samchain/econo-pairs-v1 huggingface dataset:
Instead, the complement to that fraction – that which is due to excessive financial sophistication, abnormal risk tolerance and shortcomings in risk management – should be gone for ever. That is why my conjecture is that risk premia in a number of markets will continue to be reduced – but they are unlikely to reach the compressed levels that we saw prior to the crisis. Normalcy will probably be reached at a permanently higher level of risk compensation in a number of markets. In order to build an effective system of crisis prevention, we will all need to take on board this simple fact: compensation for risk will need to be appropriate. We shall prevent “pure” speculative activities from becoming the dominant force on the markets. And we shall build financial infrastructures with sufficient buffers to make them bulwarks against instability and resist shocks. Let me mention some striking facts about the power of such buffers. There is a widespread perception that banking crises in times when money was convertible into gold had apocalyptic consequences for bank depositors. This is not true. The estimated average loss on assets born by depositors in banks that were closed down as a consequence of financial  6  BIS Review 29/2010  crises was minuscule. Taking a yearly average between 1865 and 1920, it was six cents for every one hundred dollars of deposits. This time-frame covers five of the most severe episodes of financial panic in recorded history, most notably the 1907 crisis.

We are experiencing a simultaneous slowdown in all the leading economies. After the terrorist attacks on 11 September, moreover, there is an even greater risk of the cyclical decline being more pronounced and persistent. The almost simultaneous and marked change that occurred in the global economic climate in the latter part of last year was triggered to an important extent by rising energy prices, higher interest rates, falling stock markets and the abrupt swing in corporate investment. Weaker demand led in turn to stock adjustments and thereby to further downward effects on orders and production. At the same time, falling asset prices, not least in stock markets, tended to subdue private consumption. On top of this, the terrorist attacks entailed a loss of production in the short run and postponed a cyclical upturn. In many respects, economic activity is following the normal cyclical pattern and is therefore not all that surprising. After a long period of expansion, sooner or later activity turns downwards while the economy gathers strength for a renewed upward surge. While there is nothing exact about the succession of cyclical phases, one can say that activity has always fluctuated more or less regularly. What was unexpected, however, is the rate at which activity has slackened. The downturn seems to have been accentuated by a reaction to the excessive optimism which the technological breakthrough had generated, giving rise to the notion of a new economy.
William C Dudley: Importance of the state and local public sector for the US economy Opening remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, for the Chapter 9 and Alternatives for Distressed Municipalities and States Workshop, Federal Reserve Bank of New York, New York City, 14 April 2015. *  *  *  Andrew Haughwout and Joseph Tracy assisted in preparing these remarks. Good morning and welcome to the Federal Reserve Bank of New York. I am especially happy to welcome this group, with its focus on the finances of state and local governments. We at the New York Fed are committed to playing a role in ensuring the stability of this important sector. To this end, we supported the outstanding work of the Volcker-Ravitch state fiscal crisis taskforce. In addition, we conduct ongoing outreach activities with local officials and produce research on the subject of local fiscal conditions. We do these things because we recognize the critical role of state and local governments and their fiscal health to the overall well-being of the economy and its citizens. In my remarks today I will touch on the importance of the state and local public sector for the economy, its fiscal health and the need for proactive efforts to address the emerging fiscal stresses in the sector. As always, what I have to say represents my own views and not necessarily those of the Federal Open Market Committee or the Federal Reserve System.

The importance of state and local governments manifests itself in different ways, which are really different sides of the same coin. First, the sector directly produces a very large amount of economic activity. In 2014, state and local governments generated output valued at about $ trillion. This represents over 11 percent of total U.S. GDP and is more than 50 percent higher than the federal government’s contribution. And, even after years of retrenchment following the financial crisis, state and local governments employ almost 20 million individuals – nearly one in seven American workers. Clearly, a successful and stable state and local government sector is a vital contributor to overall output and employment. On the other side of the coin, we find the real effects of this activity: the provision of public safety, education, and health; as well as water, sewer and transportation services. These are the core public services that our citizens need, and which are absolutely fundamental to support private sector economic activity. So, as a central banker, I recognize the essential role that state and local governments play in the economy. Without successful state and local governments, the Fed’s dual mandate of maximum sustainable employment with stable prices would be much more difficult to attain. A final important dimension of the state and local sector – and the one that is perhaps most obviously front and center for today’s discussion – is its debt. The municipal bond market is very large, with outstanding issues totaling over $ trillion.
From an accounting perspective, that reflects the unprecedented weakness in productivity in recent years. The level of private sector productivity is around 15% below the level implied by a continuation of its pre-crisis trend. This weakness in productivity has meant that, despite muted pay growth, unit labour costs – the single biggest determinant of companies’ costs – have grown at or above their historical rate for much of the four years since the financial crisis. And indeed, it’s this weakness of productivity that underpins the second argument put forward for why the relationship between growth and inflation may currently be unusually favourable. The suggestion here is that the recent stagnation in productivity – and of the supply side of our economy more generally – is in large part a direct consequence of demand weakness. If only demand were to pickup, this – on its own – would prompt an increase in the effective supply capacity of companies. The economy could recover without significantly reducing the degree of spare capacity and with little or no additional inflation. 6  My MPC colleague Ben Broadbent made a similar point in a speech last year (Broadbent 2012). BIS central bankers’ speeches  5  The possibility that persistent demand weakness may erode supply capacity is not new. Indeed, it was central to the economic doldrums that characterised our economy in the first part of the 1990s.

The comparison of the public debt levels with the Maastricht Criterion as a benchmark reveals shift towards less vulnerable zone in most of the countries. In 2015, when the average government debt level reached its peak, it was below the accepted benchmark by close to 8 p.p. of GDP, while in 2019, the distance was widened to 14 p.p. and by 2024, it is expected to reach around 20 p.p. (according to the WEO, October 2019 forecast). This clearly indicates that in the last couple of years, despite the low interest rate environment, fiscal space in CESEE region was rebuilt thus reducing public sector exposure to sudden shifts in the sentiment at the global financial markets or reversal in the interest rate cycle. Still it has to be noted that the public debt level is still above the pre-crisis pone, and few of the countries, despite the adjustment, did not succeed in bringing the debt level below 60% of GDP (Albania, Croatia, Hungary, Montenegro, and Slovenia). Even more, in Montenegro the debt level has still been increasing, reaching above 80% of GDP in 2019, raising concerns related to sustainability issues. Private leverage in the region has been rising since early 2000s, albeit mostly from lower levels compared to advanced economies. After reaching the peak at the onset of the global crisis, gradual deleveraging occurred, but debt level remained elevated in comparison to the pre-crisis in many countries.
Some has in fact already been withdrawn with the return of the standard rate of VAT to 17.5% at the beginning of the month. But uncertainty about how and when fiscal policy will respond has a direct bearing on monetary policy. And markets can be unforgiving. As Federal Reserve Chairman Bernanke said recently about the similar fiscal position in the United States, “near-term challenges must not be allowed to hinder timely consideration of the steps needed to address fiscal imbalances. Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy  4  BIS Review 4/2010  economic growth”. The Chancellor has made clear that the Spring Budget provides the opportunity to do precisely that. Over the past year, the UK economy has battled against the headwinds of an intense monetary squeeze and a sharp fall in world trade, supported by the tailwinds of a huge policy stimulus and a lower exchange rate. At this very early stage of the recovery, it is particularly difficult to judge the medium-term prospects for the economy. Ten years ago, I described how movements in macroeconomic data can sometimes bear a “resemblance to oldfashioned disco dancing – sharp movements in unpredictable directions creating much excitement, accompanied by a good deal of noise”.

Provided monetary growth remains well under control – and remember that at present it is undesirably low – inflation should return to target in the medium term. I hope you will all remember that in both of the past two years inflation picked up as a result of temporary price level factors and then fell back, as the MPC had predicted. So how will 2009 be remembered? As I said at the outset, it is too early to tell. The full impact of the financial crisis has yet to be seen. And the national statisticians will take another two years or so before providing their best estimates of spending and output in the UK economy. More importantly, the question of whether basic reforms to the structure of banking and the international monetary system will be made before another crisis engulfs the world economy remains unanswered. BIS Review 4/2010  5
Second, the timing of this sequence will depend on the inflation outlook and its progress towards our target of close to but below 2%. We will accordingly monitor the impact of the exchange rate evolution – which is a source of uncertainty –, and be ready to reassess if necessary. Fiscal devaluations have also been considered by countries aiming at boosting competitiveness through changes in their tax system, typically by cutting labour and/or capital taxes, while rising consumption taxes.9 This shift in the tax system increases the competitiveness of domestic firms with respect to foreign ones, both in domestic and export markets. In practice, however, 3/5  BIS central bankers' speeches  there are empirical limits to this strategy. A race to the bottom on corporate tax rates also raises increasing challenges about the social fairness of globalisation – and hence its sustainability – as President Macron stressed in Davos… and as is even pointed out sometimes in debates about Ireland. Recent research has put emphasis on the noticeable influence that fiscal policy can have on variations in imbalances, including in the US and Germany. In this respect, the recent US tax reform adopted by Congress is expected to significantly boost the US economy, which is already at full employment, leading in turn to increasing imports and a widening external deficit. So, it clearly risks increasing global imbalances.10 Symmetrically, within the euro area, some countries with large positive current accounts recently experienced budget surpluses (e.g.

*** During the consultations, I found that we share with the IMF and the Ministry of Finance the same views on the need to maintain and further strengthen macroeconomic stability. Moreover, there is a modern consensus on division of duties between the two central institutions of macroeconomic administration (central bank and Ministry of Finance) as well as a concrete commitment to continue this co-ordination in the future. In conclusion, I would like to reiterate that the Bank of Albania remains fully committed to observe the inflation target of 3%, and continue to orientate its monetary policy exclusively to this function. 2  BIS central bankers’ speeches
Those who are subject to this pain should have a good understanding of the virtues of this painful adjustment and be prepared to take the bitter medicine for a permanent cure of the ailment. This casts a new responsibility on the banks, because monetary policy is implemented by the central bank through banks. In terms of this new responsibility, the banks should appreciate the intention of the central bank with a positive note. If the central bank raises interest rates and curtails credit levels, the banks should do much more than what the central bank has directed. It has to extend, both by deed and word, its full cooperation and commitment to attaining the monetary policy targets, because at the end, they are the main beneficiaries of having an inflation free world. A similar responsibility is cast on the private sector as well. The Central Bank, like a good physician, has to flush out all the causes of inflation from the system. When doing so, it has to adopt painful and unpopular measures. But such measures are taken for the interest and the long term well-being of the economy. If the economy is allowed to be hit by inflation continuously, it is the private sector which would suffer most. It would be reduced from a long term planner to an at the moment event manager. It would be pestered with numerous requests for wage increases by the employees. Its profits would fall in real terms.

Salaries, earlier paid monthly would become payable first fortnightly, then weekly and daily and finally hourly. It would entail a tremendous cost on the employers to meet the demand for paying salaries every hour. Similarly, all other contracts would also be very short term contracts. People would not think of the future, but only on the passing moments. This type of short-term behavior on the part of people would cause the economy concerned to collapse on itself due to a lack of long term commitments. Inflation normally brings in several other irreparable damages to an economy. In the first place, inflation discourages exports, encourages imports and widens the gap between the imports and exports known as the trade gap causing problems for the balance of payments and the exchange rate. If the domestic prices are higher, there is no reason for exporters to sell a product abroad. For instance, if inflation raises the price of a coconut to Rs 100 in the domestic market and its given price in the international market is Rs 50, an exporter would sell the product in the domestic market to gain the price advantage. Similarly, imports are encouraged, because of the lower price in the international markets than the domestic market. This is equivalent to imposing a tax on exports and giving a subsidy to imports. Second, inflation favors borrowers and discourages savers, if interest rates are not adjusted to reflect the going inflation rate.
Moral hazard may be related to single institutions that take on too much risk. In these cases, it is manageable. Central bank measures are formulated in such a way that shareholders, management and staff, and probably also lenders, suffer substantial losses. There is no such thing as comprehensive insurance. It is more complicated when banks herd with other banks in taking on excessive risk. This herd behaviour was described by John M. Keynes in 1931: “A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.” 4 Note that a banker’s reputation might thus be intact, although not her job or assets. The management of the Nordic banking crisis also showed that it is possible to respond in order to reduce moral hazard, i.e. reduce the risk of a repetition of the herd behaviour that led to the crisis. Expectations of a slowdown as a result of falling house prices in the US have resulted in some increase in credit premia in Norway as well. Equity prices on the Oslo Stock Exchange fell considerably during the turbulence, but have recently picked up again somewhat. The spread of market turbulence to Norwegian financial institutions is a pure contagion effect. Surveys by Kredittilsynet (Financial Supervisory Authority of Norway) show that Norwegian banks are not directly exposed to losses related to the US subprime market.

The lending margin on fully secured mortgages could then be 0.5 percentage point. In conclusion, we should be able to say that the decline in lending margins has probably come to an end. It will come as no surprise if lending margins rise somewhat ahead. It is now likely that a number of banks are not achieving a satisfactory return on new loans. Banks may have compensated for this by having low deposit rates. However, as mentioned above, there has been a marked rise in borrowing costs. Even if some of the increase should be reversed, competition for ordinary deposits will have to intensify ahead – also in view of the greater uncertainty experienced by many banks with regard to funding in the money market. A number of features of household behaviour make households more vulnerable to economic disturbances. Household debt has grown more than income since 1999. Both the  14  BIS Review 115/2007  debt burden and the interest burden have increased markedly and are expected to continue to rise somewhat in the years ahead. Most household loans are adjustable-rate loans. This is perhaps not so surprising. In the post-war period up to the late 1980s, the Norwegian State Housing Bank played a key role in mortgage financing, and banks’ lending rates were regulated. The interest rate for house purchases was politically determined, and – for a period that was perhaps surprisingly long – borrowers were confident that their best interests were being safeguarded.
Mortgage design also varies in striking ways through time and across countries and even regions; for example, in terms of the sensitivity of mortgage rates to market rates, borrowers’ ability to pay down or increase the loan balance, the ease with which loans can be modified, and the rights of junior lien holders. Reflecting this international diversity, we are very happy to have panelists from the United Kingdom, Sweden and Denmark speaking today, as well as representatives from many foreign central banks and other international organizations in the audience. This is also a particularly opportune time to think about mortgage contract design given the ongoing debate about housing finance reform in the U.S., and the future of the government sponsored enterprises Fannie Mae and Freddie Mac. But debates about mortgage design are definitely not new! In fact, 40 years ago the Federal Reserve Bank of Boston hosted a well-known conference on “new mortgage designs” 2, which included Franco Modigliani, later awarded the Nobel prize in economics, and current Federal Reserve vice chair Stanley Fischer. An interesting contrast to today – the main focus of the Boston conference was the design of mortgages to deal with a high and volatile inflation environment. The financial crisis and its aftermath have brought mortgage contract design back into sharp focus.

5  This is also an implication of the model presented in Auclert, 2015, Monetary Policy and the Redistribution Channel. 2  BIS central bankers’ speeches  A related consideration is that refinancing to a lower interest rate requires significant resource costs, which would not be incurred if the borrower’s interest rate adjusts automatically when market interest rates decline. One estimate of the cost of refinancing a mortgage, which includes costs such as those on a property appraisal or title insurance, is $ plus one percent of the loan amount. 6 Under this estimate, total refinancing transaction costs over 2008–2013 exceeded $ billion. 7 Furthermore, the re-underwriting of existing loans leads to resource constraints in the mortgage origination industry during refinancing waves, frequently followed by lay-offs when the refinancing boom is complete. 8 Timing a mortgage refinancing optimally also requires time and attention from the borrower, and can lead to refinancing mistakes, particularly by less financially sophisticated households. 9 But do these considerations make ARMs preferable to FRMs, either from the point of view of monetary policymakers, or public policy more generally? Not necessarily. FRMs have many advantages; for example they are simple for borrowers to understand, and clearly limit household exposure to interest rate volatility. Consider too the incidence of interest rate adjustments: widespread reliance on ARMs may have unattractive distributional consequences for monetary policy, since it implies that a larger component of monetary transmission falls on a subset of highly indebted mortgage borrowers.