samchain/econo-pairs-v1 huggingface dataset:
Simon M Potter: Money markets at a crossroads - policy implementation at a time of structural change Remarks by Mr Simon M Potter, Executive Vice President of the Markets Group of the Federal Reserve Bank of New York, at the Anderson School of Management, Los Angeles, California, 5 April 2017. * * * Accompanying slides Thank you very much. I’m very pleased to be back at UCLA, where I enjoyed eight years in the 1990s as an assistant professor of economics. I’d like to thank my hosts for their gracious invitation to have, once again, the experience of speaking to a classroom of future leaders in finance, business, economics, and—just perhaps—central banking as well.1 Due to the large size of the Federal Reserve’s balance sheet, we are employing a new and innovative framework to control money market rates. Since late 2015, we have seen several significant developments in money markets that have tested this new framework. These include a profound reshaping of the money market fund industry as a result of new Securities and Exchange Commission (SEC) rules, significant shifts in cash management practices at the Treasury and large foreign reserve managers, and continued pressure on bank balance sheets due to the ongoing implementation of Basel III capital requirements. Also since that time, the Federal Open Market Committee (FOMC) has directed three 25 basis point increases in its target range for the federal funds rate.

This trend has leveraged on the respective comparative advantages in countries of the region. Malaysia 's distinct capabilities in a wide number of areas has increased its participation in this process. In addition, increased economic integration following the rise of intra-regional trade and investment has brought mutually reinforcing benefits in terms of the expanding regional opportunities. The strengthened corporate sector has also led to increased direct investment abroad by Malaysian companies. Going forward, developments in the Malaysian economy will also benefit from the Ninth Malaysian Plan. A major strength of the Malaysian economy has been its economic flexibility. Significant changes in the structure of the economy continues to take place. The manufacturing sector has continued to move up the value chain while the services sector has gained increasing prominence, with its share of GDP rising from 45% in 1995 to almost 60% today. The role of private consumption in the economy has also been enhanced, supported by steadily rising incomes, low unemployment, and access to the financial system. Of importance is the recovery of investment activity. In addition, the small and medium-sized enterprises (SMEs) have increased their role in the domestic economy. New areas of growth are also emerging, ranging from the shared services and outsourcing industry to agrobusiness, biotechnology and Islamic finance. The flexibility of the economy to continually adjust to new areas of activity has been an important factor contributing to the dynamism of the economy. About a year ago, Malaysia took the opportunity to transition into a more flexible exchange rate regime.
But this discussion does reveal a catch-22 – which is that participants on both sides of the market typically want two inconsistent things: (a) they’d like everyone else’s information in a publicly-visible price so they can trade in full knowledge of their positions, but (b) they want to keep their own information out of that same price, to avoid driving it against them. One response to this, which TCA may itself recommend, is to take trades ‘dark’. But that risks undermining the robustness of that TCA (by reducing the quality of the market data on which TCA assessments are based), and may also harm the efficiency and resilience of the market, if it increases market fragmentation. I can’t help feeling that a highly fragmented world in which everyone pays up individually to secure information privately through TCA tools and market data that they could have publicly under a market-wide public disclosure standard seems deeply suboptimal and costly. Such a standard is clearly not feasible to impose by edict in a global market – but it is worth reflecting on whether current developments are heading in the right direction. 16  State of Transaction Cost Analysis 2019, quoted in https://www.fixglobal.com/home/mifid-ii-boosts-tca/. 11  All speeches are available online at www.bankofengland.co.uk/news/speeches  11  Underpinning many of my remarks today is a sense that the buyside has so much to gain, and to offer, from a more active collective participation in FX markets. And that is where we need more of you sign up to the Global Code.

In the early days, that led to a concentration of liquidity provision amongst the largest incumbent banks, eager to grow volumes and able to afford the expensive high-speed equipment required. More recently, however, some of those firms have exited or downscaled as the scope to deliver returns from traditional business models has fallen. And a number of non-bank providers have emerged, focused less on providing balance sheet capacity to the market, and more on exploiting new technology. Taken together, this has driven a renewed dispersion of market share (Chart 2). In 2009, the number one provider in Euromoney’s annual FX survey saw nearly ten times the flows of the number ten firm. Today that ratio is just two. Chart 2: Falling concentration amongst liquidity providers  Source: Euromoney FX surveys. 3  https://www.globalfxc.org/global_index.htm, adjusting for duplicate entries reported to more than one national index. 5  All speeches are available online at www.bankofengland.co.uk/news/speeches  5  There’s been an even bigger revolution in trading platforms, as the share of trading routed through liquidity providers’ single dealer offerings and the traditionally dominant primary venues has fallen, and business has increasingly migrated towards multi-dealer platforms, which allow users to put multiple chosen providers into competition on a single site (Chart 3). Chart 3: Platform use as a share of spot FX turnover in the London market4  Source: London Foreign Exchange Joint Standing Committee surveys and Bank of England calculations.
Spreads and volatility have also been lower for longer, although there is some market discrimination between agents and between emerging market economies (EMEs), as well as periodic spikes in volatility, especially recently. Next, why are inflation or interest rates so low and how does this impact policy? First puzzle: inflation remains low in countries where unemployment is close to the NAIRU, like the USA, or where the output gap has been sharply reduced, like Germany; this may imply that the Phillips curve has a lower slope too. Yet, various studies by the IMF or the BDF show that, even if slopes have tended to flatten since the early 1990s, there has been no clear-cut change over the last years. BIS central bankers’ speeches  1  There are two possible explanations. The benign one is that transitory disinflationary shocks, e.g. due to commodity prices, temporarily shift the Phillips curve downwards. The worrying one would be a disanchoring of long-term inflation expectations, threatening the objective of price stability; such a disanchoring is suggested by the surprising correlation between spot oil prices and market expectations derived from inflation-linked swaps up to 5 years in 5 years. People can reasonably differ in their interpretation; hence the scope for healthy policy debates. As regards low policy or market rates, these are mainly seen as reflecting lower equilibrium, or neutral, interest rates. This leads us to the second puzzle: does the lower neutral interest rate result from cyclical or structural factors?

As I already said, we have the whole day to discuss these tricky issues thanks to our speakers who are not only prominent but also open and humble; I noticed and appreciated these qualities in their recent speeches exploring the new territory we are in. Instead, let me conclude on the limits of the scope for action by CBs. Indeed, I prefer to stress that central banks cannot be the only game in town and, more precisely, that monetary and macro-prudential policies are not conducted in a vacuum. Structural problems require structural answers; in particular, only structural reforms can raise potential growth; aggregate demand policies cannot provide a substitute. What they can do –and it’s precious— is to help better manage time. Speaking of managing time, I think mine is up now and I shall give the floor to Christian who can give us all the benefit of his experience and wisdom. Short bibliography: R. Baldwin, C. Teulings, 2014: Secular Stagnation: Facts, Causes and Cures, CEPR Press; in particular, Chapter 8 by O. Blanchard et al., Chapter 9 by R. Caballero and E. Farhi, Chapter 11 by R. Koo. BIS Annual Report, 2014: “Debt and Financial Cycle” (Chapter IV). O. Blanchard, E. Cerutti and L. Summers, 2015:“Inflation and Activity – Two Explorations and their Monetary Policy Implications”, IMF Working Paper No 15/230.
The upfront announcement of the policy targets indicates the transparency of monetary policy operations and we believe that it helps to enhance policy effectiveness. More importantly, it helps the other stakeholders to fall in line with the announced strategy. 2. Government  The fiscal policy should support monetary policy to work effectively. Therefore, government’s commitment to maintain fiscal targets is essential. According to the government’s medium term macro framework enunciated in the fiscal management report 2007, the overall deficit in 2007 will be contained at around 7.2% of GDP. The Govt. has taken significant steps to enhance revenue through additional measures such as improvement to tax administration, rationalize current expenditure and improve its debt management policy. The achievement of the first quarter 2007 revenue target is commendable. While maintaining the momentum in revenue targets, it is also necessary to reduce Govt. expenditure and work in tandem with monetary policy to contain inflation. In reducing government expenditure, it is also desirable to link income policies of the Govt., in particular, wage increases to productivity gains. Attempts are made to minimize income expenditure gaps and avoid deficit financing from inflationary sources such as bank financing, in particular, borrowing from CBSL. Govt.’s medium term strategy rests largely on public investments in key sectors and infrastructure that supports growth. It is important that these investments are financed in such way that it would not place excess burden on the budget. In this regard, it is encouraging to note that the Govt.

Thankfully, Marvin, along with others, helped lay the intellectual groundwork and created the vocabulary for us to work through some of the most significant issues facing central banks. His work is a true emblem of how researchers play a vital role in informing and shaping the policy discussion. I look forward to the upcoming conversation. Thank you. 1 Jeffrey C. Fuhrer and Mark S. Sniderman, Conference Summary, Journal of Money, Credit and Banking, Volume  32, Number 4, Part 2, pp. 845–69, November 2000. 2 Marvin Goodfriend, Overcoming the Zero Bound on Interest Rate Policy, Journal of Money, Credit and Banking,  Volume 32, Number 4, Part 2, pp. 1007–35, November 2000. 3 Board of Governors of the Federal Reserve System, Transcript of the Federal Open Market Committee Meeting  and presentation materials, January 29–30, 2002. 2/2  BIS central bankers' speeches
Negative real interest rate not unusual Per cent 40  40 Real short-term interest rate Nominal short-term interest rate  30  30  20  20  10  10  0  0  -10  -10  -20  -20  -30  -30  -40 1900  -40 1919  1939  1959  1979  1999  Note. The real interest rate is calculated using series for the nominal interest rate and inflation/inflation expectations. For the nominal interest rates, annual data from historical monetary statistics is used for the period 1900-1918, while the Riksbank's discount rate is used for the period 1919-1983 and after that the rate on a threemonth treasury bill is used. For inflation/inflation expectations, annual data from historical monetary statistics is used for the period 1900-1918, the cost-of-living index/CPI from Statistics Sweden is used for 1919-1979 and after that inflation expectations in the household sector for one year ahead, as calculated by the National Institute of Economic Research. Sources: National Institute of Economic Research, Statistics Sweden and the Riksbank  15 [20]  Figure 4. Good profitability in Swedish banks Return on equity, rolling four quarters, per cent  Note. Unweighted mean value. The red line refers to a selection of major European banks. Sources: The banks’ interim reports and SNL Financial Figure 5. Positive sentiment in household and corporate sectors Index, mean = 100, standard deviation = 10  Source: National Institute of Economic Research  16 [20]  Figure 6.

External institutions like the IMF and the World Bank are also important, providing advice and applying pressure to do what is painful but necessary. This means that IMF and World Bank loans and assistance have to come with strict conditionality. But the line between essential conditionality and excessive intervention is a fine one. In Indonesia, the IMF pushed the Suharto government hard, not just to deal with the immediate crisis, but to implement sweeping structural reforms. President Suharto interpreted this as a threat to his own position, and treated the IMF as an opponent rather than an ally. This contributed to a collapse of confidence, political turbulence, and finally Suharto’s resignation in May 1998. Whether or not the IMF intended this outcome, it helped to precipitate a decisive and momentous change in Indonesia, the consequences of which are still unfolding. Singapore’s approach Let me now turn to Singapore’s experience in navigating through the crisis and preparing itself to meet the challenges of globalisation, especially in the financial sector. Singapore is not entirely typical of the region. We are a small, open economy, about half the size of the Swiss economy, and heavily reliant on foreign trade. We are also a financial centre in Asia, and therefore highly exposed to disturbances in the international financial system. So it is not surprising that Singapore was affected by the Asian crisis. Our GDP growth plunged from 8.4% in 1997 to 0.4% in 1998. Retrenchments went up sharply. Our stock market fell, in line with regional markets.
One of the lessons of the global financial crisis was just this – that we need to deepen our understanding of the workings of financial markets and the links between the financial sector and the rest of the economy. Having said this, I would like to stress that these are by no means issues that only came to the attention of central banks for the first time after the financial crisis. Over the years, the Riksbank and other central banks have on a number of occasions had reason to consider how various financial developments should affect monetary policy. However, these thoughts have been more based on intuition than on a concrete analytical framework. Research on these issues has literally exploded in recent years, so hopefully we will make some progress in the period ahead. But until a practically useful analytical framework is in place, I at least believe that there must be scope to put forward arguments without necessarily having to be able to translate these into exact probabilities or precise numerical effects on inflation and the real economy. If we are worried by certain developments we cannot, as I see it, refrain from taking action just because certain things are difficult to quantify or cannot be fit into a simplified, theoretical or conceptual framework for how monetary policy should be conducted. We cannot take a time-out and wait for research. This is an area with enormous potential costs for society. So I think a precautionary principle must apply.

4  A number of recent cross-country studies have documented the substantial and long-lasting effect on output of past recessions caused by banking crises. That is illustrated in Chart 6. The dark blue line shows the mean fall in output relative to a continuation of the pre-crisis trend (calculated omitting the three years preceding the crisis) across 88 previous systemic banking crises in advanced and emerging market economies. The average decline in output, relative to a continuation of the pre-crisis trend, is around 10% and remarkably persistent, suggesting that ultimately aggregate supply follows aggregate demand down, even if it does not fall immediately. The UK experience (red line) has so far been fairly similar to that average past experience, although the most recent quarterly outturns have been somewhat  4  See, for instance, the IMF’s October 2009 World Economic Outlook and Carmen Reinhart and Ken Rogoff, This Time Is Different. 4  BIS Review 142/2010  stronger than one might have expected. Chart 6 also reveals, however, a very marked heterogeneity across episodes, with the blue swathe covering the central 50% of the distribution of outcomes and the grey swathe 90% of the distribution; a substantial permanent loss in output is by no means pre-ordained. There are a variety of ways that a banking crisis might impair an economy’s supply capacity. Reduced availability of credit and lower activity are both likely to depress investment, which has indeed fallen sharply.
(2008). 12  The relevant literature tries to integrate standard or workhorse models of financial frictions (such as the Bernanke-Gertler (1989) model of the financial accelerator and the Kiyotaki-Moore (1997) model of credit cycles) into a New Keynesian “sticky” price model. Examples of this literature include Bernanke, Gertler and Gilchrist (1999), Curdia and Woodford (2009) and Gertler and Kiyotaki (2010). The only way the addition of a financial sector “matters” in these models is if we contemplate exogenous shocks to the financial friction itself. That is not very instructive. Several interesting papers presented at a Federal Reserve conference in Washington in March 2012 analysed a wide variety of potential “financial frictions” that might create externalities that would justify a policy intervention. My concern is that there seems no limit to the ingenuity of economists to identify such market failures, but no one of these frictions seems large enough to play a part in a macroeconomic model of financial stability. So it is not surprising that it has proved hard to find examples of frictions that generate quantitatively interesting trade-offs between price and financial stability – the finding in these models is that overwhelmingly the most important objective remains stabilisation of inflation. 13  Focussing on small deviations around the linearization of the steady-state of a dynamic stochastic general equilibrium model helped to divert attention away from the gradual build up of big risks.

1 But did we pay too high a price for this achievement in lowering inflation? After fifteen years of apparent success, the past five years of financial crisis and turmoil in the world economy have raised serious questions about the adequacy of inflation targeting. We don’t have to look far to see that the costs of financial instability are huge. In Britain, total output is today some 15% below an extrapolation of its pre-crisis trend, and that gap is likely to persist for some time yet. 2 In the light of such costs, should monetary policy go beyond targeting price stability and also target financial stability? And should the present financial crisis lead us to question the intellectual basis of monetary policy as practised in most of the industrialised world today? Those questions are the subject of tonight’s lecture. The story of inflation targeting But let us start at the beginning. Shortly after the adoption of inflation targeting, my predecessor but one, Lord Kingsdown (Robin Leigh-Pemberton as he then was), gave an important speech at the London School of Economics – indeed in this room – entitled “The Case for Price Stability”. 3 I remember it vividly – for I had been involved in drafting it. It was an exciting time; we were reconstructing British monetary policy after the trauma of forced exit from the ERM. In those days, of course, the Chancellor set monetary policy and the Bank of England played only a behind the scenes role.
Money market reform has made the prime money market mutual fund industry smaller and safer. The elimination of the net asset value convention for institutional prime money market mutual funds has made these funds smaller and less prone to runs during times of crisis.3 The tri-party repo system has been made more stable as intraday 4 4/7  BIS central bankers' speeches  exposures of the large clearing banks have been dramatically reduced.4 This means that they have less reason to back away from a firm if it were to become troubled. And, firms are much less reliant on short-term wholesale funding. We have also reduced the amount of risk in the system by requiring that most standardized OTC derivatives be cleared through CCPs, where multilateral netting occurs.5 In a centrally cleared regime, major intermediaries have net exposures to individual CCPs that replace much larger bilateral exposures to other financial intermediaries. Of course, this means putting more eggs in the CCP basket. So, it is particularly important now to closely watch that basket.6 Greater oversight of CCPs is necessary to ensure that they have good governance, sound risk management, robust technological infrastructures, and adequate liquidity support. In addition, we have made considerable progress in developing a viable resolution regime for large, systemically important banks and securities firms. More work is still needed Yet, we should not be complacent, as there are important areas where our work is not complete.7 Relative to other countries, the United States has limited ability to implement effective macroprudential tools.

There are two essential requirements: the ability to initiate an effective resolution strategy over the weekend, and a government entity—be it the Federal Reserve or the FDIC—that can provide a credible liquidity backstop to the recapitalized entity when it opens for business on Monday morning. If resolution cannot be accomplished in this timeframe, confidence would suffer and there would be contagion. Without a credible liquidity backstop, clients and counterparties would run, making it much more difficult for the recapitalized firm to conduct its business. I would also preserve the authority of the FSOC to designate non-banking firms as systemically important and subject to supervision by the Federal Reserve. As I see it, the designations of GE Capital and AIG were successful in two important respects. First, Federal Reserve supervision resulted in improved corporate governance and risk management. Second, it created incentives for the firms to alter their operations to become less systemically important in order to be dedesignated. We should also retain this designation tool because we cannot predict which firms and activities may emerge and become systemically important in the future. After all, I do not think many were focused on or worried about the activities of AIG’s Financial Products Group several years before the financial crisis, though in retrospect those activities proved to be systemically important. That part of the firm should have been better supervised and regulated.