samchain/econo-pairs-v1 huggingface dataset:
Már Guðmundsson: Recent economic and financial developments in Iceland Speech by Mr Már Guðmundsson, Governor of the Central Bank of Iceland, at the 53rd Annual General Meeting of the Central Bank of Iceland, Reykjavík, 27 March 2014. *  *  *  Mr. President, Prime Minister, Minister of Finance and Economic Affairs, Chairman of the Supervisory Board, former Governors, Directors, Ambassadors, Ladies and Gentlemen: This Annual General Meeting is the Bank’s sixth one since a large part of the Icelandic financial system collapsed, ushering in the deepest economic contraction Iceland has seen since measurements began after World War II. It is also the last Annual General Meeting in my current term as Governor. For this reason, and because we stand at a turning point in the resurrection of Iceland’s economy and financial system, it is appropriate to look back, assess the progress made, and identify the challenges ahead. Iceland’s financial crisis was part of the global crisis that peaked in September 2008, when the US investment bank Lehman Brothers failed, triggering a worldwide run on banks’ foreign funding. Had it not been for the coordinated response by leading central banks around the world, which provided collateralised US dollar liquidity to international banks, both directly and through foreign currency swaps, many of those banks would have gone under. Iceland was a participant in this cooperative effort only to a very limited degree. But its commercial banks were highly dependent on foreign funding, which was much shorter-term than the foreign assets in which they had invested.

In the long run, monetary policy can affect inflation, and in the short run it can smooth out cyclical fluctuations, particularly when it is credible; i.e., if inflation expectations remain close to target even during attempts to mitigate recessions. Once the slack disappears, however, monetary policy cannot deliver output growth beyond the growth potential of the economy, and any attempts to do so will ultimately lead to inflation persistently above target. By law, the Central Bank of Iceland has two main objectives. The first is to promote price stability, the main task of monetary policy. The second is to promote financial stability. As regards monetary policy implementation, the Central Bank is independent and stands alone. It is also independent as regards its contribution to financial stability; that is, its own analysis and decisions on the prudential rules it is tasked with setting; i.e., concerning liquidity and  BIS central bankers’ speeches  3  foreign exchange risk. In addition, like other central banks, it plays a key role in crisis management through its liquidity facilities and its role as lender of last resort. But it is emphatically not alone in this regard, as there are other bodies that make important contributions – the Financial Supervisory Authority in particular, but also the relevant ministries. The legislature also plays a larger role here than in monetary policy, as the statutory framework for monetary policy seldom changes, while amendments to financial system legislation are much more frequent.
The fact that there were unused resources also helped to keep down the rate of wage increase. Low inflation meant that real wages increased considerably. During a 20-year period up to the mid-1990s, real wages rose by an average of only 0.5 per cent a year, but over the past five years the average increase in real wages has been approximately 3 per cent a year. The development towards a more decentralised wage formation process continued in the 2001 bargaining rounds. All those in the central government sector have local wage formation, compared with around one-fifth in the private sector. Some of the agreements signed were completely without figures so that everything was determined at local level, without any individual guarantees or centrallyestablished levels. This applies to one-third of the employees in the public sector and 7 per cent of 3 those in the private sector. Prior to the 2001 bargaining rounds, the unions in LO decided to improve the wage situation for women in the public sector in relation to industrial workers. However, the wage bargaining between the employers and the Swedish Municipal Workers' Union broke down and after mediation the social partners reached a central agreement that entailed wage increases of around 3.7 per cent a year during the period 2001-2003, with the possibility of local agreements on higher wage increases. The Municipal Workers' Union agreement was thus one of the most advantageous among the LO unions.

Given how significant the monetary system is, it is only right and proper that the associated developments are also the subject of regular public debate. With this conference dedicated exclusively to the issue of sound money, you are making an important contribution in this regard. Sound money is a fragile accomplishment, and is thus essentially always at threat. However, against the backdrop of the global financial crisis, concerns that our good money could turn bad have increased markedly across broad sections of society in recent years. On the one hand, this is understandable. Central banks’ crisis management has led to an extraordinary expansion in money supply and interest rates are at record lows – in the past, these phenomena have often been indications of imminent inflation and thus currency depreciation. On the other hand, it is a demonstrable fact that the value of money has never been as stable as it has been in the past 20 years (cf. chart 1). Viewed from this perspective, central banks’ expansionary monetary policies have simply satisfied the enormous demand for central bank money. The strength of this demand is actually testament to a high level of trust in central banks. The fact that inflation has been held in check for so long may also explain the increasing popularity of ideas from an entirely different perspective. The proponents of modern monetary theory would like to see central banks being put at the service of state financing.
Likewise, at that time the average nominal yield on euro area 10-year sovereign bonds stood at 1.6% for 2022, rising gradually to 2.2% in 2024. It must be borne in mind that market interest rate expectations include not only expectations for ECB policy rate increases at any given time, but also a risk premium component. 6  to 2% by 2024 demanded that we accelerate the path of interest rate hikes as compared with that foreseen in the projections. Hence the exceptional increase of 75 bp. The risks to the inflation projections further strengthened the case for such a large interest rate rise. One way to illustrate these risks is through the downside scenario envisaged in the latest ECB staff projections exercise, which shows how the economic outlook for the euro area could be affected if some of the risks to the baseline scenario materialise. Under that downside scenario, in addition to a very significant downward revision of economic growth for 2023, inflation in 2024 stands at 2.7%, higher than the baseline projection (2.3%) and further still from our 2% target. One of the assumptions underlying this scenario is a complete cut-off of Russian gas supplies. And indeed, on 2 September – after the cut-off date for the latest ECB staff macroeconomic projections but before our September meeting – we learned that the Nord Stream 1 pipeline between Russia and Germany had been shut down indefinitely. Admittedly, the downside scenario also includes other assumptions that have not materialised thus far.

By contrast, demand for gas is expected to decline, in view of high prices and precautionary energy saving measures (following the EU agreement to reduce gas demand by 15%). In consequence, euro area economic activity is expected to slow in the coming quarters, as a result of the loss of purchasing power stemming from higher than expected inflation, the decline in business and consumer confidence and, in general, the greater uncertainty surrounding the economic effects of the war in Ukraine. Moreover, although supply bottlenecks are easing, they are still limiting activity among a large number of manufacturing firms in certain sectors. As a result, euro area GDP growth forecasts have been revised down significantly, especially for the remainder of 2022 and for 2023. The euro area economy is expected to grow by 3.1% in 2022 and to slow down markedly in 2023, growing by just 0.9% compared with 2.1% forecast in June. In 2024 GDP is expected to grow by 1.9%, short of the 2.1% forecast three months ago. 4  See M. Pacce, A. del Río and I. Sánchez (2022). “The recent performance of underlying inflation in the euro area and in Spain”. Analytical Articles, Economic Bulletin 3/2022, Banco de España. 3  Meanwhile, inflation continues to be driven by the surge in gas and food prices, demand pressures in some sectors owing to the economic reopening, supply bottlenecks and the depreciation of the euro.
Has the program been a good development from the perspective of the U.S. Treasury? What about from the public’s perspective? A good starting point for answering these questions is to account for the costs and benefits of the program relative to an appropriate counterfactual. For example, we might start by comparing the difference in funding costs to the Treasury of TIPS versus a program of comparable duration nominal Treasuries. But we should also be careful not to ignore other potential benefits of the TIPS program. As we see it, these potential benefits include:  BIS Review 14/2009  1  •  the provision of a virtually risk-free investment that provides value to risk-averse investors,  •  access to a market-determined measure of inflation expectations that can help inform the conduct of monetary policy,  •  greater diversification of the Treasury’s funding sources, which presumably has favorable implications for the Treasury’s overall funding costs, and  •  the potential for TIPS issuance to reduce the variability of the U.S. government’s net financial position and provide an explicit incentive for the fiscal authorities to conduct policy with an eye toward the consequences of inflation. Although it is difficult to quantify these benefits, we argue that they are meaningful and should not be ignored in evaluating the benefits of the TIPS program.

In other words, over such a short period, the outcome of an ex-post analysis can be heavily influenced by which of the two sides – the Treasury or investors – was the lucky recipient of the net inflation surprise that occurred over the period in question. For example, in countries such as the United Kingdom, where inflation declined following the inception of an inflationlinked debt program, ex-post studies generally suggest that these programs have reduced financing costs for these countries. The fact that the Treasury saved or lost money ex-post is thus not a very reliable guide as to whether the strategic decision to implement a TIPS program has been a good idea. The relevant question is whether the Treasury obtained the financing it needed at a lower ex-ante cost. If the experiment were to be run thousands of times drawing from the underlying distribution of possible inflation outcomes, would Treasury’s costs have been lower, on average, with TIPS or with nominal Treasuries? To conclude on the basis of one coin flip or roll of the dice as ex-post analysis essentially does surely is not the best way to evaluate the respective costs of TIPS issuance versus nominal Treasuries. Thus, we need to focus on the underlying factors that determine the ex-ante difference in costs. 1  2  See Sack and Elsasser (2004), Roush (2008).
M. Chinn “Getting Serious about Twin Deficits”, working paper, The Bernard and Irene Schwartz Series on the Future of American Competitiveness, CSR No. 10, September 2005. 32  This hypothesis has been justified in: Aizenman J., Lee J. “International Reserves: Precautionary vs. Mercantilist Views, Theory and Evidence”, IMF Working Paper WP/05/198, October 2005; and Gosselin M.A., Parent N. “An Empirical Analysis of Foreign Exchange Reserves in Emerging Asia”, Bank of Canada working paper 2005-38, December 2005. 33  R.Caballero et al. “An Equilibrium Model of Global Imbalances and Low Interest Rates”, MIT mimeo, September 2005. 34  C. Engel, J. Rogers “The U.S. Current Account Deficit and the Expected Share of World Output”, NBER working paper 11921, 2006. BIS Review 60/2006  13  Hausmann and Sturzenegger 35 that argues the existence of the “dark matter” is an example of this approach. In spite of many attempts to prove that the US current account deficit is in fact lower than it is believed to be, and that it is even desirable, a vast majority of academic economists and many central bankers are seriously alarmed by the scale of global imbalances. Many papers have been written which show what may be the consequences of the scenario in which the financial markets – in view of no adequate measures undertaken by economic decision-makers – initiate adjustment processes by themselves.

Distinguishes guests, ladies and gentlemen, I believe that the selected topics for this workshop are crucial and match with the current global financial crisis. I hope this workshop will produce fruitful discussions and provide a platform for reserve managers to receive good lessons while exploring best practices in setting the policy framework for the investment and management of reserves. BIS Review 51/2009  1  In addition, I believe that this BIS workshop will also provide all of you the opportunity to discover Angkor, to visit interesting places and to get to know about Cambodian people and their culture. Last but not least, let me wish you an active, productive and successful discussion. The National Bank of Cambodia is very pleased with the current cooperation with the BIS. I wish you all good luck. Please have a pleasant stay in our ancient capital city of Siem Reap, Angkor. Thank you! 2  BIS Review 51/2009
As we build our efforts to advance financial literacy, I would like to suggest three areas in which research will be particularly useful in the period ahead: (i) First, factors affecting the financial literacy and capability of consumers. This may include elements that correlate with consumer behaviours in financial management and how they choose and decide on financial products and services. (ii) Second, factors affecting consumers' financial resilience. This may include vulnerabilities and emerging risks from the changing in the financial landscape, for example, digitisation of financial products and services, or economic shocks. The research could also identify the challenges to make sure that the delivery of financial literacy is effective in supporting financial resilience. (iii) And third, intervention gaps and innovative ways to bridge the gaps. Findings from this area of research could add value to how we design and develop evidence-based interventions. One suggestion is to find out how we can take advantage of behaviourally-inspired features that can be easily embedded in digital tools such as reminders or apps for micro-savings or micro-investments, and potentially use these features for monitoring and evaluation of the financial literacy initiatives. I believe, that with the right digital tools and applications, we can amplify the impact of financial education by increasing reach and scaling up interventions in a cost-effective way. All of these should seek to help us better understand how we can help consumers make good choices and avoid bad ones.

The late Henry Ford once said, ‘If you had asked people what they wanted, they would have said a faster horse’. The industry needs to lead development. As a regulator, we want our financial sector to benefit from continuous progressive development, but without creating undue financial or monetary stability risks. Our message to investors and fintech players would then be, keep innovating with these perspectives in mind. Rest assured, we will play our part in promoting a safe and conducive environment for innovation. As part of our initiative, we also from time to time, organise challenge events to recognise innovation and impactful solutions through incentives and awards. The most recent being during MyFintech week. But later in the year, we will have another event and recognition series. I would thus like to invite you to participate in the Royal Award for Islamic Finance Impact Challenge Prize 2022. This is a new initiative that aims to reward innovative creations and solutions that strengthen the economic and social resilience of financially impacted communities globally through the application of Shariah principles. But you’ll have to hurry as applications have been open awhile and will close on 25 March 2022. With that, I wish you success and a productive engagement today. Thank you. 1 Various publications of Fintech Malaysia Report 2  McKinsey article, June 2021, “Financial data unbound: The value of open data for individuals and institutions” [Link to article]  4/4  BIS central bankers' speeches
Real household income outgrew GDP by a cumulative 7 % points during that decade. 1 In part this reflects productivity improvements in the distribution sector. In the mains it’s because  productivity tends to rise faster in goods production than in services. The technology for making cars and computer chips improves more rapidly than those for cutting hair, designing software or providing insurance. The result is that relative employment, production costs and prices all tend to decline in manufacturing. This helps to explain why the UK has had weaker productivity growth than some economies with a larger industrial sector. But the higher share of services in UK exports has also tended to mean relative prices move in its favour. In general – the last couple of years providing one very clear and egregious exception – what is lost on one front is made up for on another. Bank of England  Page 5  Clearly – and with a vengeance – the early part of this decade has seen a sharp reversal of these trends. In the third quarter of this year, UK GDP will probably be only slightly below where it was in the last quarter of 2019, immediately before the pandemic. Yet real household income is likely to be over 3% lower, with real corporate profits down by more than 5% (around 10% if you exclude the North Sea).

The unusually low long-term interest rates, combined with low interest rate differentials towards government bonds with a high rating provided further stimulation. Developments in the housing market have thus brought to the fore the debate on what role household indebtedness and house prices should have in monetary policy. At the end of the 1990s there was a similar discussion – but then it mainly concerned companies’ balance sheets and inflated share prices. Then as now it was a question of whether and in what way monetary policy should weigh together the requirements made by the inflation-targeting policy if the economy functions as normal, with the risks of a severe dampening of inflation and demand that could result from a correction of the imbalances in the financial markets. In practice this concerns evaluating whether it is worth accepting slightly weaker demand over the coming years in order to alleviate the effects of an uncertain but severe effect of corrections in financial imbalances at some point in the future. The current situation in Sweden Before I go on to speak in more detail of how I see the risks of Swedish households’ debts and high house prices today, I would like to say a few words about the Riksbank’s other task. This means that we also act to promote stability in the financial system. When household indebtedness and house prices are discussed in this context, the focus is on the risk of a crisis in the banking system.
But there is a tension with this strategy where banks want to count nonequity capital instruments issued out of subsidiaries as TLAC or MREL. The instruments may meet the other requirements to qualify – minimum maturity, subordination etc – but if the only way that they can bear loss is by putting the subsidiary into resolution there is a question of compatibility with the resolution strategy. As part of BRRD we have in the EU a statutory power at the point of nonviability (PONV) to write-down regulatory capital instruments. But the same is not true outside Europe. As part of the resolution planning process we will need to identify these cases and how to address them. Incidentally one advantage of this PONV write-down power is that in resolution we can ensure the order of depletion of liabilities follows the creditor hierarchy. That is, losses are first absorbed by regulatory capital instruments in the operating company where they occur. If the losses are sufficient to wipe out the capital, then the operating company is recapped by write-down or conversion of any other internal TLAC. This pushes losses up into the parent company or holdco where they are absorbed following the creditor hierarchy, capital first and then debt. •  My third example of issues that will be addressed through resolution planning is foreign law debt. We cannot count as MREL or TLAC instruments where the statutory powers of the resolution authority to bail them in are uncertain.

Even if the development of inflation in one country may conceivably disturb the path for the union, that country cannot be required to tighten its fiscal policy as long as it complies with the Stability and Growth Pact. 5  BIS Review 76/1999  Secondly, at present there is thus no mechanism whereby a fiscal adjustment could be spread over the participating countries. This is also a problem because the implementation of the Pact indicates that there is a risk of this contributing to a procyclical budget policy. To date, the Pact’s surveillance process has focused on countries with a budget deficit close to the limit. There is nothing remarkable about that: this is where the problems are most apparent and the risk of failure — with problems for the credibility of the Pact as a whole — is most acute. But there is also the risk of the Pact having a procyclical effect. Countries that are close to the maximum deficit on account of weak activity are obliged to follow a restrictive line, while those with good activity and a surplus do not need to tighten their policies in this way. This problem has arisen because the Pact was actually constructed so that it only functions properly when all the member states have established the necessary margins. That is still not the case. For the euro area as a whole it would presumably be best in the present situation if the countries with high activity were to tighten their policies even more.