samchain/econo-pairs-v1 huggingface dataset:
Maja Kadievska-Vojnovik: Recent developments in central bank governance, accountability and transparency as core drivers for effective financial supervision and the importance of board effectiveness for banks and central banks Speaking note by Ms Maja Kadievska-Vojnovik, Vice-Governor of the National Bank of the Republic of Macedonia, at the Conference “Central Bank and Supervisory Governance”, organized by the Netherlands Bank, Amsterdam, 12 February 2016. *  *  *  At the beginning of 2016, the global economy looks set to enter another challenging year ahead. The risks for policymakers remain multifaceted as global transitions continue with adjustments happening on multiple fronts. First source of vulnerability is China as it transits from earlier main engine of global economic growth to a new phase of growth rebalancing, that is almost certain to result in a major slowdown internally and adverse spillovers externally through the trade linkages and prices of commodities. As second, is the protracted period of low commodities prices straining growth prospects for commodities exporters, including some major emerging markets like Brazil, Russia and South Africa. Third front is Europe that along with the debt crisis, now faces another challenging struggle to effectively manage the migrant crisis that has brought to a test the EU’s absorption capacity and the political system. Fourth, the US FED has launched the normalization of monetary policy leading to a policy divergence in advanced economies and building fears of potentially tighter financing conditions and declining capital flows that may adversely affect emerging market economies.

There has always been a considerable risk from having a large share of the nation’s wealth linked to a single commodity. But this share has fallen. Only a decade ago, oil and gas reserves made up two-thirds of Norway’s petroleum wealth. Today that share has dropped to about a third. Our aggregate wealth has become more diversified, which means we can tolerate slightly higher volatility in our financial wealth. The Government has today announced that it will propose an increase in the equity allocation in the oil fund to 70 percent. At the same time, the estimated expected real return on the oil fund is adjusted down to 3 percent. The choice of equity allocation is an important decision. But an even more important choice is the level of oil revenue spending. Fluctuations in the value of the fund present challenges for fiscal policy and for the fiscal rule. Let me comment somewhat further on this issue. The oil fund and the fiscal rule have long been important pillars of Norwegian economic policy. One key goal has been to preserve large parts of our petroleum wealth for future generations. There has also been an explicit desire to shield the Norwegian economy from swings in oil prices. Allow me to quote from the Revised National Budget for 1995: “Revenues from the petroleum sector vary more over time than other revenues.
Given our forecast of stable prices and a still slow path back to full employment, there is an argument for easing further. But, unfortunately, our tools have costs associated with them as well as benefits. Thus, we must weigh these costs against the benefits of further action. As long as the U.S. economy continues to grow sufficiently fast to cut into the nation’s unused economic resources at a meaningful pace, I think the benefits from further action are unlikely to exceed the costs. But if the economy were to slow so that we were no longer making material progress toward full employment, the downside risks to growth were to increase sharply, or if deflation risks were to climb materially, then the benefits of further accommodation would increase in my estimation and this could tilt the balance toward additional easing. Under such circumstances, further balance sheet action might be called for. We could choose between further extension of the duration of the Federal Reserve’s existing Treasury portfolio and another large-scale asset purchase program of Treasuries or agency mortgage-backed securities. Conversely, I would be willing to consider tightening policy at a somewhat earlier stage if growth strengthened sufficiently to materially improve the medium-term outlook and substantially reduce tail risks, or if there was evidence of a genuine threat to medium-term inflation, including a rise in inflation expectations. In such a case, I would anticipate that the first step would be to bring in the late 2014 date of the policy guidance.

To generate this estimate we first need to estimate how much long-term rates have been pushed down because of the Federal Reserve balance sheet programs. Although there is considerable uncertainty, New York Fed staff has estimated that the Fed’s programs have pushed down the term premium by about 50 basis points. The question then becomes how much would the federal funds rate have to fall to generate the same result? That depends on how changes in the federal funds rate pass through to longer-term interest rates. If reductions in the federal funds rate were viewed as permanent, then the pass-through would presumably be 1 to 1. However, if the federal funds rate reductions were viewed as fully transitory, then there would be virtually no pass-through. Econometric estimates indicate a value of about 4 to 1, a four basis points reduction in the federal funds rate would lead to a one basis point reduction in long-term rates. However, this degree of pass-through seems too low in the current environment in which the reductions in the federal funds rate have been in place for some time and are expected to continue for several more years. If one assumes a parameter value of 3 to 4 and uses 50 basis points as the estimate of the balance sheet impact on longer-term rates, then this implies that these actions have been equivalent to a 150 to 200 basis point reduction in the federal funds rate currently.
But this equilibrium could be unstable in a different inflation environment. Indeed, markets seem to be aware of some inflation “tail risks” and are hedging against these risks through gold and the CHF, whose prices have reached historical highs. In the Euro Area, we consider that any lasting backstop has to come from governments. This is why we have been asking for a speedy implementation and greater flexibility in the EFSF and very much welcome decisions taken in this regard in July and in October. At this stage, therefore, the euro area is paying a double price. One for its mistakes and one for its virtues. The mistakes, for governments, was to allow the piling up of debt through unsustainable fiscal policies over a decade, and then to create ex nihilo a doubt as to their willingness to pay those debts. And we are also paying the price for our virtue and our refusal to liquefy public debt through massive monetization of our fiscal deficits. I believe that virtue will eventually be rewarded. In the next decade, markets and lenders will trust those currencies that, whatever the circumstances, are managed with one overriding priority: preserving price stability and the intrinsic value of the currency unit. On this fundamental basis, we can look at the future of the euro with strong and realistic optimism. I see the recent decision by the Swiss central bank to peg the CHF to the euro as a confirmation of this statement.

In current, unstable circumstances, what role should the central bank play? Monetary policy should certainly stick to its mandate and ensure price stability in the medium run. In Europe, with financial conditions tighter as a result of the explosion in sovereign spreads, increased uncertainty and loss of confidence, – as shown by the fall in most indicators – there are now more downside risks to price stability. It was therefore appropriate to lower our policy rates by 25bp, a decision reached unanimously by the Governing Council. Second, we need to ensure that the banking system has access to liquidity –what is sometimes called the role of lender of last resort of the central bank. In this respect, the  BIS central bankers’ speeches  3  Eurosystem has confirmed its policy of providing unlimited liquidity – at fixed rates – to the banking system until at least until the end of Q2 2012. Collateral policy has been adjusted to avoid the shocks and liquidity squeezes borne out of rating changes. Dollar funding, based on the existing swap with the Federal Reserve, has also been made easier. Finally, in a period of intense market disruption, it is essential to ensure that the monetary policy transmission mechanism actually works. This may involve temporary and exceptional interventions on those market segments where dysfunctions are most apparent. This is the purpose of the Securities Markets Program (SMP), initiated in May 2010 by the Eurosystem.
In 2014 and 2015, we could see that inflation in Sweden had developed so weakly that confidence in the inflation target risked being undermined. Powerful monetary policy stimulus was required to reverse the  I would like to thank Björn Lagerwall for help with writing this speech, Emelie Theobald for help with the diagrams, Gary Watson for translation into English and Charlotta Edler, Martin Flodén, Jesper Hansson, Per Jansson, Anna Lidberg, David Kjellberg, Cecilia Roos Isaksson, Peter van Santen, Marianne Sterner, Ulf Söderström and Anders Vredin for valuable comments. *  1 [13]  trend. In addition to lowering the interest rate below zero, we have also purchased large volumes of government bonds. We now see that inflation has been close to target for a longer period, while confidence in inflation remaining around the target has been strengthened, illustrated by the fact that inflation expectations have been around 2 per cent in recent years (see Figure 1). Figure 1. Inflation close to 2 per cent and confidence in the target has strengthened Inflation around 2 per cent ...  … and confidence in the inflation target has strengthened  Note. Left-hand graph. Annual percentage change in the CPIF. Right-hand graph. Inflation expectations among all participants, per cent, mean values. Sources: Statistics Sweden and TNS Kantar Prospera  Economic activity abroad remains healthy, despite growth having recently slowed somewhat.

The estimated interest rate they use in the calculation is on average around 7 per cent, which is some way above a long-term normal level, which can be assumed to be between 4.5 and 6 per cent. 7 Calculations done by the Swedish financial supervisory authority, Finansinspektionen (FI), on a sample of new mortgage holders show that only just over 5 per cent of households have a deficit in their discretionary income calculations if the mortgage rate rises to 7 per cent. 8 There is hence nothing to indicate that the household sector as a whole would encounter significant problems in paying their interest expenses even if interest rates were to rise substantially in relation to their current levels. And, as I said earlier, our forecast indicates extremely limited rate increases in the years to come. But when the rate rises, many households might have to adapt their consumption to cope with the increased interest payments. From a macroeconomic and monetary policy perspective, it is therefore important to understand how household consumption is affected when interest rates change. 7 I have assumed a mark-up on the mortgage rate of 2 percentage points over the interval for the long-term repo rate of 2.5-4 per cent. 8 See Finansinspektionen (2018), “The Swedish mortgage market”.
The experience of recent years shows that Norges Bank must take into account the fundamental conditions for exchange rate stability over time. The krone is influenced by unrest in international financial markets, changes in oil prices, inappropriate fiscal policy responses and high cost increases peculiar to Norway. Norges Bank cannot fine-tune exchange rate movements through exchange market interventions. This means that the krone exchange rate will fluctuate. It is up to Norges Bank to evaluate the best means of returning the krone to its initial range. This also means that the Bank must exercise a large degree of discretion when using the Bank’s instruments, essentially the interest rate. In exercising its discretion, Norges Bank emphasises the fundamental conditions for exchange rate stability. There are two fundamental conditions necessary for achieving stability against European currencies. BIS Review 20/1999  12  First, price and cost inflation must fall to the level aimed at by euro area countries. A high rise in prices and costs will in itself fuel depreciation expectations. Monetary policy must therefore be oriented with a view to bringing price and cost inflation in Norway down to the inflation target in Europe. As illustrated in the chart, price inflation in Norway has been about 1% higher than in euro area countries over the last two years. Wage growth differentials are even wider. In this situation, pressures in the economy require a relatively tight monetary policy, as is the case today.

The 1999 national budget estimates that in 20 years the central government’s net wealth will have risen to 120–130% of GDP. Financially, the state will thus be well equipped to cope with the higher expenditure associated with an ageing population. So far this year, the oil price has averaged slightly more than NOK 80 per barrel. The chart shows allocations to the Petroleum Fund with oil prices of NOK 110 and NOK 90 per barrel in the years ahead. An oil price of NOK 90 will alone result in a substantially smaller surplus than previously anticipated. In this scenario, the Petroleum Fund will peak at 75% of GDP in 2015. The bottom line in the chart shows a different scenario. We are still assuming an oil price of NOK 90 per barrel – in other words, one that is not especially low under present circumstances. In addition, we have assumed a further reduction in the budget surplus, equivalent to 0.5% of GDP, each year for the next 10 years. The combined effect is that after 10 years the budget surplus will have declined by about 5% of GDP compared with the other calculations. BIS Review 20/1999  14  This may seem substantial, but is no greater than the changes in the budget balance that we have seen previously. In the previous downturn, the government reduced its surplus by slightly more than 5% by means of an active countercyclical policy – and that was only during a five-year period.
While these banks have the skills and experience to do the job, even their resources are not inexhaustible. There may be a case to spread the role of lead bank more widely, or at least for banks to make a bigger contribution in steering committees. Steering committee members should strive to represent the interests of the bank group as a whole rather than their own interests. The representatives of banks on steering committees should also have the right level of knowledge and experience to understand the issues and to make a real contribution to driving the process along. They should also of course turn up to meetings in the first place. *  Fourth, banks need to be able to respond more quickly to restructuring proposals that are presented to them for approval. At present, it seems that the decision-making process can get bogged down in internal bureaucracies within banks, particularly when proposals have to be sent to head office for approval. While decisions are delayed, companies can bleed to death. *  Finally, and I realize that this is a contentious point, banks should be realistic and pragmatic about what they can expect to get out of restructuring. While they should obviously be trying to extract the best possible deal from the company and its shareholders, this should not be at the expense of jeopardizing the company’s future business viability. All this results in a process which is often more protracted than it need be.

To our guests who have travelled from far, I wish you a very pleasant stay in Kuala Lumpur. 2  BIS Review 129/2009
We have been helped by good luck, in terms of favourable terms-of-trade shocks and a relatively flexible labour market, which has allowed labour supply to grow. The economy was fairly robust when the financial crisis hit in 2008, in sharp contrast to our situation back in the 1980s. A more robust policy framework has improved the functioning of the economy. The Act relating to the Government Petroleum Fund was passed in 1990. At the time, in the midst of a deep recession, many doubted that any petroleum revenues would ever be saved. Projections indicated that offshore petroleum production would peak in the early 1990s. However, the government’s cash flow from the petroleum sector started to increase sharply, and a strategy for the management of the fund was needed. The policy guidelines were  BIS central bankers’ speeches  1  clarified in 2001, and rules governing the interaction between Norway’s petroleum wealth and fiscal policy were established: •  All government revenues from the oil sector are to be transferred to the fund. •  According to the fiscal rule, the government must only spend, on average over the cycle, the expected real return on the fund – stipulated at 4 per cent – in the annual budget. •  All of the fund’s capital is to be invested in international markets. After nearly three decades of spending the petroleum revenues more or less as they came in, the fiscal rule enabled the government to save for future generations.

At the same time, the rule made fiscal policy more robust: By decoupling spending from current petroleum revenues, the fiscal rule provides for a gradual and sustainable phasing-in of petroleum revenue spending. The guidelines ensure the necessary flexibility to allow automatic stabilisers to work, and they allow for careful countercyclical policy. The savings plan has remained intact and the Fund has now reached a size of nearly NOK 4 trillion, or 130 percent of GDP. When the fiscal rule was introduced in 2001, Norges Bank was charged with the task of keeping inflation low and stable. Thus, our traditional fixed exchange rate policy was abandoned. A clear division of responsibilities between monetary and fiscal policy was now established. Norges Bank’s conduct of monetary policy is geared towards low and stable inflation. The operational target of monetary policy is consumer price inflation of close to 2.5 per cent over time. When setting the key policy rate, we also take into account the impact of the interest rate on output and employment. In addition we give weight to the risk that a prolonged period of low interest rates can lead to elevated risk-taking and excessive debt accumulation in the household and business sectors. Inflation targeting has become more flexible. The present economic situation in much of the rest of Europe stands in contrast to ours. In Norway, domestic activity is high, and particularly so in the oil industry and the construction sector. Unemployment remains low and stable. But the Norwegian economy is not unaffected by the turbulence abroad.
Some of the variation is due to differences in credit risk across countries owing to very different economic situations. Additional risk premiums may reflect fears that one or more countries might at some point have to replace the euro with a new local currency. ECB President Mario Draghi has referred to these as convertibility risk premiums. One of the objectives of the OMT programme is to reduce this premium and restore the proper transmission of monetary policy. The OMT programme can be regarded as an answer to the signs of financial market fragmentation in the euro area. Differences in financial conditions across countries have become considerable and the willingness to provide loans across national borders has declined. The same picture is reflected in the so-called TARGET2 balances. TARGET2 is the central interbank settlement system in the euro area. In all countries, interbank payment settlement is carried out by the national central bank. One bank’s payment to another is settled by adjusting the two banks’ deposits in the central bank. Central bank reserves are the means of interbank payment. In the euro area, interbank payment settlement takes place in two stages: banks have their settlement account in the national central bank, while each country’s central bank has, in turn, an account at the ECB. If, for example, deposits are transferred from a Greek bank to a German bank, the Greek bank’s deposits in the Greek central bank are reduced, while the German bank’s deposits in the Bundesbank increase by the same amount.

The risk of inflation can only arise if growth in the monetary base coincides with an increase in the broader monetary aggregates through higher customer deposits in banks. For the broader monetary aggregates to  6  See for example speech by Federal Reserve Chairman Ben Bernanke: “Monetary Policy since the Onset of the Crisis”, the Federal Reserve Bank of Kansas City Economic symposium, Jackson Hole, Wyoming, 31 August 2012. See also speech by Spencer Dale, Chief Economist at the Bank of England: “Limits of monetary policy”, http://www.bankofengland.co.uk/publications/Pages/speeches/2012/597.aspx  BIS central bankers’ speeches  3  increase, banks must increase lending or purchase securities from enterprises outside the banking sector. Since the crisis in 2008, the monetary base in Europe and the US has grown considerably more rapidly than the broader monetary aggregates. The risk of high inflation in such a situation should be viewed in the context of central bank exit strategies. In the future, central banks will want to reverse the extraordinary measures that have resulted in substantial growth in the monetary base. This will normally be done when the crisis is over and the economy is recovering. Third, the large sums of money involved may also affect exchange rates. Even if central banks do not intervene in exchange markets directly, the measures may in the short term reduce the value of the currency issued by a central bank. This will, in isolation, strengthen exchange rates in countries that were initially less severely hit by the crisis.