samchain/econo-pairs-v1 huggingface dataset:
Various measures of underlying inflation are often used to justify the system used. What these measures have in common is that they use the CPI but remove various price components that have historically shown substantial fluctuations. One such measure, UND1X, has been given a particular status. In this measure the effects of changes in indirect taxes and subsidies as well as mortgage interest expenditure have been excluded. In the long term, the difference between the increase in the CPI and the increase in UND1X is slight. However, in the short term, inflation develops slightly more evenly according to UND1X than according to CPI as a whole. The bases for the monetary policy decisions are therefore often easier to explain when the inflation forecasts follow UND1X than when they follow CPI. BIS Review 29/2006  1  The fact that the objective of monetary policy has been given as low, stable inflation is because in the long term, this is the only factor of the economy that monetary policy can influence. Long-term developments in growth and employment are not affected by changes in the interest rate. They are determined by factors such as productivity and the supply of labour and capital, as well as the way the labour market – and the economy as a whole – functions. Monetary policy’s most important contribution is to act to ensure that the macroeconomic environment remains as stable and predictable as possible. At the same time, monetary policy has some effect on short-term fluctuations in production and employment.

It should be specified in Inflation Reports and in connection with monetary policy decisions that we expect inflation to deviate from target for a longer period than two years, why this is the case and when we expect the target to be attained. Increased clarity on the principles guiding monetary policy These principles as to how monetary policy is formulated are in many ways an accepted reasoning for those who have followed the monetary policy discussion in Sweden and in other countries that apply inflation targeting. However, there have also, as I mentioned earlier, been some changes in recent years that are worth highlighting. As it is a question of a gradual development of our work, the extent of what can be regarded as new elements depends on how far back one looks. A point of comparison that feels natural is the clarification of the Riksbank’s monetary policy strategy published in 1999 2 . The difference between then and now is that the Riksbank can now go a little further with regard to how we communicate the consideration that monetary policy gives to the real economy. I do not consider it particularly strange that there have been changes on this point. The possibility to formulate monetary policy based not only on inflation prospects but also on how production and employment will develop has come about because the inflation target is today firmly anchored in the economy.
Urban Bäckström: The current situation for Swedish monetary policy Speech by Mr Urban Bäckström, Governor of the Sveriges Riksbank and Chairman of the Board of Directors and President of the Bank for International Settlements, before the Swedish Parliamentary Standing Committee on Finance, Stockholm, 27 March 2001. *  *  *  First a word of thanks to the Committee for the invitation to have a stimulating discussion about the current situation for monetary policy. An open discussion of these matters is important for people’s perception of the Riksbank’s legitimacy. I cannot think of a more suitable forum than you as representatives of our principal, the Riksdag. Risk of a slowdown after a series of years with strong economic growth We can look back on a series of years with strong economic growth in Sweden, accompanied by low inflation. As far as can be judged at present, one explanation for this combination is that the Swedish economy is functioning more efficiently. To some extent, however, it has also been a cyclical phenomenon. After the economic crisis that ravaged Sweden in the early 1990s, there were plenty of unutilised resources to draw on and therefore less risk of rising production hitting the ceiling at an early stage. Sooner or later, however, demand growth that is excessively rapid and persistent will generate imbalances in the economy and that normally pushes the rate of price and wage increases up. Such a course of events is liable to result in a recession, with falling output and rising unemployment.

If world economic activity had remained strong, it would have been reasonable to count on the Riksbank continuing to raise the repo rate. BIS Review 26/2001  1  A look at the threats we perceived in December as being liable to push inflation up above our forecast, shows that they have become less troublesome. At the same time, the clouds that were gathering over the U.S. economy have thickened and darkened. To date this year the Federal Reserve has cut its interest rate a total of 1.5 percentage points. The first cut, announced in January in between the regular monetary policy meetings, surprised the market by its magnitude as well as its timing. Another cut came at the end of January and a third last week, on 20 March. There has been a spate of negative news about the global economy in general and certain companies in particular and international stock markets have remained turbulent. US economy difficult to assess The focus at present is on the U.S. economy. Its future path is highly important for economic developments in Sweden. In order to arrive at a clear picture of the situation, we need to judge the effects of alternative outcomes. During the 1990s the United States experienced its longest economic upswing ever without any serious signs of accelerating price and wage increases. A more efficient economy, with strong competition and functional product and labour markets, accompanied by advances in computer and telecom technology, are said to have contributed to a higher rate of potential growth.
The guideline was introduced in order to provide a level playing field at a time when many banks were already themselves applying this restriction. It continues to have the broad support of the banking industry. It has helped maintain banking stability during a period of considerable stress, and, no less important, it has helped limit the problem of negative equity. The guideline does not prevent borrowers from obtaining further finance from other sources, and indeed there are many products on the market to enable homeowners to borrow up to 90% of the value of their home, and many homeowners who have taken advantage of these products. In other words, the 70% guideline is intended to restrict the risk exposure of banks, not to limit the amount of finance that borrowers can obtain. The guideline is therefore a not a tactical tool for affecting property prices in the short term but a strategic measure for maintaining banking stability over the longer term. Anyone who wishes to see what happens when there is no such guideline in a falling market can find plenty of examples overseas. Or you can look again at the situation in Hong Kong in 1983, when banks became dangerously exposed, directly and indirectly, to a volatile property market in which the bubble had burst and from which confidence was draining fast: there was, of course, no 70% guideline in those days. Functions and Responsibilities in Monetary and Financial Affairs You may have noticed here parallels with monetary policy.

The general wisdom was that the inevitable direction of the Hong Kong dollar under a freer exchange rate would be to depreciate. The result would be an end to deflation, a boost to economic growth, a reduction in unemployment, and the elimination of the budget deficit. In fact, all of our problems would be cured - and rapidly - by this single panacea. BIS Review 44/2003  1  If only things could be so simple! But, of course, they are not. I have spoken and written at length on other occasions about the huge risks to financial and social stability that we would expose ourselves to in following such a course. Financial markets have a habit of overshooting and precipitating financial crises that are very costly to the community. And it seems, from recent events, that the very premise on which this panacea of exchange rate depreciation is based may be seriously flawed. For the market exchange rate of the Hong Kong dollar has strengthened over the past two or three weeks to the extent that it has been necessary for the HKMA to inject liquidity into the system in order to dampen excessive volatility. The market has, all of a sudden, chosen to ignore the continuing problems of deflation, unemployment and budget deficit, and the possible implications of these for the exchange rate. The clear message from the market now is that, were the Hong Kong dollar to be allowed to float, its exchange rate would rise rather than fall.
The US will not always get its way; for example it is facing serious difficulties in Iraq. However, there is no credible challenger for America’s global position. In East Asia a strong US presence has been the cornerstone of peace since the end of the Second World War. The US will remain a vital and irreplaceable part of the East Asian strategic picture for the foreseeable future. Of course in Asia as in other regions, many countries, including friends and allies of the US, are uncomfortable with the scope of US pre-eminence and some of its policies. But all still want the best possible relationship they can have with the US. They know that they cannot challenge US pre eminence and that no issue in the region can be resolved without America’s cooperation. China is a prime example. China’s fundamental preoccupations are internal. It wants a stable regional environment in order to deal with them. Beijing will not compromise on its vital interests, one of which is the status of Taiwan. But it knows that it is also in China’s interest to have good relations with the US. For its part, the US knows that it needs the cooperation of China in order to deal with terrorism and other post Cold War challenges. US China relations are the most important bilateral relationship in Asia and soon, perhaps in the world. Some degree of competition between the US and China is inevitable, but conflict is not.

I have every confidence that the European Banking Authority – which is moving to Paris on 13 June this year – will encourage effective cooperation and the useful exchange of information between national supervisors. Edouard Fernandez-Bollo also chairs the EBA’s internal AML/CTF committee. The ACPR conference on 21 June, which will focus on AML/CTF in its morning session, will be an opportunity to remind ourselves of the efforts we all need to keep making in this field. The ACPR and Banque de France are at the frontline of efforts to increase cyber-security in the financial sector, which is one of the priorities of France’s G7 presidency. Let me remind you that there is no more certain threat to the financial sector than that of cyber-risks. Given this urgency, we will be implementing concrete measures in the near future. The main ones are the shared “categorisation” of cyber-incidents, and the lessons to be drawn from the G7 cyber stress-test that will be organised by the Banque de France at the start of June. ** The French economy has the advantage of having a solid financial system, the most solid in the euro area: France is a leader in essential activities such as life and non-life insurance, and asset management, and is home to four of the euro area’s eight global systemically important banks. The European supervisor can also rely on the expertise and experience of the ACPR, which are recognised both in Frankfurt and in Europe.
As international monetary policy is presently very expansionary, we also need to conduct an expansionary monetary in Sweden so that inflation does not become too low. However, a more expansionary monetary policy contributes towards households’ debts increasing, and this increases the risks for the Swedish economy as a whole and the risks for financial stability. Financial stability in Sweden is affected by the banks, to a large extent, obtaining funding for households’ mortgages on the market, largely in the form of what are known as covered bonds. These bonds have come to form the linchpin of the Swedish financial system: the value of the bonds corresponds to over half of Sweden’s GDP. Foreign investors own a large proportion of these bonds. Swedish banks’ funding is therefore dependent upon both Swedish and foreign investors having confidence in the Swedish housing market. Let me now go on to talk first about our monetary policy and the significance of the housing market and household indebtedness for interest rate decisions, then describe the risks and finally discuss the tools for managing these risks. Why is monetary policy so expansionary? Sweden is a small, open economy that is affected to a large extent by events abroad. The euro area, which represents about half of our foreign trade, is particularly significant. 2 As you  1  According to the Sveriges Riksbank Act, the Riksbank must maintain price stability. The Riksbank has defined a target for inflation: the annual change in the Consumer Price Index (CPI) should be 2 per cent.

Moreover, the Law incorporates a number of incentives for foundations to relinquish control of the banks in which they participate, something that will normally happen in most cases in less than four years. We believe that this approach will certainly promote better business management and facilitate access to capital markets. In doing so it will contribute to a smoother adjustment by saving banks to the new and very demanding environment, thereby contributing to the strength of the institutions themselves and to financial stability. But more importantly, the highly relevant social objectives of the cajas are fully preserved through the operation of the foundations. These foundations continue to contribute very 4/5  significantly to social welfare. It is just that the foundations´ wealth will now be more diversified and, therefore, they are likely to obtain a more robust stream of income with which to finance their activities. Of course, I would not dare claim that this formula be pursued everywhere. Other reform strategies may also work in other jurisdictions. Yet, I strongly believe that some form of restructuring is required in the European banking market and that the strategy followed in Spain is a reasonable response to the new challenges all credit institutions have to face while preserving the essence of the social value that saving banks have historically provided. Thank you for your attention. 5/5
But some general policies are also emerging. Here in the UK, the government is requiring the domestic retail banking business of the largest banking groups to be ring-fenced. And for the EU, Erkki Liikanen has produced an important report on  BIS central bankers’ speeches  3  the structure of banks which would involve essentially ring-fencing the trading business. Both of these approaches, which are similar in many respects, work with the grain of the FSB’s approach to resolution. Single-point of entry resolution: bail-in of the debt of the top company The central principle running through this whole endeavour is that after equity is exhausted, losses should fall next on uninsured debt holders, in the order they would take losses in a standard bankruptcy or liquidation process. Although all resolution strategies have that effect, it is the particular focus of what has come to be called “bail-in”. I should perhaps say that bail-in isn’t about identifying a special type of bond that can be written down or converted. “Bail-in” is a verb not a noun. It’s about giving the authorities the tools, the powers, to effect a restructuring of the capital and liabilities of a bank that isn’t toxic all the way through; as such it will be recognisable to specialists as broadly akin to the US Chapter 11 system for business reconstructions, but speeded up for the exigencies of banking. Bail-in is not unique in putting losses on bondholders. All resolution tools do that.

It therefore stands to lose money if there is a realised loss that is not absorbed by more junior creditors. Any such loss is later recouped by the Deposit Insurer via a levy on the surviving insured banks. It is important to underline that for banks funded by insured deposits, some of the costs of failure will fall on their peers. Over time, I suspect that that will increase pressure for a funded deposit-guarantee scheme with risk-based levies. That avoids defaulting banks getting off scott free, and has banks contributing to the deposit insurance system when times are good rather than only when under pressure. I realise that I am telling this conference of deposit insurance agency experts things you already know! I am doing so because they are highly relevant to where I am going on the development of resolution strategies for coping with the failure of the world’s largest and most complex banks, and how Deposit Insurance might fit into that endeavour. Resolution regimes for systemically important firms The objective is, of course, to get to a position where public money is never used to provide solvency support for a failing bank, however large or complex. To be clear, this is emphatically not just about preserving payments and transactions-deposit services.
Over time, the failure to achieve first-mover  5  Overconfidence actually applies to a broad range of activities, not just investing. For a more general treatment of this issue of overconfidence and other ways in which economic agents depart from complete rationality, see Richard Thaler. “From Homo Economicus to Homo Sapiens.” 2000. Journal of Economic Perspectives 14, no. 1 (Winter): 133–41. 6  This is not to argue that short positions could not be established at all. Monoline guarantors, AIG Financial Products and some securities dealers were willing to sell protection in the form of credit default swaps on some of these assets. Michael Lewis examines how some investors managed to take positions that benefitted from a collapse of the housing bubble in The Big Short: Inside the Doomsday Machine. 4  BIS Review 43/2010  status becomes evident and valuations adjust to reflect this, or lock-up provisions on Internet stocks expire, leading to a large increase in supply that leads to a sharp fall in prices. 7 In the housing boom, the end came about for several reasons. One limiting factor was that the rise in home prices outstripped income growth. Thus, for the boom to persist, underwriting standards had to be continually relaxed; only in this way could a new cohort of first-time buyers qualify for big enough mortgages to be able to “afford” to buy their homes. The difficulty in replenishing the pool of new home buyers limited how fast demand could keep rising.

For the fixed income market, such tools might include raising the haircuts charged to securities dealers on their repo financing; raising the haircuts that the securities dealers assess against the collateralized borrowings of their customers as part of their prime brokerage business, or raising initial margin requirements on OTC derivatives transactions. Macroprudential tools are undoubtedly difficult to use effectively in practice. For example, it is difficult to judge their impact. If, for example, loan-to-value ratios for single-family mortgages are lowered by 5 percentage points, how big an impact will this have on housing demand? There also is a risk that the rules or regulations will simply be circumvented. For example, investors might move to instruments or to off-shore regimes with less stringent margin and leverage restrictions. Thus, it is important that the authorities have the ability to apply the macroprudential tools broadly throughout the financial sector. 11 None of this is going to be easy. A lot more work will be required to develop a portfolio of tools that could be used, that would be effective and would not be subject to significant evasion or unintended consequences. In terms of the use of macroprudential tools, let me briefly take note of another issue that requires significant consideration – the issue of governance. Who controls all these tools? Who decides when the tools will be deployed and how extensively or intensively? Having a sufficient toolkit seems like a good idea. But lodging all this authority within a single entity or institution might not be practical or desirable.
These novelties will be offered to the public as a modest contribution to the formation of a modern and dignified state for the Albanian nation. At present, fulfilling these obligations has become a more difficult task due to negative effects arising from the global economic crisis. Most evidently, labour markets, capital markets and economic activity remain under the effect of contraction of consumption and investments in the private sector. The anaemic reaction of the markets has placed central banks in a difficult position, a solution without any choice, i.e. intervene in the economy with all the instruments to address current emergencies while the other factors are forced to contract in favour of the long-term stability of public and private balances. In this situation, central banks are obliged to undertake a series of extreme and qualitatively-different measures, which have been never tested before and exceed all imaginary boundaries of the monetary policy. Actually, politicians are obliged to cope with debt crisis through an extreme fiscal policy aiming at short-term balancing and long-term stability of the fiscal policy. The focus and emphasis of the economic policy remains long-term rebalancing by cutting on expenses. An important part of these measures is very focused on the short-term problematic, hence risking to disregard the undesired effects in the long term. Under the pressure from social costs, the philosophy of current policies is to overcome the situation and maintain social peace and macroeconomic stability at the expense of sovereignty.

I am confident that these issues I shared with you provide a summarised vision of some of the main directions of our work during this period. BIS central bankers’ speeches  3  Looking forward to a productive exchange during the proceedings of the conference, I thank You for your attention! 4  BIS central bankers’ speeches