samchain/econo-pairs-v1 huggingface dataset:
Our forecasts show a substantial fall in demand and the lower interest rate policy is intended to contribute to softening the fall. When the circumstances have suddenly changed, monetary policy has been rapidly adapted to the new situation. The two cases I have taken up show the flexibility inherent in our monetary policy and which we have made good use of. What is the driving force behind inflation? A fundamental question As monetary policy’s ability to influence inflation and ultimately economic developments depends on the type of shock to which the economy is subjected, we must analyse the driving forces behind inflation. 5 When inflation is governed by supply factors that push up inflation, as in 2007-2008 when for instance energy prices rose, the initial effect cannot be prevented by monetary policy. When inflation became too low in relation to the target around 2005, this was largely because productivity rose more than expected. This is essentially a positive development that neither should nor can be prevented by monetary policy. However, it provided a possibility to hold the interest rate at a low level and to allow a higher level of demand than would otherwise have been the case. But the effects on employment were limited by the underlying productivity growth. However, the Riksbank might have needed to cut the repo rate further if one had at the same time observed a deterioration in demand or that the more long-term inflation expectations were far below the target.

Given the gloomy economic prospects, I and the other Executive Board members considered in February that a substantial repo rate cut was needed. We were expecting a rapid deterioration in the labour market situation, which together with rapidly falling energy prices meant that inflationary pressures had declined. In this situation there was thus nothing to prevent monetary policy being used in a forceful manner to alleviate the effects of the fall in demand that came in the wake of the financial crisis. On the contrary, the interest rate cut was necessary to attain the inflation  6  BIS Review 38/2009  target in the long run. If the situation were to deteriorate, a first measure would be to cut the interest rate further. If the repo rate were to be cut to zero, or close to zero, and this was still not sufficient, other types of measure would be necessary. We are prepared to implement the measures that are necessary. If inflationary pressures were instead to increase, it may be necessary to raise the repo rate more quickly than we have assumed. A few years ago the Riksbank was criticised for not giving sufficient consideration to other variables than inflation, such as unemployment, for instance. Economic theory and experiences show, however, that monetary policy has only a very limited ability to lastingly affect real economic variables. On the other hand, the Riksbank tries to achieve a reasonable balance between attaining the inflation target and stabilising the real economy.
There are some speculations about the Stock Exchange in Vienna wanting to be the market for the region [Vienna is the second smallest SE in the EU.]. However, individual countries would prefer to either remain independent, or to cooperate more closely with some bigger partners - such as the Frankfurt Stock Exchange. As shown above, the financial sector is generally in good shape. There are some differences among the individual parts of the financial sector, but the main part [the banking sector] is as sound and  BIS Review 53/2003  9  strong as never before. This is due to several reasons, such as the improving legal environment, improving management, or even outright government financial assistance in the past. However, the greatest difference is due to the privatization to foreign banking institutions. These institutions have brought all the necessary components for successful long-term banking. The legislative and regulatory framework has been harmonized with the acqui communautaire. The harmonization has been confirmed by EC Peer reviews and by the multinational financial institutions (such as the IMF and World Bank during their FSAP process). Of course, there is still a lot of work to be done. The legislation and regulation shall be more streamlined, the area of law enforcement needs to function more efficiently, changes in accounting standards must be made. But these tasks are not related purely to the EU accession. They would have to be done under any circumstances. The financial sectors in the new member states are functioning efficiently, and are stable and competitive.

(L.A.) Volume (L.A.) PX50 (R.A.)  440  420 100 000 400  0  380  1994  1995  1996  1997  Number of Traded Shares  1998  1999  2000  2001  2002  1994 1995 1996 1997 1998 1999 2000 2001 2002 22 1024 1698 1628 300 283 181 142 100 79  In bond trading, the situation is slightly more optimistic. The volume traded is approximately eight times the size of share trading and there is much higher liquidity. Continuous increase in volume is mainly due to the issuance of new public debt. PSEPSE- Basic Data (Bonds) 2 000 000  1400  1 800 000  1350  1 600 000  1300  1 400 000  1250  1 200 000  1200  1 000 000  1150  800 000  1100  600 000  1050  400 000  1000  200 000  950  Marcet Cap. (L.A.) Volume (L.A.) PXD  900  0 1994  1995  1996  1997  Number of Traded Bonds  1998  1999  2000  2001  2002  1994 1995 1996 1997 1998 1999 2000 2001 2002 23 27 48 80 92 98 95 94 82 72  What will the future bring to capital markets? It is evident that with limited share trading, there is not a very rosy future ahead. There are discussions about merging the markets in the region and possibly joining some European Stock Exchange.
Good examples of this are the work by the G-20, the creation of the Financial Stability Board (FSB), the strengthening of the Basel Committee on Banking Supervision and the changes in the governance structure of the BIS and the IMF. Highly significant progress is being made in international financial regulation, including most notably the regulatory reform of capital and liquidity (known as Basel III), which will come into force in 2013. Both the reforms already approved and those still under discussion within the FSB are geared to countering the problems identified as lying at the root of the recent crisis. Examples here are the measures aimed at smoothing the cyclical fluctuations inherent in the banking system, namely procyclicality, at restricting high-risk activities, at mitigating systemic risks (in particular those arising from the so-called systemic financial institutions) and at setting in place more rigorous and effective supervision. To this must be added the efforts made in Europe, both in terms of governance and crisis management in the EU, and of the revision of financial system regulation and surveillance arrangements. In this respect, a new supervisory structure has been set up in the EU, namely the European Systemic Risk Board, which will be entrusted with the surveillance of risks to financial stability. It will be joined by three supervisory agencies covering banking, markets and insurance, which should contribute to providing for much more fluid and efficient coordination among national supervisors.

But apart from this progress on the international and European levels, the crisis has also required national governments to come up with energetic responses at home. This is because not all economies faced the onset of this crisis with the same macroeconomic imbalances or the same weaknesses in their banking systems or supervisory arrangements. From the start of the crisis, governments in some of the biggest economies were, in addition to compensating for the effects of the tightening – and even closing down – of certain funding markets, obliged to support some of their major banks with public funds. Fortunately, the more strictly regulated and supervised Spanish banking system withstood reasonably well this first wave of the crisis. But that does not mean we were immune to it. The crisis entailed an abrupt decline in world growth and gave rise to major problems on international funding markets which significantly affected the Spanish economy in general, and its banking system in particular. BIS central bankers’ speeches  1  In the long upturn prior to the crisis, the Spanish economy had built up significant imbalances, such as the external deficit, the increase in private debt and the excessive expansion of the real estate sector. In parallel, weaknesses had been incubating in the banking industry, especially in parts of the savings bank sector.
However, it increases the difference in treatment between repo transactions with central banks and interbank repo transactions not backed by level 1 HQLA. 13  See Stein (2013, op. cit.). BIS central bankers’ speeches  5  pricing of the CLF should therefore strike the right balance to protect monetary policy without undermining the effectiveness of the LCR as a prudential instrument. On the one hand, in order to reduce pressure on demand for central bank funding, it is necessary that banks find it more attractive to pay the CLF commitment fee rather than to obtain central bank liquidity and leave it on their accounts at the central bank. A CLF that would only be used in stressed times would not serve our purpose. On the other hand, there is a danger perceived by some that a CLF could materially change the effectiveness of the LCR, as the definition of HQLA would de facto be substantially widened, which would offset the objective that banks should self-insure against liquidity risk. To avoid such an outcome, the following remedies exist: first, the pricing of the CLF in normal times should reflect the opportunity cost of a bank for holding HQLA rather than non-HQLA. As a result, reliance on the CLF should not be more attractive than holding private-market HQLA. Second, it has to be borne in mind that access to the CLF needs to be collateralised; hence collateral availability puts a “natural” limit to accessing HQLA in the form of a CLF.

The inadequacies of banks’ liquidity management became apparent when some markets for long-term debt securities (including ABS, ABS CDOs, etc.) experienced a sudden re-pricing, resulting from the fact that risks were not properly reflected in their prices. Banks faced  BIS central bankers’ speeches  1  substantial liquidity outflows and shortages owing to their excessive exposure to these instruments and their excessive reliance on short-term and volatile secured market funding sources. In the US, this phenomenon mainly materialised as a “run on repo”;1 in the euro area, it resulted into drying up of foreign currency funding, severe strains in bank unsecured funding, and/or a reduced access to repo through clearing houses. In all cases, the central bank had to step in and to expand its liquidity provision to banks. What does this imply for liquidity regulation? Regulations should start from first principles, and we therefore have to identify the market failures or negative externalities that liquidity regulation aims at addressing. I consider that there are three main objectives for liquidity regulation: a) to reduce the impact of uncertainty on the bank risk profile, b) to build up liquidity buffers and c) to mitigate the systemic characteristics of a liquidity crisis. Maturity transformation gives rise to liquidity risk since, by definition, a bank engaging in maturity transformation cannot honour sudden and large withdrawal requests by depositors. They may face similar difficulties if interbank market lenders refuse to roll over their loans.
At the heart of the answer to this question is the Eurosystem’s monetary policy strategy. Indeed, this strategy is designed to make both our objective and the monetary policy aimed at achieving this objective credible, transparent and comprehensible, and thus make our decisions predictable. However, let me be very clear. Being predictable in no way implies that the central bank intends to follow the market. On the contrary, the causality should run in the other direction. Markets should be in a position to anticipate monetary policy decisions based on a credible strategy of the central bank. This does not exclude that certain monetary policy decisions may sometimes surprise the markets, but this is not our aim. As was argued in an article in the most recent issue of the ECB Monthly Bulletin, a stability-oriented monetary policy contributes to reducing certain risk premia in interest rates and thereby to increasing the efficiency of the allocation of capital, thus enhancing overall welfare. This shows that it is very important to give clear guidance to the markets by conducting a credible monetary policy focused on price stability. As you know, the strategy selected by the Governing Council of the ECB comprises a quantitative definition of price stability, which should contribute to anchoring long-term inflation expectations, as well as the two so-called pillars. The quantification of the primary objective, combined with the transparency and the credibility of the Eurosystem, provides the most important guidance to financial markets. Our monetary policy should contribute to keeping inflation expectations safely below 2%.

Such fundamental changes in investor risk assessment influence not just the prices of the affected bonds. They also impact on other investment categories and, therefore, as I will explain later, on the financial markets in general. Allow me to begin by addressing the most serious developments. The European sovereign debt crisis is far from over. In comparison to last year, it has again worsened. Thus the credit risk premia of euro countries with large debt burdens continued to rise; compared to the previous year’s average value, the risk premia have approximately doubled. That the debt problem in the euro area has worsened is apparent not just on the bond markets. On the foreign exchange market, the CHF/EUR exchange rate, in particular, reacted strongly, attaining new all-time high levels. Since, at the same time, the US dollar was still tending lower, the CHF/USD exchange rate also climbed to extreme levels. The weak dollar has to do with doubts about the robustness of the US economy in the wake of diminishing fiscal and monetary policy stimuli, as well as worries about US public debt. Since the Swiss franc also recorded historical exchange rates against other currencies, its value, on a real and trade-weighted basis, is now well above its long-term level. Investor appetite for bonds considered to be secure helped to push down capital market yields on US, German and Swiss ten-year government bonds to the level last recorded in December 2010 of around 3% (US and Germany) and 1.7% (Switzerland).
We thus need to carefully weigh all relevant considerations and determine the actions that would be both legal and effective in promoting environmental protection without interfering with the main objective of the ECB’s monetary policy under the Treaty, which is price stability. Views and opinions certainly differ here. But I would argue that the ECB, acting within its mandate, can – and should – actively support the transition to a low carbon economy, in two main ways: first, by helping to define the rules of the game and, second, by acting accordingly, without prejudice to price stability.25 Our actions to protect the environment begin with reducing our own ecological footprint. In 2007 we adopted an environmental policy and registered with the European Eco-Management and Audit Scheme. For more, see ECB (2018), “2018 update of the ECB’s Enviornmental Statement”, October. Much of this is already happening, although I have no doubt it will intensify in the future. The ECB, together with other national central banks of the Eurosystem, is actively supporting the European Commission’s sustainable finance agenda.26  5/9  BIS central bankers' speeches  We are doing this by supporting ongoing work in various international and European fora aimed at enhancing the pricing of climate change and transition risks and promoting the reorientation of financial flows towards sustainable investment products.27 A tangible side effect of these measures is that, once adopted, they will automatically be reflected in our collateral framework.

Only last week, ECB Banking Supervision communicated to banks that climate-related risks have been identified as being among the key risk drivers affecting the euro area banking system. And, of course, the Central Banks and Supervisors Network for Greening the Financial System published its first progress report just a few weeks ago, reasserting that climate-related risks fall squarely within the supervisory and financial stability mandates of central banks and supervisors. An area that has received less attention though, both in policy and in academia, is the impact of climate change on the conduct of monetary policy. Today I would like to contribute to this debate and offer a way of thinking about how climate change fits into our current monetary policy framework – the way we react to shocks and the way we think policy propagates through the economy – and how it may affect our monetary policy implementation. I will argue that climate change can be expected to affect monetary policy one way or the other. That is, if left unchecked, it may further complicate the correct identification of shocks relevant for the medium-term inflation outlook, it may increase the likelihood of extreme events and hence erode central banks’ conventional policy space more often, and it may raise the number of occasions on which central banks face a trade-off forcing them to prioritise stable prices over output.
In the beginning, a period of low macroeconomic volatility usually brings about an expansionary phase of the business cycle. As the period of stability grows longer, we have rising investor and consumer confidence, depicting a bout of optimism. The rise in optimism leads to increased risk-taking, resulting in increased demand for credit and rise in asset prices. In this period of optimism, the pricing of risk tends to fall, lending spread narrows, and banks tend to provision less as they focus more on a short-term outlook rather than a longer-term perspective of risk. This leads to an upswing in the financial cycle. Demand for credit is further bolstered by a rise in asset price which raises the valuation of collactoral, further raising confidence and magnifying the risk-taking behaviour and leverage. Next, greater availability of credit leads to more spending and adds to the expansionary forces as business outlook is elevated by perception of low risk and strong profitability. It is when confidence changes that the interactions of the three cycles go into reverse. Decline in confidence closes down the risk-taking behaviour, leading to a fall in credit demand. Banks respond to this re-assessment of risk by de-risking their financial exposure, exacerbating the downturn in the financial cycle. This results in large adverse impacts on the real economy that further weaken confidence. In the downturn, the three cycles interact and move in synchronization, propagated by deteriorations in the balance sheets.

Such interactions tend to amplify the amplitude of the bussiness cycle, thereby heightening the risk to financial stability. This description of procyclicality presupposes the existence of two cycles, namely the business cycle and the financial cycle, that interact and reinforce each other. However, economic and financial decisions underlying the two cycles are not independent. They are inherently linked by the risk-taking behaviour of economic agents: the behaviour which is prone to change in response to incentive, perception of risk, regulation, and new information. It is this change in risk-taking behaviour that explains large swings in investor sentiment, from a period of optimism when risk is disregarded to a period of pessimism when there is no willingness to  BIS Review 160/2009  1  take risk. And it is this change in risk-taking behaviour that underscores the abrupt change in financial behaviour, and in the direction and momentum of economic activities. It follows therefore that procyclicality is a mechanism that encompasses the interactions of at least three reinforcing cycles that move in tandem. They are the business cycle, the financial cycle, and the cycle of risk-taking beheviour represented by fluctuations in asset prices or the asset price cycle. The three cycles are self-reinforcing, and it is the ways the cycles interact with each others that define the amplitude and the momentum of the cyclical flunctuations, as well as risk of a financial crisis. Interactions of the three cycles can be illustrated with reference to a typical boom-bust cycle.
As I touched upon initially, financial innovation and financial integration have led to explosive growth in the international movement of capital. These flows serve as an important catalyst for domestic financial market development, as reflected both in the size of the banking sector and equity markets, as well as the quality of institutions for supervision and regulation. In recent years, attention has been given on how macroeconomic policies should respond to the unexpectedly big wave of capital flows to many emerging market economies. Regardless of the form or way of these inflows, they create important challenges for policymakers due to their potential to cause overheating of economies. Emerging market countries have responded to address these concerns in a variety of ways, such as exchange rate alignments, efforts to neutralize the monetary impact of interventions through sterilization, and controls on capital flows. At this point, I should note that coordinated fiscal and monetary policies are necessary to attract high quality capital flows  BIS Review 21/2008  3  and to manage flows efficiently regardless of their type. Low inflation and prudent fiscal polices signal to investors the extent of government’s commitment to achieve macroeconomic stability and adds to the credibility of the government. On the other hand, efforts in the field of financial supervision and regulation, together with policies such as labor and product market reforms are important for the stability and soundness of financial systems in handling capital inflows.

Regulatory and supervisory authorities should strengthen prudential and other financial market regulations in order to deepen financial markets and improve investment climate, whereas central banks should focus more on greater currency flexibility and price stability. In conclusion, as a central banker, I would like to highlight three key messages from the thoughts I have shared with you. First, to achieve price stability, central banks need to ensure efficiency of financial infrastructure and maintain smooth operation of financial services. An efficient and effective payment and settlement system is at the core of financial infrastructure. Second, removing market imperfections is essential for the smooth operation of financial systems. Establishment of credit bureaus to improve exchange of information on credit history of economic agents and reducing fiscal dominance are important steps to ensure sound-lending activities. In this context, the role of micro finance in promoting the access of the low-income segment of the society to credit should be supported and encouraged. Third, the overall level of external financing and its composition is important for domestic access to finance. The benefits of capital inflows to economic growth would be higher with a developed financial sector. Central banks could best support this process through their contribution to macroeconomic stability. Thank you. 4  BIS Review 21/2008