samchain/econo-pairs-v1 huggingface dataset:
The central bank does not thus attempt to compensate for the previously low inflation with a period of inflation above the target. If firms and households consequently believe that inflation will be very low in the short term and thereafter equal to the inflation target, then the average expectations in the slightly longer term will still be low and under the target. In such circumstances, with a zero interest rate, the real interest rate may still be too high even if the inflation target is credible in the longer term. One way to avoid this disadvantage is instead to have a so-called price level target, or what may also be referred to as “average inflation targeting”. A credible price level target A price level target in the form of a path for the price level, in which the rate of increase in the price level is given by the inflation target, has several advantages compared with a standard inflation target in a situation with a zero interest rate. Unlike an inflation target, a price level target has a “memory” in the sense that lower inflation or deflation during a period of time whereby prices fall below the target path will be compensated for by a correspondingly higher inflation in a later period to attain the price level target path once again. If the price level target is credible, the long-term inflation expectations will be stable, even if low inflation or deflation is expected in the short term.

If prices have already fallen below the price level target, a credible price level target will lead to short-term expectations of inflation rising above the long-term average. With an unchanged nominal rate the real interest rate will then fall and the real economy will be stimulated. A credible price level target will thus entail an inherent automatic stabilisation in a situation with a zero interest rate. 7 A price-level target can be seen as an average inflation target for a longer period of time, for instance five years. 8 In a case where there is a risk that inflation will be too low, or even negative, for a couple of years it may be appropriate, in order to avoid the disadvantage with a standard inflation target that I mentioned above, to tighten the inflation target and temporarily interpret it as a target of 2 per cent for average inflation over the next five years, for example. This would mean that the central bank would then compensate for low inflation during the first years with higher inflation in the subsequent years so that the five-year average is on target. The Australian central bank, the Reserve Bank of Australia, actually formulates its target in this  7  For a few years beginning in 1931 the Riksbank had a price level target, after leaving the gold standard. To date, the Riksbank is the only central bank in the world to have had an explicit price level target.
BIS Review 86/1998  -3-  The basic financial analysis that is the foundation of the credit process may be affected by changes in both customer and counterparty behavior. For example, a lesson we have learned from the current turmoil is how complex the concept of leverage is in today’s markets, where leverage roughly describes the ratio of risk to capital. Where leverage once could be measured directly from the balance sheet, we’ve become aware that leverage can be achieved in a number of ways. These include holding a high-risk portfolio of assets, engaging in extensive derivatives trading, especially if it involves options, funding domestic currency assets with foreign currency liabilities, investing in long-term assets with short-dated funding and pursuing a high-risk business strategy. All of these effectively can create leverage. A related lesson learned is that collateral can mitigate credit risk, but it cannot eliminate it. One reason is that posted collateral inevitably lags movements in market prices and recognition of credit issues. In trading agreements, for example, gaps between the amount owed by the customer and the amount of collateral pledged develop surprisingly quickly. One costly solution is to hold large amounts of excess collateral, but that is most often unacceptable to the counterparty. Similarly, when the collateral is real estate, equities or high-yield securities, a gap can open up between the amount owed and the value of the collateral whenever the price of the collateral declines. We have seen both problems in the current turmoil.

In a similar vein, the sharp deterioration of the fiscal positions of many governments has also led to a re-assessment of sovereign risks. About 10 years ago, investors were concerned that the strong budget surplus of the US Federal Government might lead to a severe reduction in the supply of US Treasuries. Today, bond vigilantes are focusing attention on not just the short term fiscal health of governments, but on the impact of demographic changes, large entitlement benefits and unfunded pension liabilities on the longer-term fiscal health of these governments. 7. My third observation is the speed of structural changes in emerging economies and transformation in the patterns of global trade and investment. As these are superimposed on cyclical changes, it is often difficult to disentangle the two. Emerging markets, especially Asia, have weathered the crisis relatively well, and recovered quickly. This year, the IMF expects emerging Asia to grow by nearly 7%, almost double the rate forecast for the global economy as a whole. Many analysts expect the differential in growth rate to persist in the coming decade. The global economy went through stagflation in the 1970s, disinflation in the 1980s, and a roaring decade in the 1990s. In 2000s, we had the dotcom bubble, and a severe financial crisis. How the coming decade will turn out, especially for emerging economies, will change many of the risks and return assumptions on a wide range of asset classes. Dealing with the implications 8.
I regret this somewhat as it would have been useful for us. Is the French banking system still sufficiently robust? In fact, French banks are increasingly robust as they are reducing their risks and increasing their capital. The reduction of risk has resulted from the selling-off of business lines, often abroad, and a scaling-back of some market activities; the increase in their capital reflects the setting aside of profits that remain substantial thanks, in particular, to the resilience of retail banking in the face of the economic slowdown. Their core tier 1 capital grew by 0.5 percentage point in the second quarter and they have exceeded the target set by the EBA. In terms of liquidity, they have managed very well the withdrawal of US money market funds last year by adjusting their assets, as well as the rebalancing of their sovereign bond portfolios. This goes to show that, if it is based on a sound internal model, the universal banking model works well. 2  BIS central bankers’ speeches  Do you remain opposed to the separation of investment and retail activities? I really do not understand the benefit of this principle of separating activities. The only thing I wish to see is the outright prohibition of speculative activities and stronger internal controls for the risks associated with market activities. Otherwise, banks should be able to serve their customers, whether they are private individuals, companies or institutions, in all of their operations – on bond markets, forex and hedging operations, and creating savings products.

  Banks become dependent on optimal market functioning at all times and on the confidence of market participants. BIS central bankers’ speeches  1  If this process goes too far, an external shock could turn a situation of vulnerability into a crisis. This is what is referred to as systemic risk – the risk that shocks will weaken the functioning of the financial system, rendering it unable to provide funding, execute payments or redistribute risk effectively. Systemic risk can build up over time through a rapid rise in asset prices and debt and in the form of increasing interdependence among institutions. Or systemic risk can build up when many institutions are exposed to the same risk factor, for example on the funding side. Vulnerability also in Norway A financial crisis can be triggered by domestic conditions or it can be triggered by external factors. This time, the crisis came to Norway through external channels. International funding channels dried up, creating a liquidity crisis in the Norwegian banking sector. We can never fully insulate the financial system from shocks. But we can increase our resilience. One of the ways we can do this is by keeping our own house in order – by preventing major imbalances from building up in the economy or in the financial system, and by ensuring that the financial system in general is robust. We will then also be capable of withstanding disturbances generated by external conditions.
Particularly notable was the higher inflation in components relating to expenditure on transport, household equipment and maintenance and, especially in Spain, recreation, hospitality and tourism.4 The economic projections for the euro area have undergone significant revisions, with growth revised down and inflation revised up The recent escalation in the energy dispute with Russia has cast a shadow over the economic picture. This leads us to believe that the inflationary episode will be more intense and longer lasting, and that the economic growth outlook for the euro area will continue to soften. These circumstances have led to a significant revision of the economic outlook for the euro area in the ECB’s latest projections exercise. These forecasts include the surprises in terms of inflation and activity, and also the potential impact of the escalation of the energy dispute with Russia, as well as a revision of other technical assumptions, such as a greater depreciation of the euro. In this respect, one of the main changes in the ECB’s September projections exercise compared with that published in June are the assumptions relating to gas prices. First, the outlook for gas prices is revised up in accordance with gas futures prices. Second, and for the first time, a degree of gas rationing, albeit moderate, is assumed. This would be more significant in the countries that are most heavily dependent on Russian natural gas imports, which could even see some production cuts in the winter.

The full reopening of European economies after two summers of pandemicrelated restrictions has unleashed strong demand for leisure, hospitality and tourism. Accordingly, euro area GDP rose by 0.8% in the second quarter, compared with 0.7% in the first quarter, outstripping the 0.2% projected in the Eurosystem’s June forecasts. The growth in GDP in the second quarter was higher than anticipated in many euro area countries, and especially in Spain and Italy which both saw an unexpected surge in private consumption. However, the reopening effects are expected to dwindle and economic growth to slow in the short term, in view of households’ loss of purchasing power, the energy crisis, weaker global demand, tighter financial conditions as a result of the monetary policy normalisation, and the highly uncertain economic and geopolitical setting. Indeed, the latest data for the third quarter point to a rapid economic slowdown in the euro area countries. The Purchasing Managers’ Indices (PMIs) signal a contraction in manufacturing in the big euro area economies in the third quarter, while the PMI services index points to a considerable slowdown, with a contraction in Germany and Italy. Thus, the gas market developments described above contrast with developments in other commodities – such as oil and non-energy goods – whose prices have tended to moderate since the summer owing, among other factors, to the prospects of a global economic slowdown.
As I just noted, the crisis clearly demonstrated the added importance of liquidity, as the firms that failed appeared to have been appropriately capitalized based on traditional regulatory metrics at the time. Moreover, I strongly favor a system of capital and liquidity requirements that is harmonized on a global basis. Some believe that the United States should no longer participate in international forums—such as the Basel Committee on Banking Supervision—that discuss and recommend minimum capital and liquidity standards for global banking institutions. The argument is made that these international bodies are dictating to and constraining the choices of the United States. That is simply not the case. The Basel standards and other international efforts actually benefit the United States and its banks. In the preponderance of cases, agreements struck in these forums raise international standards closer to existing U.S. standards. Establishing a more level playing field enhances the competitiveness of internationally active U.S. firms. It also makes the global financial system safer by ensuring that foreign banks are subject to appropriate standards that cover their global operations. This protects the U.S. households and businesses that transact with these banks in the United States and abroad.2 Also, it is important to note that the recommendations of these international standard-setters are not automatically legally binding in the United States. They do not go into effect unless they are adopted by a U.S. authority acting under U.S. laws following an administrative process. They are also subject to a period of public notice and comment.

While we do not yet have evidence of how these reforms will hold up during the next economic downturn, many have been in place long enough that we can begin to evaluate their efficacy. In such an evaluation, we should keep in mind the three goals I mentioned in my introduction. First, we must ensure that the probability of failure for a systemically important firm is exceedingly low. Such a failure can lead to contagion that can damage a broad set of financial market participants, and impede the ability of the financial system to support the economy. The failure of a single systemically important firm—because of its size and interconnectedness—can significantly weaken the entire financial system. We saw this firsthand following the failure of Lehman Brothers. Second, if a systemically important firm does fail, we must have mechanisms in place to minimize the damage to the rest of the financial system. While we can make individual firms stronger, more robust and less prone to failure, I expect that there will still inevitably be failures in the future. In principle, we could make individual institutions completely bulletproof in all possible environments. However, this would require such high levels of capital and liquidity that it would likely make them uncompetitive in their ability to provide financial services to their customers. 2/6  BIS central bankers' speeches  Third, we must keep in place the structural changes that have made the global financial system less vulnerable to adverse shocks.
Moreover, the optimal monetary policy in these models looks rather like flexible inflation targeting: the central bank aims to offset completely shocks to aggregate demand, but accepts temporary movements in inflation in the face of shocks to supply so as to limit the volatility in output. Financial intermediaries are conspicuous by their absence in these models. That is not to say that mainstream macroeconomists and monetary policy makers ignored financial considerations altogether. It had been long understood that financial frictions could affect both the evolution of the economy and the monetary transmission mechanism. But these frictions typically served merely as modest amplification and propagation mechanisms, rather than a potential source of fundamental disturbance to the economy. One example is the “financial accelerator” arising from monitoring costs which give rise to a relationship between the external finance premium paid by a borrower and their financial health (see Ben Bernanke, 1983). The behaviour of intermediaries was thus seen as being of marginal relevance to the understanding of macroeconomic fluctuations. And many analyses ignored financial imperfections altogether, assuming that that the transfer of funds from savers to borrowers was both frictionless and efficient. To see why the behaviour of financial intermediaries is potentially so important, note that most financial crises have been characterised by two features. The first is an excessive expansion of credit during the prelude to a crisis, perhaps prompted in the first instance by some innovation4 or other beneficial economic development.

The second is a mismatch between the maturities and/or currencies of the assets and liabilities on either side of the balance sheet. Consider a simplified bank balance sheet, shown in Chart 4, with the bank’s holdings of loans, securities and reserves financed by a mixture of: (insured) deposits; other debt of various forms, including borrowing from other financial institutions collateralised against the bank’s assets, repurchase agreements, unsecured bank debt; and finally equity capital. This last category is the initial absorber of unexpected losses and is a key determinant of sustainable balance sheet size and thus of the supply of credit to the economy. That is, by the way, rather different from the standard textbook model, in which banks’ holdings of reserves and loans are financed solely by deposits and the size of the bank’s balance sheet  3  This could come about through: conventional asset substitution; an attempt by investors, such as pension funds, to maintain returns in order to match their commitments (Raghuram Rajan, 2005); or a movement down the risk spectrum as banks expand loans in order to maintain leverage as the value of their existing assets, and therefore also of bank equity, rises (Tobias Adrian and Hyun Shin, 2009). 4  Though Adam Posen (2010) notes that equity booms precipitated by technological innovations are typically less costly than real estate booms. BIS central bankers’ speeches  3  is determined by the product of its holdings of reserves and the money multiplier.
What in practice central bankers everywhere have to do is to try to keep aggregate demand growing consistently over time broadly in line with the underlying, sustainable, rate of growth of supply. And consistently low inflation is essentially the measure of our success in achieving that. Yes, we are all  BIS Review 76/2001  1  aiming for effective price stability, certainly. But that is not simply a doctrinaire end in itself - as is sometimes suggested, though not often here in Germany. It is a reflection, if you like, of our broader aim of achieving macro-economic stability in the much wider sense of a sustainable balance between aggregate demand and underlying supply. Insofar as we succeed in that aim we can hope thereby to moderate rather than aggravate cyclical fluctuations in the economy, and to remove much of the nominal uncertainty and related short-termism from economic decision-making. To that extent we can help indirectly to improve the supply-side performance of our economies. This is essentially the thought that underlies the universal central banker's mantra that "Price stability is a necessary condition for sustainable growth", not to mention sustainable high levels of employment and rising living standards, which are, of course, the really good things of macro-economic life. Now it is relatively easy to explain in these terms what we are trying to do. Actually doing it is a good deal harder!

9  Giavazzi, F. and F.S. Mishkin (2006), “An evaluation of Swedish monetary policy 1995-2005”, Reports from the Riksdag 2006/07:RFR 1, Committee on Finance. 6  BIS Review 8/2007  I hope that I have been able to give you an insight into how our monetary policy strategy has developed and how it looks today. At the beginning of my talk, I said that the development of monetary policy was a learning process. In my opinion, it has to be so. We are working in a world that is constantly changing and always making new demands of us. It is only natural that we must always work on refining and improving our strategy and framework. Openness, clarity and efficient communication are important guiding principles in this process. It is also a strength to be able to learn from others’ experiences in the monetary policy field. Gatherings like this are excellent opportunities to do just that. Perhaps the Swedish experiences of monetary policy with an inflation target may in some way be useful to other countries planning to introduce an explicit inflation target? I hope so! Thank you. BIS Review8/2007  7
The important point is that the MPC’s approach then, as now, is to form an overall judgement about demand relative to supply and, as far as it can, to set the policy rate to keep the two in balance, so  1/3  that inflationary pressure is broadly constant. So with external demand very weak – and recall that by the end of 2001 world imports were actually falling – the logic of that approach pointed to leasing policy to encourage a faster growth in domestic demand. This approach worked well in the sense that it helped to ensure that the UK went on growing steadily through the world slowdown, while consumer price inflation remained close to the Chancellor’s target. But there were side effects. One was a marked increase in the UK’s trade deficit. Another was the creation of a monetary climate conducive to strong rises in house prices and consumer borrowing relative to disposable incomes – an experience shared with other countries such as Australia and more recently the United States. Together with structural and demographic trends, this has helped to push the ratio of both house prices and consumer borrowing to household disposable incomes to levels well outside the range of previous experience. If, against the background of a much flatter housing market, households now go through a period of rather subdued spending, strong external demand would help to support activity and rebalance the economy. But is that in prospect? And what are the risks?

In fact, infrastructure (b) loans tend to be “unique” rather than “common”, and each can have its own risks and corresponding mitigation structures, which would pose challenges to the 2/3  BIS central bankers' speeches  structuring, rating and assessment processes; given such unique nature of infrastructure loans, originating and managing an (c) infrastructure loan portfolio require the asset manager to possess highly specialized skillsets and experience, and the track record of the asset manager is a key assessment criterion of rating agencies as well as prospective investors; the risk appetite of many long-term investors may need to adjust over time. Over the past few years, we have seen an increasing interest among conventional long-term investors like pension funds and insurance companies in infrastructure-related (d) assets, possibly because the conventional fixed income instruments have failed to provide a decent return amidst the long-depressed yield environment. However, the appetite of such investors tended to focus on the small set of prime quality, investment grade-tranche of infrastructure loan assets, whereas many infrastructure loans may fall in the sub-investment grade domain. 8. Ladies and gentlemen, the reputation of financial derivatives was badly damaged during the Global Financial Crisis. The mortgage-backed securities, CDO, CDO2 and CDO3, etc. all got a bad name, for good reasons.