samchain/econo-pairs-v1 huggingface dataset:
The intensification of the sovereign debt crisis from the summer of last year interrupted the mild recovery that the Spanish economy had begun a year earlier, with a decline in GDP of 0.3% in the final quarter of 2011. This pattern ran into the first quarter of this year, so that the Spanish economy is, once again, in recession. As in the case of the 2008–09 recession, national demand is displaying the greatest weakness. All domestic demand components declined in the fourth quarter of 2011 and have continued to do so during the first few months of this year. A strongly negative factor during all these ups and downs has been the need to reverse the accumulated imbalances (the assignment of excessive resources to housing, high indebtedness and competitiveness losses), as part of an adjustment process that has still to be concluded. More recently the intensification of the sovereign debt crisis and its effects on the financial system has compounded matters, leading to a tightening of the economy’s financing conditions and eroding agents’ confidence. The downward revision of euro area growth prospects and the stepping up of fiscal consolidation have contributed to a further contraction in consumer demand and investment, and the acceleration in the decline in employment has further fuelled these trends. In the face of slack national demand, the external sector has once again acted as a shock absorber, alleviating the negative impact of lower spending on output.

Niklaus Blattner: System stability and monetary policy Summary of a speech by Mr Niklaus Blattner, Vice-Chairman of the Governing Board of the Swiss National Bank, at the University of Berne, Berne, 31 January 2006. The complete speech can be found in German on the Swiss National Bank’s website (www.snb.ch). *  *  *  For a number of years the Swiss National Bank (SNB) has been devoting considerable attention to the interaction between system stability and monetary policy. The aim is to arrive at an assessment of the current situation. The results obtained so far have been very useful, but there is still work to be done in implementing them and developing them further. Our point of departure is an analysis comparable to that presented in the 2005 Annual Report of the Bank for International Settlements (BIS). From basic research papers published by the BIS we can conclude that, where financial systems are liberalised, a monetary policy that responds exclusively to short-term risks to price stability will promote the elasticity of economic systems. Only if monetary policy also responds to cumulative disequilibria in financial markets can this elasticity be limited. A monetary policy response of this kind can be achieved through coordination with macroprudential and microprudential instruments. With this in mind, we turn to the activities of the SNB. The primary objective of the National Bank’s monetary policy and its contribution to the stability of the financial system is to supply the economy with liquidity.
3  If b is the ratio of debt to income then its growth rate is given by r − g − s/b, where r is the ex post interest rate, g the growth rate of income and s the proportion of income used to pay off debt. So if g falls and r does not either debt starts rising faster than income or debtors must save more; if r and g change by the same magnitude b and s don’t have to. e  BIS central bankers’ speeches  3  than the interest rate, and therefore when servicing debts requires much more of their incomes than people had expected, that problems can arise 4. When (mild) deflation doesn’t matter: a high neutral real rate I think you can see the importance of these considerations in the UK, both in recent history and, as it happens, over a much more distant period. In the second half of the 19th century, and up until the First World War, Britain and much of the advanced world were on the Gold Standard: the price of gold was fixed at £ Deflation was commonplace. Discoveries of gold occurred only intermittently, and because the global economy – and therefore the demand for currency – was generally expanding, its real price often came under upward pressure. With the nominal price fixed, the only way that could happen is if the denominator of that real price – the price of goods and services – declined.

BIS central bankers’ speeches  1  Following the financial crisis, of course, the developed world has been in exactly that position: the neutral real rate of interest has been extremely depressed, official interest rates have been pushed to the zero lower bound and central banks have employed unconventional means of easing monetary policy. Were it to occur right now, sustained deflation would therefore pose more of a risk than at times when the neutral real rate was higher. But, in my view, those risks are nonetheless relatively contained. For one thing I think the evidence suggests that unconventional policy is effective: even if they don’t circumvent it entirely, asset purchases help soften the constraint of the zero lower bound. Second, with the financial system gradually improving my guess is that the neutral real rate of interest is more likely to rise than fall over the next couple of years. Third, and most importantly, I think the chances of a sustained and widespread deflation are in any case low. That’s certainly what the international experience suggests. That experience is substantial: we have annual CPI data since 1960 for over 70 countries, a total of over 3,000 data points. In only 70 cases (barely 2% of the sample) have consumer prices actually fallen and in the majority of those inflation was positive the following year.
At the end of April 2022, the total number of failures over the  Page 4 of 8 previous 12 months was 43% lower than the figure for April 2019.i And even more importantly, according to our estimates, more than 95% of stateguaranteed loans (SGLs) should be repaid on time. Half the SGLs granted in 2020 started to be repaid in 2021; repayments on the other half began as of April this year. True, the shock of the war in Ukraine is slowing our rate of growth, and I shall come back to this. But the soundness of our banks and businesses at the end of 2021, with the emergence from the Covid crisis, gives strong grounds for confidence. There is nothing today that justifies, in the face of certain warnings or excessive demands, a return to the exceptional measures that we saw in 2020: either in bank prudential regulations or in terms of general, untargeted support for businesses. The Credit Mediation service, which is attached to the Banque de France has received very few requests for the restructuring of SGLs (fewer than 200 cases out of a total of 700,000 SGLs granted). France has the strongest banking and insurance sector in the euro area: this is a major asset for our economy, and one that our country is not always sufficiently aware of or positive about. This justifies us paying close attention to a healthy regulatory framework. II.

BIS Review 138/2009  5  Figure 6. GDP with uncertainty bands, annual percentage change, seasonally-adjusted data 6  6  4  4  2  2  0  0  -2  -2 90%  -4  -4  75% 50% O utcome  -6  -6  Forecast  -8  -8 04  05  06  07  08  09  10  11  12  Sources: Statistics Sweden and the Riksbank  I and my colleagues on the Executive Board want the growth curve to look like a “v” when the economy recovers after the recession, as in the figure with our forecast for GDP growth, and not a “w” (see Figure 6). Having said that, let me just briefly comment on my own view of monetary policy as expressed in the minutes of our most recent monetary policy meeting. As I see the situation with regard to the Swedish economy, it is more important to allow some safety margin for a weaker outcome than for a stronger outcome. In my opinion, it would be more problematic if the recovery ground to a halt because we had provided too little stimulation than if we were later forced to put the brakes on a little harder than expected. So where do we stand with regard to the financial system? Where we stand in terms of the economic cycle is to some extent connected to developments in the financial markets.
While underlying inflation is still low, rising capacity utilisation will probably push up price and wage inflation further out. Core inflation is now projected to rise to a little above 2 percent in 2021. Chart: The Executive Board’s assessment and interest rate forecast At its monetary policy meeting in March, the Executive Board gave weight to the sustained upturn in both the global and the Norwegian economy. The Executive Board decided to keep the key policy rate unchanged at 0.5 percent. The Board’s current assessment is that the key policy rate will most likely be raised after summer this year. The March Monetary Policy Report is the first report since the new regulation on monetary policy came into force. Although the new regulation will not result in significant changes in the conduct of monetary policy, the interest rate outlook is to some extent affected by the lowering of the numerical inflation target. Chart: Factors behind changes in key policy rate since MPR 4/17 The effect on the key policy rate from the new inflation target is summarised in this chart. The black line shows the change in the key policy rate forecast since the previous meeting in December. The contribution from the new inflation target is shown by the red bars, while the other bars show the effect from other factors. Over time, lower inflation owing to a lower inflation target will result in a correspondingly lower nominal interest rate, so that the long-term real interest rate is unchanged.

How Norges Bank will react to movements in the exchange rate will depend on how these fluctuations affect the outlook for inflation, output and employment. Chart: Exchange rate and oil prices A recent example is the monetary policy response to the negative oil price shock in 2014. The exchange rate served as a shock absorber. With confidence in the inflation target, monetary policy was able to underpin a weaker krone. The krone depreciation, combined with moderate wage settlements, contributed to a marked improvement in business profitability and competitiveness. Chart: GDP for mainland Norway Let me now turn to the outlook for the Norwegian economy. Two years after the cyclical trough was reached in Norway, growth has gained a firm footing. In our latest Monetary Policy Report, the negative output gap is projected to narrow and close early next year. There are prospects for solid growth in business investment and renewed optimism in the petroleum industry. A number of large development projects will contribute to a rebound in oil investment in the coming years. The impetus from abroad has strengthened and exports are picking up. On the other hand, housing investment has fallen, and is likely to decline further. 3/4  BIS central bankers' speeches  Growth in household consumption picked up markedly last year. Higher real wage growth and continued employment growth should support consumption growth ahead, while higher interest rates will likely have a dampening effect. Chart: Inflation After falling markedly in the period to autumn 2017, inflation has edged higher.
Some comments are therefore called for. One comment concerns the formulation of the budget target. A medium-term average implies that in good years the surplus should be above 2 per cent and by most standards the coming years must be regarded as good. While the economy does admittedly still appear to have some unutilised resources, they will gradually be utilised. Maintaining a surplus above 2 per cent when activity is high means that a smaller surplus can be tolerated when activity is lower. In this way, room is created for the budget to act as an automatic stabiliser. If, instead, the surplus is held mechanically at exactly 2 per cent from year to year, fiscal policy will tend to accentuate cyclical fluctuations and exert a destabilising effect. Another comment concerns the demand effects of an easier fiscal stance in the present situation. The tax changes being discussed seem largely to be unfinanced income tax reductions for low and medium income groups. Judging from what has been indicated to date, a corresponding adjustment of public spending is not envisaged. In that case, the tax cuts would enlarge household income and raise the level of economic activity via increased consumption. That could result in increased inflationary pressure that monetary policy might need to counter. That said, I want to underscore that tax cuts may well be motivated. There are many indications that the Swedish economy would work better if taxes were lower.

Consensus as to what reforms to undertake and with what content, supported by the findings of sound economic evaluations, would provide economic policy with stability beyond the electoral cycle and, therefore, with credibility in the eyes of citizens and investors, thus multiplying its positive impact. Once more, these principles may also be particularly relevant when it comes to maximising the transformative impact of the European funds our economy will receive in the coming years. Broad agreement on their use, based on constant and rigorous evaluation, would offer most possibilities of bringing about a more prosperous country that provides more and better opportunities for all: for our youth, so they may freely and confidently pursue their plans for the future; for our elderly, so they may face retirement securely; and for our workers, so they may adapt and prosper in an increasingly demanding and competitive world. 5/6  BIS central bankers' speeches  In sum, we need wide-ranging – political, social and also intergenerational – agreements in order to confidently face our future. In our recent history, whenever Spanish society has looked far ahead and resolutely addressed a long-term horizon, the outcome has been greater freedom and prosperity. At the Banco de España we believe that, taking a rigorous and independent view, we can contribute decisively to this objective.
Turning to our estimates, the baseline scenario foresees that this year GDP will grow between 2.25% and 3.25%, a range that is somewhat lower than estimated in the last Report 2  BIS central bankers’ speeches  (table 3). This projection considers that the floods in the north of the country and one-time effects on important mines reduce the mining growth estimate, with a downward incidence on the estimate for annual GDP growth of one tenth of one point compared with the March forecast. Meanwhile, since the partial data of recent months show weaker private expenditure, it is foreseen that the recovery that was expected for the second half will occur at a slower pace than was projected in March. The Business Perceptions Report of last May confirmed bounded expectations regarding the performance of businesses and investments in 2015. Moreover, the CBC’s survey continued to point to a fall in valued projects for this year compared with 2014 (table 1). On the external front, our projection assumes trading partners’ growth to drop by one tenth of a point in 2015 and 2016, to 3.3% and 3.7%, respectively. This adjustment responds largely to the reduced projection for the US. In the Eurozone, prospects remain unchanged because first quarter data brought no surprises other than some differences within the region. Growth is revised down for China and Latin America, because of actual first-quarter data and weaker prospects.

To the extent that this situation continues, it is possible that domestic output and expenditure will fail to show the greater dynamism that is expected in the baseline scenario. Conversely, a scenario where expectations improve significantly would allow for a faster recovery of the economy, particularly in 2016. Regarding inflation, pressures are somewhat milder than expected in March, due to lower activity and the fact that, although with volatility, the peso has not continued to depreciate. However, in a context of persistently high inflation, with bounded margins, strong wage growth, higher fuel prices and external risk scenarios that can drive a significant further depreciation of the peso, inflationary risks remain important. As we are permanently aware of our legal mandate, this is one risk we analyze and monitor with special care. After evaluating these risks, the Board estimates that the risk balance is unbiased for both output and inflation. Summing up, inflation remains high, despite some decline in recent months. Domestic activity picked up in the first quarter, but the outlook for the second half of the year has moderated. As has been mentioned before, macroeconomic policies have played a countercyclical role. In particular, the stronger monetary impulse translated into a reduction of 200 basis points off the monetary policy rate, which helped to drive the long-term rates close to their historic lows.
If anything, recent developments suggest that the remaining spare capacity in the economy is being absorbed a little more rapidly than had been expected, and that inflation remains likely to overshoot the 2% target over the next three years. The MPC’s reaction function is clear. The continued erosion of slack lessens the trade-off that the MPC is required to balance and, all else equal, reduces the MPC’s tolerance of above-target inflation. As the Committee stated last week, if the economy continues to follow a path consistent with the prospect of a continued erosion of slack and a gradual rise in underlying inflationary pressure then, with the further lessening in the trade-off that this would imply, some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target. The case for a modest monetary tightening is reinforced by the possibility that global r* may be rising, meaning that monetary policy has to move in order to stand still. Any prospective increases in Bank Rate would be expected to be at a gradual pace and to a limited extent, and to be consistent with monetary policy continuing to provide substantial support to the economy. There remain considerable risks to the UK outlook, which include the response of households, businesses and financial markets to developments related to the process of EU withdrawal. The MPC will respond to these developments as they occur insofar as they affect the behaviour of households and businesses, and the outlook for inflation.

13  All speeches are available online at www.bankofengland.co.uk/speeches  13  Chart 11: Majority of long-horizon variation in UK equilibrium rates explained by international factors  Notes: Forecast error variance decomposition from a vector error correction model, share not explained by domestic R*. Sources: Holston, K, Laubach, T and Williams, JC (2016), ibid. Global factors also influence domestic financial conditions and therefore the effective stance relative to the shorter-term equilibrium rate of monetary policy, r*. The presence of borrowers and lenders operating in multiple currencies and in multiple countries creates multiple channels through which developments in financial conditions can be transmitted across countries. 35  For example, changes in sentiment and risk aversion can lead to international co-movement in term premia, affecting collateral valuations and so borrowing conditions. Work by researchers at the Bank of England, building on analysis by the IMF,  36  shows that a single global  factor accounts for more than 40% of the variation in domestic financial conditions across advanced economies. For the UK, which hosts the world’s leading global financial centre, the relationship is much tighter, at 70%. Highlighting the openness of the UK economy and financial system, a third of the business-cycle variation in the UK policy rate can be attributed to shocks that originate abroad. 37  One important channel of global spillovers is of course monetary policy.
The answer may seem trivial ex post but if these issues had been highlighted and subjected to more transparency, we believe that the ultimate outcome probably could have been different. A lot of the surprise seemed to come from the fact that virtually all risk management had been done within a “local” framework, rather than genuinely extreme stress tests. If regulators, rating agencies or, for that matter, bond and equity investors had demanded analysis based on extreme stress tests, many of the repercussions in the system could have been identified. The main point is that a stress test has to be internally consistent. As an example, if you stress test a 30–40% fall in US residential real estate prices and that shows your institution would be in trouble, you need to make consistent assumptions about the deteriorating credit conditions of your counterparties, anyone that provides reinsurance and general market conditions. At some level, there is always a stress scenario that forces bankruptcy. Perhaps the greatest sin in the years preceding the financial crisis was blatantly ignoring what really would happen if the “unthinkable” drop in US house prices actually happened9. Some major institutions seemed to have had no grasp of how risky their exposures really were, despite spending millions on risk management and while being inspected by regulators on an ongoing basis.

By addressing these issues, the stress tests implemented by the Federal Reserve in the United States, and by the European Banking Authority in Europe, could play a key role in re-establishing confidence in the banking system. Reputational risks in tail events The second category of contracts we want to examine can be put into more of a game theoretic framework, where the perceived pay-off in the tail event is offset by “unforeseen” costs. In this section, we are focusing on behaviour that, at first glance, may seem irrational, but is best understood as being driven by classic time inconsistency. In particular a market participant may voluntarily choose not to enforce a contract that is “in the money”, if the reputational repercussions are perceived to cause more damage than whatever could be gained financially by enforcement. During the crisis, banks moved a significant amount of their mortgage-based assets offbalance sheet into Structured Investment Vehicles (“SIVs”). Most of the funding for these SIVs came from publicly sold asset-backed commercial paper (“ABCP”) and other mediumterm notes (“MTN”). There was a small amount of equity in the form of a junior “capital note,” which split the excess return with the asset manager. From their invention by Citigroup in 1988 and until the crisis, there was sufficient spread between the assets and the funding to generate a reasonable return to attract investors to buy the capital notes. In addition, there was typically a partial liquidity back-stop facility provided by the originating bank.