samchain/econo-pairs-v1 huggingface dataset:
In my personal view, this means a material easing of monetary policy is likely to be needed, as one part of a collective policy response aimed at helping protect the economy and jobs from a downturn. Given the scale of insurance required, a package of mutually-complementary monetary policy easing measures is likely to be necessary. And this monetary response, if it is to buttress expectations and confidence, needs I think to be delivered promptly as well as muscularly. By promptly I mean next month, when the precise size and extent of the necessary stimulatory measures can be determined as part of the August Inflation Report round. Yesterday, the minutes of the July meeting of the MPC were published. Broadly consistent with my personal view, they noted: “In the absence of a further worsening in the trade-off between supporting growth and returning inflation to target on a sustainable basis, most members of the Committee expected monetary policy to be loosened in August”. So whose recovery? So far at least, this has been a recovery for the too few rather than the too many, a recovery delivering a little too little rather than far too much. Nowhere is that more evident than here in Port Talbot. Yet it is evident, too, in sectors from steel-making to shipping, in towns like Portstewart as well as Port Talbot, from Wales to West Lothian. Monetary policy cannot do everything to counter the impact of the referendum which is, after all, an economic regime shift for the UK.

Chart 15 plots real household disposable income per head across households grouped into five income categories. Because household spending differs materially depending on someone’s income – for example, poorer households spend proportionately more on food and energy – we deflate the income of each group using a price index which reflects their different spending patterns. Chart 15 paints a fairly reassuring picture. In general, lower income groups have fared somewhat better than higher income groups since the crisis: the lowest income quintile has seen disposable incomes rise by around 5% since 2007, while the highest quintile has seen income fall by around 5%. Those in the bottom half of the distribution have seen incomes rise since 2007, while those in the top half have seen them fall. This reflects the impact of the benefits and pensions system in supporting lower income households. As a result, the distribution of incomes across the UK has probably narrowed a little since 2007. Income inequality has, if anything, fallen. That means, when we look at measures of social welfare aggregated across different income groups, we find it has not performed very differently than aggregate real disposable income since the crisis (Chart 16). These patterns of gains and losses are, however, very different when we turn to wealth. Chart 17 plots the distribution of wealth gains since 2010 across income quintiles. It suggests a dramatically uneven pattern. Those in the bottom two-fifths of the income distribution have seen virtually no gains in their wealth since 2010.
According to these theories there is some scope for monetary policy to take account of the output gap without necessarily threatening price stability in the slightly longer term. An important condition for this, however, is that there is considerable confidence in the central bank’s aim to focus on long-term price stability. In the long run, monetary policy cannot determine the real interest rate but in the short term the real interest rate can be influenced and deviate from its long-term equilibrium position. An increasing number of central banks have adopted inflation targets during the 1990s. The introduction of statutory price-stability objectives, independent central banks, transparency and - not least - regulations that give long-term sustainability in the public finances have also been important means for increasing credibility for the ability of economic policy to maintain price stability. 1  2  E.g. Woodford, Claridas  BIS Review 40/2004  In Sweden, the Riksbank adopted an inflation target as early as 1993. According to this target, inflation measured in terms of the change in consumer prices should be 2 per cent per year, with a tolerance for deviations of +/- 1 percentage point. As monetary policy does not have an immediate impact, interest rate decisions are normally governed by forecasts of inflation one to two years ahead. To avoid the economic costs of excessively sharp fluctuations in economic activity, the Riksbank many decide not to take account of price effects that are judged to be temporary.

Risk had been dispersed and diversified to the four winds, courtesy of an ever-more interconnected global financial system and ever-more sophisticated financial instruments.17 The Great Moderation in the economy also meant finance faced fewer shocks than in the past. 13  Haldane and Kruger (2001). Fischer (1999). 15 Evanoff et al (2015). 16 Taylor and Schularick (2012). 17 Greenspan (2002). 14  11  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  11  When it came to assessing risks to the financial system, unlike with monetary policy, there was no off-the-shelf model. In pursuit of one, I started looking to other disciplines for inspiration. From the mid-2000s, I began discussion with a set of scientists – physicists, evolutionary biologists, epidemiologists – on the models they used to understand complex, adaptive systems. I was hoping they might provide some analytical clues when it came to modelling the complex, adaptive world of finance. I was in luck. There was a well-developed field of complexity science, with applications in most of the natural sciences and some of the social sciences. Economics and finance was a notable exception. Once I had retro-fitted these models to the financial system, I wrote a note and sent it to the Governors in 2005. It was titled “Public Policy in an Era of Super-Systemic Risk”. It made some bold claims about financial system resilience, most of which jarred with the prevailing orthodoxy.18  Financial integration, it argued, was a double-edged sword. It was fantastic for risk-dispersal when the good times rolled.
This means that the more mortgage loans for residential property a bank holds on its balance sheet, the more additional capital it is obliged to hold. We regularly assess whether the required capital buffer level is appropriate. If we decide that an adjustment of the buffer is required, we make a proposal to the Federal Council after consultation with FINMA. Ladies and gentlemen, ongoing communication, targeted adjustments of the regulatory framework and the activation of the CCyB have all proved effective in recent years. I will return to this later. Such measures taken by the authorities are essential in dealing with cyclical risks, and we need to continue to review the instruments at our disposal on an ongoing basis and to adjust them to the risk situation. 9 However, let me add at this point that, although the possible applications and effects of macroprudential instruments are important, they do have their limits. Measures taken by the authorities are therefore no substitute for market participants’ own responsibility – it is ultimately up to them to manage their risks. Current assessment of the situation This takes me to our current assessment of the situation in Switzerland. Let me start by jumping to our overall evaluation. We consider the vulnerabilities on the mortgage and real estate markets to be at a high level at present. Allow me to elaborate on this, first turning to the mortgage market and then to the real estate market.

The policy rule shall not be applied mechanically under all circumstances. This is particularly important given that the economic reality appears to be taking on increasing complexity and becoming more difficult to define. The Inflation Report published in mid-March contained the assessment that economic growth in Sweden and abroad would remain high over the coming years. Our forecast for Sweden was a growth rate of around 3 per cent a year, which is higher than we consider to be sustainable in the long term. The new information received since then has been mixed. The oil price has been unexpectedly high, although recently it has fallen slightly. Moreover, industrial activity appears to have weakened slightly, both in Sweden and abroad. We therefore came to the conclusion in April that growth in Sweden would be somewhat weaker than was anticipated in the March Inflation Report. Since then, we have seen statistics showing that growth in Germany was slightly stronger than expected during Q1, and that the downturn noted in the United States in March appears to have been temporary. We had anticipated lower growth in Sweden’s net exports, but exports of goods appear to be increasing even less than was forecast. However, good growth in real incomes and low interest rates will contribute to favourable growth in household consumption. The labour market remains relatively weak, and our forecast is based on employment strengthening during 2005.
Global imbalances were built up If we are to understand the origins of the crisis, we cannot ignore certain factors in the macroeconomic landscape. This applies in particular to the major global imbalances that were built up over a long period of time. In the rapidly-developing economies in the oilproducing countries and Asia, particularly China, domestic saving reached a level that was higher than required to fund domestic investments. This led to substantial current account surpluses. Large amounts of capital were built up which sought an outlet on the global financial markets. These were used, for example, to buy assets in the West. At the same time, the economies in the West, especially the USA, experienced an unusually long, uninterrupted period of favourable conditions with strong growth and low inflation. Policy largely focused on maintaining these good conditions. It was possible to stimulate domestic demand at the cost of a gradually increasing current account deficit. The large capital flows on the financial markets helped to keep interest rates down. With consumer prices held in check, it was also felt that there was no real reason to conduct a stricter monetary policy. The result was that significant global imbalances arose – a lasting savings surplus in some countries and a deficit in others.

The difference was that this house would last another 100 years, while the old house would have lasted only until the next earthquake. I see the current juncture in the transition away from LIBOR to a new reference rate regime in much the same way. We have seen the development of several reference rates that may meet various needs, including creditsensitive rates.4 Separately, the ARRC just announced the indicators that it will consider in recommending a forward-looking Secured Overnight Financing Rate (SOFR) term rate, which with continued market progress, it believes can be achieved relatively soon.5 These are valuable steps in the transition to the new post-LIBOR world—but in my house metaphor, these represent the rooms of the house. They're important, but more critical is that they be built on top of a robust foundation that will withstand any storm or earthquake. And the foundation must be built to the highest standards and with the very best materials.6 The reason is clear. If you build on a foundation that is not absolutely sound, you are risking trouble at some point in the future. Unfortunately, the cracks in the LIBOR foundation ran deep. The short-term bank funding markets that LIBOR is based on have withered away since the global financial crisis. Worse, they can dry up completely under stress, as we saw last spring.7 This means we need to have a strong and deep foundation of reference rates that we are confident will be rocksolid, holding up our financial system under all contingencies, foreseen or unforeseen.
Finally, it is only the speculators that  4  BIS Review 40/2004  are fuelling the rise in prices. While they know that the price increases are exaggerated, they do not know when the situation will turn. The slightest signs of an imminent change lead to large-scale selloffs, and prices plunge. In well-developed markets, participants that judge the price increases to be excessive always have the possibility to make a profit by taking offsetting positions. Uncertainty over when the situation will turn, coupled with reward systems that encourage short-term gains, are likely to result in an insufficient number of investors taking offsetting positions. Financial accelerator effects most likely lead to a situation where rising asset prices, regardless of whether they are being driven by short-term investors, also affect the real economy and thus can contribute to overinvestment. As regards house prices, the risk of a purely speculatively driven rise ought to be lower. This is true especially of economies such as the Swedish one, where regulations make it very difficult to own and let houses and apartments for speculative purposes. Empirical studies also indicate that the risk propensity of investors and lenders appears to increase according as economic activity strengthens, while it decreases markedly during economic declines. So, when economic activity has been improving over a long period, investors appear to interpret this as meaning that growth will continue to rise at the same high rate, without taking account of the risk of a slowdown.

Thirdly, somewhat tighter monetary policy than otherwise would be able to counter an over-optimistic pricing of financial assets and properties. The second argument is therefore based on the idea that the central banks’ normal forecast horizon of two years is too short, while the third argument is based on the assumption of irrational expectations. Lengthening the forecast horizon is relatively simple in principle, but in practice it is more difficult of course. Especially if the models used have some of the shortcomings I mentioned earlier. The third argument regarding irrational expectations is more difficult to adopt a position on. If we seriously believe that it is relevant, a large part of the foundation for the analysis and recommendations on which central banks today base their policy collapses at the same time. However, “Irrational expectations” could be a result of insufficient availability of information. Therefore, it cannot be ruled out that central banks, by pointing out potential problems associated with high debt levels, can contribute to reflection among those agents that otherwise would undertake commitments that they would not be able to meet when conditions change or in banks that otherwise would take on excessive credit risks. Influencing behaviour in this way by spreading information is an important idea behind the Riksbank’s Financial Stability Reports. Those that maintain that there is too much uncertainty to dampen a price rise via interest rate adjustments are thus of the opinion that it is better to wait until asset prices start to decline.
In terms of the different agents, a deficit target, in National Accounts terms, of 3.8% of GDP is proposed for central government and the Social Security system, compared with a deficit of 4.5% of GDP projected in 2012, which would represent an improvement of 0.7 pp of GDP, similar to that projected for the regional governments, which should reduce their deficit from 1.5% in 2012 to 0.7% in 2013. The adjustment would be completed with the projected reduction of 0.3 pp in local government to reach a balanced budget in 2013. Revenue On the revenue side, this budget tightens the fiscal pressure both in terms of direct and indirect taxation, with a range of new measures. Furthermore, it should be recalled that, in 2013, the measures approved in 2012 in relation to higher personal income tax rates, the increase in the rate on income from fee-earning activities, changes to corporate income tax and the rise in VAT rates will still have a significant impact. Despite the background of recession, the tax take is projected to increase overall by 3.7%. The net effect of all the tax regulation measures with an impact in 2013 is estimated to be approximately € billion. Net of this impact, revenue would fall by 0.5%. As for the Social Security Budget, the 1 pp reduction planned last July is postponed or ruled out, and a 1.1% fall is projected in 2013 in total social security contributions compared with the initial budget for 2012.

Just as a pebble dropped into a lake disturbs the water not just at the point of impact but ripples outward far from the origin, changes in the federal funds rate influence the prices of financial assets more broadly and this, in turn, affects the broader economy. An important insight of modern monetary theory is that this transmission of monetary policy to the broader economy through its many channels works best when the central bank is transparent about its goals, policy strategy and approach to implementing its strategy. In this case, market participants and households both understand and can anticipate actions by the central bank. By doing so, the transmission channels of monetary policy are enhanced. This places considerable importance on effective central bank communication. Recognizing this, the FOMC has undertaken many initiatives over the years to improve its communications with the public. These include providing clarification in terms of the goals of monetary policy, discussions of the FOMC’s broad policy strategy, as well as FOMC participants’ ongoing explanations of their views on monetary policy. As part of this effort, I provide a comprehensive update on my outlook for the economy and monetary policy several times during the year. Once a year we publish our staff’s judgmental economic forecast. We have also provided in the Liberty Street Economics blog discussions of an internal staff modelbased economic forecast. In addition, we now regularly release our real-time forecast of “current quarter” real GDP growth.
Let us assume that demand in the economy has fallen, and that a need for more expansionary policy has therefore arisen to stabilise the real economy and inflation. The central bank then wants to cut the policy rate so that it is on the red curve. 9  Capital requirement here refers to the statutory capital adequacy requirement. BIS central bankers’ speeches  11  But at this low interest rate the financial supervisory authority may worry that risks are beginning to build up and it will therefore raise the capital requirement. However, the higher capital requirement not only means that the risks decline, it also has some negative effect on demand in the economy. This has the consequence that the central bank wishes to cut the policy rate further, which in turn makes the financial supervisory authority want to raise the capital requirement, and so on, and so on. This leads to a “race”, which ultimately leads to the capital requirement reaching its upper limit at the same time as the interest rate is extremely low. It is easy to imagine that this final mix of the two policy instruments is not optimal from the perspective of the economy as a whole. The means of control for monetary policy and risk have been used much more aggressively than is beneficial for the economy and also more aggressively than either the central bank or the financial supervisory authority would wish. Of course, one can discuss how realistic this particular example is.

The mean squared gap analysis makes it easier for the central bank to explain why it chooses a particular monetary policy – what it means more specifically by a “well-balanced” policy. It can also provide support when assessing monetary policy. But however good the tool is, the step from theory to practice is not without complications. I intend to discuss some circumstances that in various ways complicate things when taking this step. Arguments in loss function less clear in practice than in theory One such circumstance is that although the variables included in the loss function – inflation and resource utilisation – are in theory unambiguous and well-specified, in practice it is far from evident how they should be measured. Resource utilisation can be regarded as a summary of developments in the real economy and shows to what extent labour and real capital are being used at a particular time. It normally states use in relation to the level sustainable in the long run, which is often regarded as a “normal” level. One complication is that it is not possible to directly observe how high the level of resource utilisation in the economy is, and nor is there any generally-accepted view of this should be calculated. Different measures can give fairly different results and it is therefore difficult to determine to any great degree of precision the level of resource utilisation at any given time.
Consistent with the Policy Normalization Principles and Plans, when this occurs in a given month, no reinvestment occurs, and the portfolio size declines by the amount of principal repayment. In the future, mortgage principal repayments, which are sensitive to various factors, especially long-term interest rates, could conceivably rise above the level of the cap, particularly if interest rates were to decline. If this were to occur, those amounts above the cap would be reinvested. It is this cap mechanism that keeps the decline in the balance sheet at a gradual and predictable pace. The New York Fed’s Open Market Trading Desk (the Desk) will conduct operational readiness exercises during periods of no reinvestment to ensure it remains prepared to reinvest if needed. 14 The FOMC’s approach to balance sheet normalization—and its transparency and clear communication about the normalization principles and plans prior to its implementation—was designed to mitigate the risk of sharp or outsized asset price reactions to the decline in the portfolio’s size over time. Desk surveys corroborate market commentary describing a relatively 13  The dollar values of securities held in the domestic SOMA portfolio refer to par values. The Desk conducts small value purchases of agency MBS on a regular basis in order to maintain operational readiness. Under these plans, the Desk may purchase up to $ million of agency MBS for monthly periods in which principal payments fall below the cap and there is no reinvestment amount.

Figure 2 Commodity prices (*) (index, 2009=100) 240  240  210  210  180  180  150  150  120  120  90  90  60  60  30  30  06 Edible oils  07  08 Sugar  Meats  09 Dairy  10  11  Cereals  WTI oil  (*) Except for WTI oil, FAO indexes are used. Source: Bloomberg. 6  BIS central bankers’ speeches  Figure 3 Inflation  (annual change, percent)  CPI  Core CPI (4)  10  10 6  6  8  8  6  6  5  5  4  4  4  4  2  2  3  3  0  0  2  2  -2  -2 1  1  -4  -4 0  0  05  06  07  08  U.S.A. Emerging Asia (2)  09  10  11  05  06  07  Eurozone Emerging Europe (3)  08  09  10  11  Latin America (1)  (1) CPI anc Core CPI include: Brazil, Colombia, Mexico and Peru. (2) CPI includes China, Indonesia, Malaysia, South Korea and Thailand. Core CPI includes South Korea and Thailand. (3) CPI includes Czech Rep., Hungary, Poland and Russia. Core CPI excludes Russia. (4) Uses definition of each country. Sources: Bloomberg, CEIC Data and statitics institutes of respective countries.