samchain/econo-pairs-v1 huggingface dataset:
James McAndrews: Review of the experience of fielding the survey of consumer expectations Remarks by Mr James McAndrews, Executive Vice President and Director of Research of the Federal Reserve Bank of New York, at the Barclays Global Inflation Conference, New York City, 24 June 2014. *  *  *  Accompanying charts can be found at the end of the speech. Good afternoon. It is a pleasure to be here today to talk with you about some of the research being conducted by the New York Fed on the measurement of household expectations, including households’ expectations of inflation. The views expressed are my own and do not necessarily reflect those of the Federal Reserve Bank of New York or of the Federal Reserve System. To begin, I’d like to acknowledge some colleagues of mine who have managed our household survey project and conducted much of the research that I’ll speak about today – namely Olivier Armantier, Giorgio Topa, Wilbert van der Klaauw, and Basit Zafar. In 2012, my colleague Simon Potter spoke to this conference about the approach that researchers at the New York Fed adopted in rolling out a household survey of expectations. Today, I will report on the survey, which is the result of more than six years of research, including a pilot survey that was conducted for about five years, and the published survey that we ran for a year prior to its first publication in January 2014.

I do understand these concerns. Let me assure you now that I will not bore you with a recollection of past events. I intend my exposé today to be forward-looking, as should the exposé of any central banker. I want to discuss what lessons for the future we can draw from over-optimistic expectations related to so-called regime shifts, such as the supply-side shock of a perceived “new economy”, and the subsequent financial boom and bust cycle in asset prices. How should monetary policy-makers deal with the resulting financial imbalances and reconcile monetary stability with financial stability? In my presentation today, I shall first briefly discuss the challenges that have been presented by the new environment for monetary policy-makers, in particular by the “new economy” and the growing importance of capital markets. Then, I shall look at what I call the excesses of this new environment, which for me are the speculative boom in asset markets and evidence of a corporate culture infatuated by short-term considerations. Finally, I shall look at the financial stability concerns and conclude by presenting some lessons for the future. The paradigm of the “new economy” Without a doubt, the world has experienced overwhelming progress in technology and productivity over the previous century, resulting in enormous growth in economic activity and individual wealth. It has been calculated that the industrialised countries were about 20 times better off at the end of the 1 20th century than they were a hundred years earlier.
Finally, banks took large mark-tomarket losses on their trading books and had to increase their loan loss provisions. As the crisis continued into 2008, the squeeze on bank balance sheets intensified. This was driven by several important developments. First, the demise of Bear Stearns increased the pressure on the other broker dealers to deleverage. They did this, of course, by becoming less willing to lend funds to their counterparties, such as hedge funds, and by shrinking their trading books. In the week leading up to Bear’s demise a nasty feedback loop ensued: forced asset sales increased price volatility. This led to higher haircuts by dealers on their counterparties, which led to more forced asset sales and still higher volatility. Second, the failure of Lehman in September accelerated the pace of this deleveraging process. Major bank intermediaries were frightened by what had happened and were unwilling to engage with each other. Prime money market mutual funds suffered large outflows. Investors fled as the news came out that the Reserve Fund had “broken the buck” because of large losses generated by its holdings of Lehman paper. By late September we were in a very bad spot. Banks weren’t willing to lend to each other even at very short term maturities. LIBOR – the London Interbank Offered Rate, which is the rate that banks offer to lend to each other – soared even as the Federal Reserve continued to lower its federal funds rate target and injected extra reserves into the banking system.

Although the terms and conditions of the PPIF have not yet been announced, this facility should help put a floor under the prices of lower-quality assets and provide a means for banks to shed such assets from their balance sheets. Despite all these efforts, I don’t want to give you the impression that all will be well soon – that seems unlikely. It will take time for the deleveraging process to come to an end and, as the recent employment data have underscored, the economy has considerable momentum to the downside. But the Federal Reserve is prepared to do whatever it takes, within the bounds of its legal authority, to keep markets working and credit available and affordable. Finally, what are the lessons to be learned from this crisis? What do we need to fix in order to make our financial system more robust and our economy less vulnerable? Let me offer up a short list of seven areas that we might focus on – recognizing that this list is by no means complete or exhaustive. •  We need more transparency and homogeneity in securities. The difficulty in valuing opaque and heterogeneous securities has led to greater illiquidity, price volatility and market risk, bigger haircuts and more forced deleveraging. Opacity has also led to an undue reliance on credit ratings. •  We need central counterparties or CCPs for over-the-counter derivatives in order to reduce settlement risk.
Here we adopt a somewhat different approach. Specifically, we consider how effective various combinations of regulatory constraints would have had been in identifying banks which subsequently failed during the crisis (the “hit rate”), while at the same time avoiding incorrectly signalling stress among banks which survived (the “false alarm rate”). To do this, we exploit a dataset on the pre-crisis balance sheet characteristics of global banks developed by Aikman et al (2014). The dataset includes almost all global banks which had more than $ billion in assets at end-2006 – 116 banks in total across 25 countries. A range of balance sheet metrics are proxied at consolidated (group) level for each of these banks at end-2006. Restricting attention to those banks for which data are available to compute all of risk-weighted capital ratios, leverage ratios and NSFRs reduces the sample to 76 banks. If we focus on risk-weighted capital ratios, leverage ratios and loan-to-deposit (LTD) ratios (as a simplified proxy for the NSFR which captures the ratio of retail loans to retail deposits) the sample size is 96 banks.20 These banks can be divided into those that ‘survived’ and those that ‘failed’ between 2007 and the end of 2009.

Table 2: Assessment of the relative suitability of Basel III standards to address selected forms of risk  Risk Microprudential solvency risk – ‘true’ asset risk  Microprudential solvency risk – ‘unknown’ asset risk under Knightian uncertainty  First Best Mitigant RWCR: Requires loss absorbing capital to cover solvency risks. If risk can be measured and risk weights can be chosen appropriately, this allows for the greatest level of granularity. LR: Effective when risks are unknowable and cannot pinpoint particular asset classes of concern, especially in the face of limited historical data or fattailed loss distributions. Vulnerability to risk shifting arbitrage  RWCR: High degree of granularity reduces the scope for risk-shifting  Vulnerability to gaming  LR: Lack of granularity and degrees of freedom minimises gaming opportunities. Second Best Mitigant LR: Provides loss absorbing capacity but does not include any risk granularity by design. Less effective Mitigants LCR & NSFR: Neither ratio attempts to mitigate the risk of losses. RWCR: Provides loss absorbing capacity but may perform less well out-of-sample and vulnerable to model risk (IRB approach) or miscalibration of risk weights (standardised approach). LCR & NSFR: standardised assumptions mitigate some scope to shift risk but also allow some scope for distortion if weights are miscalibrated. LCR and NSFR: Small number of modelled assumptions offer some safeguard against gaming. LCR & NSFR: Neither ratio attempts to mitigate the risk of losses. LR: Greatest scope for distortion through risk shifting because of lack of risk sensitivity.
[5] Reference rates play an important role, for the impact of monetary policy and in financial contracts. In only a few years’ time, Nibor may be replaced by other reference rates. This may affect the design of a range of financial contracts. Preparing for new reference rates will require ample time and planning. When the working group presents its proposals in 2019, an important first step will also have been taken in Norway. How will consumption be affected by a rise in interest rates? Let me return to today’s situation. There are now prospects for a gradual rise in interest rates in the years ahead. A less expansionary monetary policy aims to prevent the economy from overheating further ahead. Households account for a substantial portion of demand in the economy. Households’ response to higher rates will therefore have a considerable impact on the effectiveness of the interest rate increase. In the Bank’s current assessment of the outlook for the Norwegian economy, it is assumed that the gradual rise in interest rates will curb growth in household consumption somewhat. Many households have likely become accustomed to a low interest rate level over the past few years. In the past ten years, the key policy rate has been reduced as many as 13 times. In the meantime, household debt ratios have increased. Almost one quarter of total debt is now held by households that have never experienced an interest rate increase. With a higher level of debt, an interest rate change will have a more pronounced impact.

Then I will look at monetary and financial conditions and the SNB’s monetary policy. In the third quarter of 2012, global economic growth remained weak, while the volume of international foreign trade actually declined. A mild recession persisted in the euro area, and Japan recorded strongly negative growth figures. In the US, growth was supported by private consumption as well as the improvement in residential construction investment. The situation varied in the emerging economies. In some countries, there was scarcely any improvement in economic momentum, while in others – such as China – a supportive economic policy led to some consolidation. BIS central bankers’ speeches  1  We still expect that the global economy as a whole will gradually recover. However, we have adjusted our forecast for 2013 slightly down from the last monetary policy assessment. This revision mainly affects the short-term outlook for the euro area. We expect that the euro area will only emerge from the recession during the course of 2013. In the US, the moderate recovery is likely to continue, partly as a result of the favourable developments in residential construction. In the emerging economies, growth should continue to gain momentum. The downside risks for the global economy remain high. The crisis in the euro area continues to weigh on the economic outlook. In September, the ECB initiated a new securities purchasing programme, Outright Monetary Transactions.
Finally, many central bankers, myself included, were of the opinion that fluctuations in asset prices, especially those in the exchange rates, should be considered not only in relation with their impact on inflation, but also in connection with their effects on the competitiveness of the economy and on balance sheets. In practice this was seen as a heresy and faced severe criticism. The ongoing crisis brought to the fore the liquidity trap that economists have lately analyzed especially in light of the Japanese experience. The Great Moderation had given the impression that shocks capable of pushing inflation down to zero might no longer emerge and therefore the issue saw little debate. The Great Moderation showed that low and stable inflation may induce complacency, which is a prerequisite for expectations to become exuberant. The present crisis has proved, however, that a low inflation level – somewhere below 2% – may not be adequate. At this low level, in the context of larger cyclical fluctuations – such as the ones we have been experiencing recently – inflation can easily enter negative territory, whereas policy rates cannot go below the zero bound. From that point on, monetary policy must resort to quantitative easing in order to boost the economy that runs the risk of recession. This is the reason why Blanchard et al. (2010) proposed a change in the inflation target to more than 2% to, maybe, 4%, to give the central bank enough room for maneuver to lower the interest rate.

Later on, the two mainstreams merged in order to create the dynamic stochastic general equilibrium models based on which monetary policy has been conducted ever since the early 1990s. 10  BIS central bankers’ speeches  After practitioners and theoreticians agreed on the above mentioned issue, low and stable inflation became the main, and sometimes the only objective of monetary policy. Blanchard et al. (2010) showed that “this was the result of a coincidence between the reputational need of central bankers to focus on inflation rather than activity (and their desire, at the start of the period, to decrease inflation from the high levels of the 1970s) and the intellectual support for inflation targeting provided by the New Keynesian (NK) model”. According to the NK standard model, low and stable inflation is indeed the best policy to pursue, since the “divine coincidence”, as Blanchard and Gali (2006) called it, is assumed to hold, so that by maintaining a stable inflation, the output gap equals zero. Thus, within this framework, central bankers were able to take care of production without further debating the issue. Moreover, this suited the practitioners since, according to this model, the interest rate was the only instrument resorted to for attaining the inflation target, just like in practice. Nevertheless, preserving stable inflation does not ensure a zero output gap, where the economy also faces other imperfections than the nominal ones. Although both theoreticians and practitioners were aware of this, they maintained their view that low and stable inflation was beneficial for the economy.
Wage rigidity may be one such factor. During periods of high unemployment it is not unusual that wages are not increased. On the other hand, it is more unusual that wages are actually reduced, and this in turn has significance for how low price increases will be. 12  BIS central bankers’ speeches  States and the United Kingdom, inflation does not appear to fall to levels as low as in, for instance, Sweden and the euro area. Misinterpreted: Rapid technological development leads to falling prices The most common misunderstanding I hear concerns falling international goods prices. For instance, one usually notes that Swedish goods prices have fallen in recent years and perhaps also that the price of technology-intensive goods is falling rapidly.26 But here one confuses relative prices with the general level of inflation. It is no new phenomenon that goods prices are increasing at a slower pace than services prices.27 Nor is it a surprise. While wage increases are roughly the same in both the goods and services industries, productivity increases are higher in the goods industries. This means that unit labour costs are increasing more slowly there, which in turn means that price increases for goods always tend to be lower than those for services. And for the goods industries with the most rapid growth in productivity, the price increases will be even lower. However, these insights do not say anything about average price changes – inflation – only something about how price developments in different goods and services relate to one another.

I’d like to conclude with another quote on the future, this time from Nelson Mandela, more than 150 years after Kierkegaard: “A bright future beckons. The onus is on us, through hard work, 4/5  BIS central bankers' speeches  honesty and integrity, to reach for the stars.” I have every confidence that today’s agents have what it takes to thrive in the future, but the hard work of laying the necessary foundations must begin today. With that, I thank you for your time, and wish all of you a productive day ahead. 1 Customer  Behavior and Loyalty in Insurance: Global Edition www.bain.com/publications/articles/customer-behavior-loyalty-in-insurance-global-2017.aspx  2017. 2 Insurance Barometer Study survey in 2016 by the Life and Health Insurance Foundation for Education (LIFE) and  LIMRA 3 Customer  Behavior and Loyalty in Insurance: Global Edition www.bain.com/publications/articles/customer-behavior-loyalty-in-insurance-global-2017.aspx  5/5  2017. BIS central bankers' speeches
It reminds us if need be that crisis management is a difficult and potentially long lasting task and that we should always keep in mind that our policies have effects not only the current course of events but also through the expectation of the private sector that they may be repeated in the future. It is therefore timely to reflect upon the past, present and future course of Central Banks’ actions. I – The seeds of financial instability It is paradoxical that the crisis took place after a protracted period of nominal and real stability. In particular, inflation had remained low and remarkably stable for nearly two decades. This unprecedented degree of price stability mostly reflects a combination of central banks’ credibility and the effects of a benign economic environment. This macroeconomic stability has however not prevented deep imbalances – macroeconomic and financial – to grow in parallel, reinforcing one another. The abundance of savings in the world, specifically in emerging economies, prevented real long term interest rates from rising and stimulated the pace of credit expansion, especially in the US. Indeed, when policy rates were raised in 2004 in the US and late 2005 in the euro area, long term rates responded much less than in previous interest rate cycles and the yield curve flattened unexpectedly. Over the same period, financial markets have gone through deep structural changes. Financial innovation and extensive financial engineering fuelled a “search for yield” through increased risk taking.

Also related to the present theme is the Eurosystem monetary transmission mechanism network. Why have we chosen the transformation of the European financial system as our subject on this occasion? The establishment of Economic and Monetary Union (EMU), almost four years ago, and the introduction of the euro banknotes and coins were real milestones. In respect of the Maastricht Treaty, they appear to mark the completion of the process of monetary integration in Europe. But we shouldn't regard Monetary Union as an end in itself. The introduction of the euro will have – and already has had – a powerful influence on the development of financial markets in Europe and their integration, as we will learn and discuss today. The implications of these developments are manifold and profound, in particular for central bankers, but also for other policy-makers. Let me mention a few examples. First and foremost, the transformation of the financial system has an impact on the conduct of monetary policy. For example, the emergence of new financial instruments and changes in the use of existing ones affect the choice, behaviour and interpretation of forward-looking financial indicators of underlying economic variables, such as consumer price inflation and GDP growth. Moreover, the implications for the transmission mechanism of monetary policy are of supreme importance to the  BIS Review 60/2002  1  ECB. But I'll say no more on this matter now, as my colleague Otmar Issing will cover it in greater depth in his dinner speech this evening.
Joseph Yam: Fourth Hong Kong Monetary Authority Distinguished Lecture: opening remarks Opening remarks by Mr Joseph Yam, Chief Executive of the Hong Kong Monetary Authority, at the Fourth Hong Kong Monetary Authority Distinguished Lecture on the theme of Monetary Policy and Financial Stability, Hong Kong, 13 February 2001. *  *  *  It is an honour for me to welcome Mr Andrew Crockett to deliver this Fourth Hong Kong Monetary Authority Distinguished Lecture. I am also delighted to welcome Dato’ Dr Zeti Akhtar Aziz as the Discussant. Both are good friends of the HKMA, and it is a special pleasure to see them here today before this large and diverse audience. I extend to all of you, on behalf of the HKMA, a very warm welcome. The subject matter of this Lecture – monetary policy and financial stability – is at the heart of central banking. Much attention has been given to resolving the apparent conflicts between the two desirable objectives of monetary stability and financial stability, at the policy as well as the operation levels. The recent experience of a number of jurisdictions has indicated problems in achieving both simultaneously. Some have gone as far as to introduce institutional changes to alleviate the tension, or the embarrassment, or the risk of policy credibility being undermined as a result of such conflicts.

As discussant for today’s lecture, we are privileged to have Dato Dr Zeti Akhtar Aziz, who has been Governor of Bank Negara Malaysia since May last year, and who is another one of the ‘classmates’ at BIS. I have known Dr Zeti for some years now and benefited from her wise counsel, particularly during the time when she was Assistant Governor in charge of economic research. Dr Zeti is a career central  BIS Review 13/2001  1  banker who joined Bank Negara in 1985 and who has taken up various important positions within Bank Negara. She played a pivotal role in steering, very successfully, Malaysia through the Asian Financial Crisis and in introducing the very important financial sector reforms. Dr Zeti is therefore able to offer a particularly practical perspective on today’s theme, and I look forward to her comments with much interest. Ladies and Gentlemen, I now have great pleasure in calling upon our speaker, Mr Andrew Crockett, to deliver the fourth HKMA Distinguished Lecture. Mr Crockett, please. 2  BIS Review 13/2001