropriations in order to remedy these problems. Norway imports labour from other countries to cover its resource shortages. What are the reasons behind this situation? BIS Review 14/2000  16  Chart 19  Demand for health and care services rises sharply when incomes increase.

If there is confidence in nominal stability, the deterioration in competitiveness may result in an appreciation of the krone in the short term. A lack of confidence in nominal stability may result in a depreciation of the krone. Both cases may entail fluctuations in the exchange rate. A shift in public expenditure growth - or one-sided tax cuts - will have an impact on domestic demand, thus prompting movements in the exchange rate. When fiscal policy is used to smooth fluctuations in domestic demand, it will contribute to a stable exchange rate. International business cycles and financial market unrest may have an impact on the krone exchange rate. Exchange rate variations among major currencies may influence the krone exchange rate measured against individual currencies. Over the last year the euro has depreciated against the US dollar, the yen and pound sterling. The krone has appreciated against the euro. The effective exchange rate has been more stable. A situation may arise with a significant shift in economic fundamentals in Norway. A shock of this nature may be due to a permanent change in growth prospects. This may also imply a permanent change in the krone exchange rate. Our experience suggests that this seldom occurs. A sharp and sustained shift in oil prices, as witnessed in 1973 and 1986, may imply that the use of oil revenues will have to change. This may in itself have an impact on the exchange rate.
Interest rates were more and more determined in the markets, and some measures were taken regarding the supervision of the banking sector. However, before taking the necessary actions for strengthening the domestic financial markets, such as measures for more transparent balance sheets and more careful risk management in the intermediation process, the capital account was liberalized at the end of the 1980s. The Turkish economy with an inefficient banking sector became open to intensive capital movements. In my view, the Turkish economy turned into an open one before it became strong enough to cope with capital movements that would occur in the 90s. The sequencing of reforms for the Turkish economy in general and its financial system in particular should have been set differently. What went wrong in the Turkish economy in the 90s? Policies did not concentrate on ensuring and maintaining macroeconomic stability; different priorities, delayed reforms, loose fiscal policy and accommodative monetary policy led to dynamic instability throughout these years. As a result, inflation climbed to 79 percent on average, budget deficit widened so much that the public sector borrowing requirement reached 15.5 percent of the GNP by 1999, the output growth was very low on average and volatile compared to other emerging markets. So, poor macroeconomic fundamentals and a fully liberalized capital account brought about vulnerability of the economy to external shocks and the Turkish economy faced severe financial crises and turbulences in the 90s. Such an environment had also important implications on the financial system.

Within this framework, restructuring public banks, strengthening private banks, solving the problems of the troubled banks taken over by “Savings and Deposit Insurance Fund” and strengthening the regulation and supervision of the banking sector were among the priorities of the program. And, for improving the asset quality of the system, a debt restructuring process was put into practice, named as the “Istanbul Approach". The sector increased its capital and decreased foreign exchange open positions to a great extent. Hence, right after the 2001 crisis, the authorities intervened into the system in order to prevent a total collapse of the system. This operation had cost around 21.7 billions in New Turkish Lira – more than 12 billion Euros at current rates- or in other words, 12.1 percent of GNP. Firstly, the Treasury and the Central Bank have injected liquidity to public banks. Secondly, the Central Bank started foreign exchange sale auctions on a daily basis to provide foreign exchange liquidity in exchange for some of the excess domestic liquidity to the system so that they could close their open positions in foreign exchange. The Central Bank also used open market operations to withdraw the remaining still excessive liquidity from the system to prevent hyperinflation. Thirdly, to provide more room to the banking sector for liquidity management, measures were taken regarding the reserve requirements of the banking sector. The Central Bank started paying interest to banks’ required reserves.
BIS central bankers’ speeches  15  The evidence presented here suggests that there may also be a case for reconsidering the measurement of equity capital. Basing this on market values rather than accounting cost is not only simpler, but appears superior as a guide to banks’ dynamic viability. Certainly, adding market-based indicators of capital adequacy to regulators’ and investors’ indicator set would seem worthwhile. 22 On calibration, at present Basel III rules prescribe a 3% leverage ratio – that is, banks’ equity can in principle be leveraged up to 33 times. Most banks would say a loan-to-value ratio of 97% was imprudent for a borrower. A 3% leverage ratio means banks are just such a borrower. For the world’s largest banks, the leverage ratio needed to guard against failure in this crisis would have been above 7%. The leverage ratio that would have minimised Type I and II crisis errors is around 4%. Both lie well above the current Basel backstop. (c)  Pillars 1, 2 and 3  The Tower of Basel is underpinned by three pillars: Pillar 1 (regulatory rules); Pillar 2 (supervisory discretion); and Pillar 3 (market discipline). To date, the weight borne by these three pillars has been heavily unbalanced, with most of the strain taken by Pillar 1. Simplifying Pillar 1 rules would help rebalance the Basel scales. That would not only strengthen Pillar 1, but could simultaneously strengthen Pillars 2 and 3. A rebalancing away from prescriptive rules provides greater scope for supervisory judgement, Pillar 2.

So one of the secrets to making this new supervisory approach a success will be the accumulated experience of supervisory staff. That means having staff with a nose for a crisis (like a hedgehog) as well as ears and eyes (like a fox). Therein lies a dilemma. Galbraith observed that: “There can be few fields of human endeavour in which history counts for so little as in the world of finance.” 23 A full crisis cycle might last 20–30 years. A systemic crisis might only occur once or twice a century. Among  22  A number of authors have proposed basing contractual triggers in banks’ debt instruments on market-based measures of capital adequacy (Calomiris and Herring (2011), Flannery (2010)). 23  Galbraith (2008). 16  BIS central bankers’ speeches  risk managers, typical levels of experience are significantly less than a full crisis cycle. The same is true among bank supervisors. Historically, financial supervision has been long foxes and short hedgehogs. Ever-expanding numbers of regulators will not solve this problem – if anything, that may cause average levels of experience to fall, not rise. Nor will ever-expanding amounts of regulatory reporting – if anything, that breeds more complexity, not less. A strong case can be made for a reversal of the historical trajectory in which “more is more”. This strategy has comprehensively, and repeatedly, failed the crisis test. This calls for a different supervisory direction of travel.
BIS Review 66/2004  5  •  The first is the APEC Initiative on the Development of Securitisation and Credit Guarantee Markets, which is spearheaded by three APEC member economies, namely, Hong Kong, Thailand and Korea, and sponsored by the World Bank;  •  The second is the Asian Bond Market Initiative (ABMI) of the ASEAN+3 forum; and  •  The third is the Asian Bond Fund initiative of EMEAP, comprising eleven central banks in the region, which has successfully launched ABF1, denominated in US dollars and has been working hard on ABF2 to be denominated in domestic currencies. There is inevitably competition among these forums, some overlap on the issues being addressed and use of different strategies. In Asia there is no political or institutional framework comparable to the one in Europe for taking a more focussed approach and for co-ordinating efforts. But all the initiatives have the common aim of addressing the structural impediments to the development of bond markets, including for example harmonising standards and practices, and creating the necessary regional financial infrastructure to facilitate this much needed development. There is momentum built up and I am hopeful that we should see significant progress made in the years to come. But I think the long-term solution to the problems of Asian finance lies in co-operation in respect of currency arrangements.

The practical way is to ensure that you are moving up each step you take, in other words making improvements, regardless of whether you are following a spiral or a zigzag path, or whether you can see the top, or the point where allocation of resources is optimal. Appreciation of this concept is essential in understanding developments in the Mainland of China, including those on the financial front. The preponderance of the banking sector in domestic financial intermediation calls for great care in the reform of the banking system, in a manner that does not undermine public confidence in the banking system. This means the continuation of state ownership and financial support, and, for the time being, de facto limited competition from foreign banks, notwithstanding WTO commitments. On the other hand, there is a strong desire to modernise management and move towards the observation of international standards, to facilitate the ongoing commercialisation and the eventual privatisation of the banks. This is a delicate process, particularly when, in terms of the prudential numbers, the banking system is clearly weak and, with the greater freedom of information that comes with modern information technology, depositors’ faith will not remain unwavering forever. The drive for diversification in financial intermediation, evidenced in genuine efforts to develop the debt and equity markets, will further divert funds away from the banking system.
When there is a positive output gap, the circumstances are normally the reverse. Then, actual output is higher than potential output, resources are strained, unemployment is lower than normal and inflation is higher than the target level. When the economy is in balance, the output gap is closed, that is to say, equal to zero. BIS Review 64/2004  1  In practice, both actual and potential output is affected by various shocks which mean that the output gap is rarely zero. If there is a situation with a negative output to begin with, the economy can grow more rapidly than its potential output rate for a short period. The fact is that this is necessary in such a situation in order to close the gap and bring the economy back into balance. However, problems arise if the economy grows at a more rapid rate than that allowed by potential growth over a longer period of time. Then production resources become strained, bottlenecks arise and tendencies appear towards overheating. In this way, potential growth for the economy can be likened to a recommended speed from which it is important not to deviate for too long a period. It is in this short-term perspective that monetary policy can play a role in influencing growth. As the output gap reflects the demand pressure in the economy and the demand pressure in turn affects inflation, monetary policy is largely about choosing an interest rate that will make the output gap as small as possible.

The possibility to improve productivity using economic policy, in addition to the basic contribution made by price stability and healthy government finances, is probably fairly small, as it is difficult, for instance, to govern how and when technological breakthroughs will occur. On the other hand, one can try to affect the conditions for good productivity growth, for instance by ensuring that competitive pressure is maintained in the economy and by conducting a good research and education policy. Labour supply growth Let us now leave productivity growth and move on to the other important component, the labour supply. Figure 3 shows the annual growth in the number of hours worked throughout the economy from 1981 onwards. As before, I have included an estimate of the long-term development. As can be seen, it is only weakly positive for the period as a whole. During the 1980s, the labour market was strong and we can see that the number of hours worked essentially grew during the whole period, up to the crisis at the beginning of the 1990s. The fact that the crisis had a dramatic effect on the labour input in the economy is also clear. On average, developments then improved during the second half of the 1990s, but the positive trend has been broken in recent years. What lies behind this and what conclusions can be drawn with regard to the future development of the labour supply? One way of examining what has driven developments is to divide up the number of hours worked into different sub-components.
Even if inflation has been subdued in recent years, it is not likely that we have arrived at “the end of inflation” for all eternity. Inflation has always varied and never been constantly high or low for any particular length of time (see Figure 1). It is difficult to see how society could have changed so fundamentally that this historical regularity now no longer applies. Assume that inflation, for reasons we cannot currently identify, will be, say, 4 per cent a few years ahead. Even those who now consider the inflation target having become irrelevant would probably then see the benefits of a credible anchor at 2 per cent. A credible inflation target stabilises wage formation, both when inflation is unexpectedly high and when it is unexpectedly low. Second, it is very unclear what might replace the inflation target as the anchor for prices and wages in the economy. One possibility is of course for Sweden to revert to a fixed exchange rate. This is something I will return to shortly. My interpretation, however, is that those who think the inflation target has run its course for wage formation are not predominantly advocating a return to a fixed exchange rate. Instead, they seem to be relying on the wage formation reforms themselves being sufficient. According to these reforms, which are collectively known as the Industrial Agreement, industry has, for over twenty years, been setting the benchmark for wage negotiations and is thereby steering wage growth in the entire economy.

What I had in mind was the period from 2011 and a few years onwards when inflation in Sweden was unexpectedly low and periodically below the inflation target by quite a wide margin. Once inflation had undershot the target for a while, long-term inflation expectations also began to fall. In addition, there were signals from the labour market parties that the inflation target was no longer a given starting-point in wage negotiations. In other words, a risk began to arise that confidence in the inflation target would weaken to such an extent that the target would no longer function as an anchor for price-setting and wage formation. As is well known, we eventually managed to reverse the development and bring up inflation to the target again, but it took a long time and required a very expansionary policy, as well as a slice of good fortune. An important reason for inflation being so low for so long was the debt crisis in Europe which hit after the financial crisis and which most analysts had not seen coming, at least not with so much force and so soon. It slowed down the recovery that had begun and caused economic activity to deteriorate again, dragging down inflation in the process. The Riksbank underestimated the inflation effects, but we were far from alone in doing so.