samchain/econo-pairs-v1 huggingface dataset:
The government finds itself having to pay ever higher interest rates, so that the interest burden itself becomes a significant component of the continuing deficit. Meanwhile the government may have been meeting some of its funding needs through foreign currency borrowing – initiated at a time when international sentiment was favourable and the interest rate seemed attractive, at least on an uncovered basis. The situation then begins to unravel acutely. Foreigners take fright and don't wish to roll forward their lending, or will only do so at a much higher margin. The country can’t afford higher foreign currency interest payments, still less to make net repayments of principal on foreign borrowing. Domestically the only means left by which to cover the deficit is for the central bank to fund it. This means that the central bank lends to the government virtually on demand by, effectively, crediting the government’s bank account – resort to the printing press in all but name. Whether this lending carries an interest rate or not is largely immaterial, since the central bank can continue at the stroke of a pen to create the money to pay the interest. This procedure will inevitably be inflationary, but a wayward government may welcome this as a means of reducing the real value of its outstanding domestic debt. It may even feel that inflation will aid its current financial position, if its revenues inflate faster than its outgoings. All of this is a clear recipe for disaster, including, probably, an exchange rate crisis.

It is definitely easy to make a reasonable case that the Government could have considered the matter more carefully when it made radical changes to its housing policy at the onset of the upswing in 2003, and that it would have been more prudent to postpone them until the boom came to an end. (I presume people realise which Prime Minister this criticism is levelled at). But there are even stronger arguments for claiming that, in spite of the questionable timing, this represented a very positive reform to the housing system framework, which the Government can be proud of. However, the response by the banking system certainly caught the Government by surprise. As things have developed, this is now a secondary consideration. The banks’ response rendered the housing system in its old form virtually obsolete overnight, whether we like it or not. Mortgage interest rates are admittedly still high in Iceland. That is by no means the most interesting point in the current debate, however. Access to credit and finance terms for buying or building housing in Iceland have never been better. But it seems obvious that a large part of the banking system is probably subsidising its own mortgage lending at the moment. Of course this may be a deliberate risk taken in the faith that, since such lending is long-term, lenders will eventually reap handsome profits when interest rates move into line with those in other countries.
At the same time, changes in the interest rate and exchange rate may influence developments in the real economy in the short run. This means that fiscal and monetary policy have a combined effect on the overall level of activity in the economy. With large and to some extent varying budget revenues, the basis for determining central government expenditure and taxes from one year to the next may easily be impaired. If budget expenditure fluctuates to a large extent in step with oil prices, the result will be abrupt shifts and instability in the Norwegian economy. Changes in oil prices may then quickly influence wage and price expectations, the exchange rate and long-term rates. In that case it will be very demanding to achieve nominal stability. Short-term interest rates will have to be changed frequently and sharply, and long-term rates will reflect a high risk premium for the Norwegian krone. It is therefore important that the annual budgets are anchored in a long-term strategy that takes sufficiently into account that oil revenues can fluctuate from one year to the next. It is advantageous if fiscal policy can also be used to counter fluctuations in demand and production. The political assessment has also been that a countercyclical fiscal policy provides the best basis for sound developments in the distribution of income and wealth. If fiscal policy is used to smooth fluctuations in demand and production, it will also contribute to stability in the krone exchange rate and in the competitive conditions for the business sector.

Because of the stagnation in the 1990s, inflation has been particularly low in Europe in recent years. Norway, on the other hand, experienced a long period of economic expansion in the 1990s. Since 1997, price inflation in Norway has been higher than in euro area countries, which is reflected in the higher level of interest rates in Norway compared with the euro area. The effects of monetary policy In theory, Norges Bank has two monetary policy instruments: the interest rate and exchange market interventions. However, in Norges Bank’s experience, extensive and sustained exchange market interventions to influence the exchange rate have yielded poor results. Interventions can often lead to game situations where market operators perceive the central bank’s attempt to influence the exchange rate as an interesting opportunity to make a profit. Events in autumn 1992, at the start of 1997 and autumn 1998 show that exchange market interventions cannot stem the pressure on the krone. Norges Bank does not want to intervene in such a way that these game situations arise. However, the Bank may use interventions to a limited extent if the krone exchange rate moves substantially out of line with what we consider to be reasonable based on fundamentals or in the event of exceptional short-term volatility in thin markets. In such situations, there is less risk of ending up in a game situation against exchange market operators.
This then feeds back into wage growth in three ways: (i) through lower labour productivity, which depresses real wages, (ii) through a higher level of effective labour market slack and (iii), in an environment of high uncertainty, through employees and trade unions valuing job security more than higher wages – in particular after recessions where wage growth would likely have been negative for a while had it not been for downward nominal wage rigidity. Put differently, what we could be seeing today is a hysteresis in the euro area economy that has an effect on wages quite unlike that of “traditional” labour market hysteresis. The issue might not be so much that fewer “insiders” may be able to push aggregate wages up – which was a key insight of Blanchard and Summers’ earlier work. It is rather that hysteresis may be affecting labour markets through employers’ risk perceptions and subsequent hiring and investment choices, which have so far had the contrary effect of pushing wages down. But while this form of hysteresis might leave some workers working less than they would like, they remain – by and large – attached to the labour market. And by retaining their professional network and skills, they are less likely to become marginalised and, on aggregate, structural unemployment is less likely to become entrenched. This is what I mean when I say that the crisis may have caused scratches, but not necessarily scars.

In the current year, while sustaining the effect of already implemented measures, we expect banking credit to grow with a rate below or near 20%. As I mentioned earlier, the dynamics of banking intermediation in the country cannot be contemplated in isolation from the process of free movement of capital and the accompanying dynamics of the balance of payments current account. Intuitively, many economists tend to seek direct cause and effect relation between bank credit growth and the current account dynamics. They rely on the logic that the growth of banking intermediation increases the possibilities for consumption and investment, which combined with the existence of free trade and the slower response of domestic supply leads to the accumulation of external imbalances. Such reasoning is to a great extent rational, but it should not lead, as is clearly manifested in the BNB’s policy, to defining the simple rule that the balance of payments dynamics can be directly controlled through controlling the banking credit rates of growth. This clarification allows me to turn to the next issue I would like to discuss, namely the dynamics of the country’s external position. The stable macroeconomic environment in Bulgaria, plus the sustainably high rates of economic growth and the prospects for its membership in the EU brought in an increasing amount of investments. Their share in the GDP in the first three quarters of 2005 increased to 26.6%, which marks the highest level reached since the beginning of economic reforms in the country.
To supplement this backward-looking analysis the FPC layered on a forward-looking judgement that the new bank resolution framework, put in place following the crisis, would reduce the gross benefits of capital. Holders of bank debt and equity now expect to be bailed-in if a bank is resolved, and so exert greater market discipline on banks to prudently manage their risks. This reduces the probability and severity of future crises (GDP-at-risk), and reduces the additional benefits of also adding more capital. The ‘gross costs’ were based on estimates of the relative costs of equity and debt funding, as well as macroeconomic estimates of what a given increase in bank lending rates implies for growth. Both of these costs and benefits are estimated to be largely constant over time. 24 “Supplement to the December 2015 Financial Stability Report: The framework of capital requirements for UK banks”,  Bank of England (2015). The analysis underpinning this framework is published in Brooke, M et al. (2015), “Measuring the macroeconomic costs and benefits of higher UK bank capital requirements”, Bank of England Financial Stability Paper No. 35, December. 24  All speeches are available online at www.bankofengland.co.uk/news/speeches  24  The FPC’s analysis pointed to an optimal range for structural capital requirements and buffers totalling 1014% of risk-weighted assets (Chart 17). This range maximised the expected future level of GDP. The range reflects the considerable uncertainty around the estimation.

The unemployment rate fell by around 2 percentage points in the post-independence period. Its standard deviation was cut in half. And fifteen years of sustained economic growth followed. Table 1: Inflation lower and less volatile since MPC independence Annual CPI inflation  Inflation volatility  Four-quarter GDP growth  Four-quarter GDP growth volatility  Unemployment rate  Real wage growth  Pre-inflation targeting (1972-1992)  9.0  5.4  2.2  2.9  7.8  0.8  Start of inflation targeting to MPC independence (1993- 1997Q2)  2.3  0.4  2.9  0.7  9.0  0.3  MPC independence to crisis (1997Q3 - 2007)  1.6  0.5  3.0  0.9  5.4  0.7  2008 - end 2012  3.3  1.0  0.0  2.7  7.4  -0.3  2013 - present  1.7  1.0  2.0  0.5  5.2  0.2  However, with time, the initially healthy focus on price stability became a dangerous distraction. Against this serene backdrop of “the Great Moderation”, a storm was brewing. 3 This is the time-consistent optimal policy in the textbook New-Keynesian model with purely forward-looking IS and  Phillips curves. See Clarida, R, Gali, J and Gertler, M (1999), “The Science of Monetary Policy: A New Keynesian Perspective”, Journal of Economic Literature, December.
I believe that the role played by the Banco de España in promoting this accumulation of provisions is well known, so I shall not dwell on this point. I will, however, point out that there are various idiosyncratic factors in the performance of Spanish institutions that have limited their exposure to the current shocks. I have already mentioned that in the euro area there is no equivalent to the US sub-prime mortgage market, an observation that applies fully to Spain. Rather, the credit quality of Spanish mortgages is high, as shown by the low doubtful assets ratio and the moderate levels of the average loanto-volume ratio and of the collateral required. Along these same lines, the weight of the assets linked to the sub-prime mortgages on institutions’ balance sheets is completely marginal, as is also their indirect exposure through any lines of credit granted to other financial intermediaries that may actually hold such assets. The fact is that intermediaries of this type have not proliferated in Spain’s financial system. One of the factors that has probably contributed most to preserving the quality of assets in the Spanish financial system is the persistence of a traditional banking model in which, unlike in other countries (especially the United States) in recent years, institutions have used asset securitisation mainly to fund the expansion of activity and not to transfer to third parties the risks associated with their loan portfolio.

In light of the buoyancy of domestic demand in recent years, it is reasonable that private consumption and residential investment should show somewhat lower growth rates, although, as has been the case so far, a continued robust employment and population growth rate would fairly effectively counter the possible deceleration of these two variables. In the construction sector, moreover, investment in civil engineering and in non-residential building, which has so far shown greater resilience, will foreseeably remain vigorous in the  4  BIS Review 134/2007  next few years. This could soften the negative impact on growth caused by the slowing of residential investment, where a cyclical downturn seems to have started. Productive investment will probably continue to be the most buoyant component of domestic demand, although it is hardly likely that it alone will offset the lower contribution of household spending. Therefore, the role of net external demand will be fundamental in ensuring that a certain containment of expenditure is compatible with continued growth of around 3%. The contribution of this variable will hinge crucially on the behaviour of Spain’s export markets, but also on competitiveness, which is a factor that firms and the economic authorities are actually able to influence. In this respect, the basic channel through which the recent episode of financial instability and heightened international uncertainty could affect the Spanish economy’s expected growth scenario depends on the performance of the foreign sector.
Since then, DFIs have contributed to the economic transformation of Malaysia and helped to reduce inequality. For example, through them, the unserved and underserved segments of society have increased access to financial services. Rural communities have benefitted from microfinance initiatives and agent banking services. Last but not least, DFIs have contributed to macro-economic stability through the provision of counter-cyclical financing during periods of financial instability. The strategic role of DFIs make them well placed to contribute to the development priorities of the nation, and assist in the materialisation of the SDGs. Specifically, DFIs can play an important role in contributing to the advancement of the following SDGs: no poverty, zero hunger, good health and well-being, quality education, clean water and sanitation, affordable and clean energy, industry, innovation and infrastructure, reduced inequality, sustainable cities and communities and climate action, amongst others. Thus, as institutions designed with developmental mandates in mind, DFIs are primed to serve the greater good. For Malaysia, the developmental story is not over as we seek to transform our economy into a high income nation while ensuring no one is left behind. The task ahead of us is challenging, but it is not insurmountable. As such, the stakes are higher than ever. In this environment, it is important for DFIs to ensure that they remain relevant. The urgency for change remains high, as shifts in the global economic and social landscape continue to create risks and unforeseen externalities that may dampen growth.

I think at some point we will have to clarify, what happens after September 2016 and what happens with what comes to maturity. Quite a lot of securities come into maturity into the early years after September ‘16, this is something the Governing Council at some point will have to decide and communicate. Some people say the ECB is dominated by the financial sector. I strongly disagree with that, it’s more the opposite. Since we implemented our Forward Guidance we have been signalling more of our reaction function. When we talk about our ability and willingness to act under a number of conditions, of course markets incorporate that. What’s your view on the need for further monetary policy action now? There will be different views as usual in the Governing Council, there will be a very good dialogue on the economic assessment. You cannot prejudge at this time the decision on what combination of measures to take or not to take. The staff has also been tasked to look at the impact of all measures on financial conditions, on the economy and on inflation. The Governing Council will discuss whether there is a case for further action in the context of heightened uncertainty. This is a key issue. What would be the impact on the banking system of an even-more negative deposit rate?
I also saw a number of bright spots on my visit to the area a few months ago. One was Jersey City, which is leveraging its proximity to New York City to attract residents and jobs. Another was Newark, where I saw signs of downtown development, including Teacher’s Village, a mixeduse community of teachers with new schools, housing and retail businesses. But pockets of weakness remain. For example, in upstate New York, Binghamton has had no meaningful rebound in employment. Although the U.S. Virgin Islands and Puerto Rico remain in a deep economic slump, employment appears to have steadied in both places in recent months. However, Puerto Rico’s weak economy coupled with a fiscal crisis means its economic outlook remains uncertain as it struggles to address its unique set of problems. Now, I’d like to turn things over to one of our regional economists, Jim Orr, who will provide a more detailed presentation of economic conditions across our region. BIS central bankers’ speeches  3

The country is therefore saving today in order to consume in the future. Moreover, it is more profitable for Japan to invest abroad since there are fewer domestic investment opportunities and growth prospects are muted. Japan therefore exports capital abroad and has a current account surplus. There are thus structural reasons why countries have a current account balance above or below zero for an extended period. Surpluses or deficits therefore do not necessarily indicate an overvalued or undervalued currency, or present a risk for the country and the global economy. 5 How can we distinguish between those current account surpluses or deficits that can be explained by fundamental factors, and those that cannot? The IMF has developed a model for conducting a thorough analysis of the impact of various economic drivers on individual countries’ current account balances. These drivers include demographics, the level of development of a country, and fiscal policy – in other words, factors that influence savings and investment. The results of the model are incorporated into an annual report, the External Sector Report, which I mentioned in my introduction. Nevertheless, it is not enough just to apply the model in a mechanistic way. The IMF therefore also takes country-specific circumstances and features of balance of payments data into account in its assessments. In Switzerland’s case, it concludes that the current account surplus is in line with macroeconomic conditions and is not the result of an undervalued currency or inappropriate monetary or fiscal policy.
Monetary policy has a limited capacity to affect the real economy When the Riksbank decides on the repo rate, we assume that it will take one to two years before the decision has its full impact. Our monetary policy is therefore based on forecasts of inflation and economic developments over the coming three years. However, as I have said, it is particularly difficult to make forecasts right now as a result of the prevailing uncertainty. When we make our decisions we take into account both the inflation outlook and the prospects for the real economy. Depending on what type of shock the economy is exposed to, we can allow it to take time for inflation to return to the target and in this way avoid overly large fluctuations in employment and production. However, it is now generally accepted that monetary policy cannot be used to attain a permanently lower level of unemployment. Many people believed this was possible a while ago when A. W. Phillips found a negative correlation between unemployment and inflation at the end of the 1950s, 5 a relationship usually called the Phillips curve. This shows that higher  5  Phillips actually studied the relationship between wages and unemployment, but later studies indicated a similar relationship between inflation and unemployment, Phillips, A. W, (1958) “The relationship between unemployment and the rate of change of money wages in the United Kingdom, 1861–1957”, Economica, 25, pp. 283–299. BIS Review 58/2010  3  employment can be achieved at the cost of higher inflation.

The Riksbank’s calculations show that employment in the manufacturing industry has been slightly stronger than the historical pattern implies during this economic downturn, given the large fall in production, while employment in the services sector has been much stronger than one might have expected given historical relationships. As mentioned earlier, it appears as though the Okun coefficient has declined during 2009. I mentioned earlier that GDP fell by almost 5 per cent last year. According to the estimated Okun’s law, unemployment in the economy as a whole should have risen by around 3 per cent, but the increase was only around 2 per cent. Although cuts in staff have been made, companies have not adjusted their workforce to the falling demand to the same extent as they would have if the historical pattern had applied. Many companies have instead chosen to retain existing personnel to a much greater extent than during earlier downturns. In some cases, they have instead introduced measures such as freezing wages or shortening the working week. One explanation might be that companies expect demand to be restored quickly and that they want to be prepared to quickly increase their production again. Another explanation as to why production has fallen more than employment, which is mentioned in the IMF’s latest World Economic Outlook 4, could be that production has fallen most in those sectors of the economy with the highest productivity level. 2  Aranki, Friberg and Sjödin, 2010, “The relationship between the business cycle and the labour market in Sweden”, www.riksbank.se.