samchain/econo-pairs-v1 huggingface dataset:
The outbreak of the first phase of the crisis dates back over three years, when a European bank suspended redemptions of funds invested in US mortgage loans. It soon became apparent that the source of these problems lay in US subprime mortgages and in the spread of the associated risk via the “originate to distribute” model. Banks were hit hardest. Major financial institutions collapsed not only in the countries where the problems originated, but also in many others whose banks invested their savings in products generated by the more indebted economies. By contrast, the Spanish banking system had not originated or invested in this type of product, thanks largely to the relatively conservative approach behind our regulation and supervision. Consequently, although our banks were obviously not immune to some of the effects of the crisis, such as the deterioration in the economic situation or the consequences of the collapse in confidence on the workings of wholesale funding markets, the direct effect on the Spanish banking system was relatively minor. During the long expansion prior to the crisis, there was a constant increase in the indebtedness of the Spanish economy, similar to that in other countries which, with the crisis, saw their banking systems collapse. Some analysts drew parallels with the events in these countries and warned that similar problems could arise in Spain. But this has not been the case.

But the fact of the matter is that hardly any far-reaching reforms such as those being drawn up for credit markets have been proposed. Those interested in this viewpoint should read the latest speech by Fernando Restoy, the vice-chairman of the CNMV (Spanish National Securities Market Commission). In it he suggests certain areas in which the regulation of these markets could be improved. I’m going to adopt a less ambitious approach, focusing on describing market behaviour from the standpoint of a country such as ours, which in recent months has had to tackle a lack of investor confidence. What have we learned from the behaviour of the debt markets in this second phase of the crisis? Perhaps one of the key lessons is that markets are capable of identifying certain structural problems which, for whatever reason, may affect an economy’s solvency. And this is why markets can offer us economic policy pointers, of interest not only to them but also to us. Restoring health to public finances, reforms to boost growth and reduce unemployment, the restructuring of our banking systems so they are positioned to promote growth when credit demand picks up, etc. are all pieces of advice of benefit to us and which are worth following. Admittedly, some may say, markets issue warnings. But they usually do so belatedly. And this is true.
Unemployment has been close to a low historical average. Although it is of course difficult to compare and assess different central banks’ deliberations, the repo-rate decisions in Sweden during most of 2013 would appear to be one of the clearest examples of a monetary policy that leaned against the wind. When the prospects for inflation fell, the repo rate was held unchanged with explicit reference to household debt. This makes it interesting both for us in Sweden and for central banks in other countries to assess how successful the policy has been. It is far too early to make a complete assessment. But as there is a substantial need to manage financial imbalances in some countries, and there is a discussion on the role of monetary policy in this context, it may nevertheless be useful to make a preliminary assessment of the policy. Swedish inflation moving further from the target CPIF inflation was around 2 per cent in 2010, when the increases in the repo rate began after the record-high cuts in connection with the global financial crisis. But since then inflation has fallen and CPIF inflation has been around 1 per cent for a couple of years. Last autumn, inflation fell further. It is now very low; in February CPI inflation was –0.2 per cent and CPIF inflation was +0.4 per cent.

Import prices  Services prices  Annual percentage change  Annual percentage change  15  15  10  10  5  5  0  0  5  Australia USA United Kingdom Norway Canada Sweden  4  3  -5  Australia USA United Kingdom Norway Canada Sweden  -10 -15 10  11  12  13  5  4  3  2  2  1  1  -5 -10 -15  14  0  0 10  11  12  13  14  Note. In Figure 2b, the data for Australia is quarterly, while the data for other countries is monthly. For Sweden, Norway, the euro area and the United Kingdom, the data refers to services prices in the HICP and for others in the CPI. Sources: National sources and Statistics Sweden  9  The KIX index for policy rates only includes the euro area, Norway, the United Kingdom and the United States. Its composition has been governed by the relevance of the respective country’s policy rate for pricing on the foreign exchange and financial markets. For a more detailed explanation, see Sveriges Riksbank (2012). BIS central bankers’ speeches  5  Slower domestic demand and low inflation expectations also contribute The impact of monetary policy via the exchange rate can be primarily observed in prices of internationally-traded goods. However, a monetary policy that leans against the wind also has effects on inflation in that it dampens domestic demand.
It included a wide spectrum of measures, including the long-term repo based on broad spectrum of collaterals and introduction of special liquidity patterns enabling the banks to swap illiquid assets for Treasury Bills for a period of up to three years. Incredible, unseen till now. However, some knew, others maybe did not, that is far from sufficient. That the liquidity injecting has vital role only to delay, prolong the immediate, forthcoming collapse. That such steps can help to overcome the crisis only until the elimination of the actual reasons that were spreading the distrust. Also, to help understanding the severity of the fundamental problem and to postpone the inevitable day for calling to account. "Exactly as the high temperature, the fever (as Mervin King wrote) is by itself a symptom for the basic condition, thus the freezing of the interbank and money markets was a symptom for deeper structural problems in the banking sector". That is why another group of measures had to follow. The new, additional measures were designed to eliminate the fear arising from the thought and the facts that the banks are insolvent. To ensure that the banks have enough capital to survive the harsh economic plummeting and hence, to enable them to continue lending on normal criteria for the good credits.

The credit default swap premium indicator, showing the markets' concern for the banks' solvency, which according to many experts is the most significant individual diagnostic statistics, started to decline. Especially the CDS premium (commercial debt securities premia) dropped significantly. The progress with the guarantees, although gradual, is also encouraging, with more banks issuing bonds even without utilization of guarantee (government) being registered. The LIBOR spread also shrunk, and it is expected to "continue to narrow gradually compared to the period before the measures were undertaken" (this primarily pertains to England). Many banks continue to face with deleveraging and rebalancing in order to lower the dependence on financing through the central banks. The stronger capital and financial position of the banks will be possible in a period of several years. In wider terms, the financial system remains to be under acute clench, tension. The real economic sector bears the consequences. The unemployment increases. The business financing is getting harder and more expensive. The economies' growth decreases. Also the so-called emerging economies started to feel decline in the growth. It seems that we are entering into recession. The central banks of the developed economies transfer the focus of their measures from the inflation control to recession prevention. BIS Review 18/2009  3  What conclusions can be derived from this crisis? 1.
3  Hoeckman (2018), “Revitalizing Multilateral Governance at the World Trade Organization”, Report of the High-Level Board of Experts on the Future of Global Trade Governance. https://cadmus.eui.eu/handle/1814/60580 4 Dai, Mian, Yoto Yotov and Thomas Zylkin (2014), “On the trade-diversion effects of free trade agreements”, Economics Letters, 122(2): 321-325. 5/8  On the financial front, the international architecture has also become more fragmented during the last decade. The difficulty of reforming the IMF´s governance structure and the impression that its resources might prove insufficient should a severe crisis occur, have contributed to the emergence of multiple layers in the global financial safety net.5 Since the global financial crisis, the system has expanded to encompass multiple forms of insurance, comprising the IMF and a number of regional financial arrangements (RFAs) — the size of which has increased from almost negligible amounts in the early 2000s to more than 1.5 trillion dollars today —, bilateral swap lines and reserve arrangements. The proliferation of regional financial agreements is a response to countries’ need to ensure access to support for their balance of payments when circumstances require it — in some cases subject to less strict conditionality, in an effort to avoid the IMF stigma —, but also to the need to boost resources for crisis prevention and resolution. The latter need is clearly the rationale for the largest RFA, the European Stability Mechanism, created in the middle of the euro area sovereign debt crisis.

This has historically been the case for many of the emerging countries in which Spanish banks have international activity. Second, the characteristics of the banking markets in which they operate (much more concentrated, and with less banking penetration) are conducive to the existence of higher margins (see Chart 4). Returning to the profitability of the banking business in Spain, its comparatively low level is explained by a variety of factors. First, as I have already mentioned, the high volume of unproductive assets has a direct negative impact on banks’ income statements by reducing interest income and increasing impairment provisioning. Second, low profitability is also explained by the significant fall in income associated with banks’ deleveraging. In addition, the current levels of interest rates have squeezed banks’ 4/11  net interest income. That said, the ECB’s monetary policy has also had a positive effect on economic activity (thus reducing the losses from loan defaults) and on banks’ capital gains. In short, the ultimate net impact of low interest rates on bank profitability seems to have been smaller than that of the other factors I have mentioned. As regards operating expenses, they remain on the downward trend seen in recent years. This containment of expenses is taking place against a background of adjustment of the operating capacity of Spanish banks and has basically taken the form of a significant reduction in the numbers of staff and branches in their business in Spain.
For the fiscal union, finding the balance between cooperation and diversity is difficult. National preferences for taxing and spending are stronger, and the case for elevating certain functions to the European level is more complex. And there can be no taxation without representation, meaning any shift to a more European fiscal policy must be accompanied by the same shift towards European democratic control. So to frame the discussion, I think it is helpful to recall the taxonomy of economic policy functions described by Richard Musgrave. He distinguished between stabilisation, allocation  3  Schoenmaker, D., (2011). “The financial trilemma,” Economics Letters, vol. 111, pages 57–59, April. BIS central bankers’ speeches  5  and distribution. Broadly speaking, stabilisation helps smooth the business cycle, allocation ensures that resources are used efficiently and distribution ensures an equitable sharing of income. Stabilisation Concentrating on stabilisation, there is a long-standing debate in Europe about whether monetary union needs a federal budget to support counter-cyclical stabilisation. As you may know, the report by the four Presidents on a genuine EMU suggested that a small fiscal capacity could be used for this purpose. I do not want to comment on the specifics of this proposal, but there are questions about whether national preferences are sufficiently aligned to permit it. For that reason, we have to think carefully about whether it is essential for the euro area. In particular, we have to consider how having a genuine banking union might change the debate.

Indeed, we at the ECB consider it of the utmost importance to ensure that the participation of the outs occurs on equal terms as the Euro Area countries. On resolution, we need to find creative solutions to ensure a level-playing field between ins and outs. This holds also true for the backstop for the single resolution fund which is currently the subject of much discussion. Taking part in the Banking Union from the beginning would bring many benefits. Having a chair at the table now allows participants to steer the practical implementation of the SSM – for example the development of the supervisory manual, guidelines and general instructions, as well as benefit from the “healing effect” that the comprehensive assessment should bring. Let me make a third remark: The banking union should be about strengthening the internal market, rather than fragmenting it. Both the single currency and the single market are key pillars of growth and prosperity in Europe. Both should be maintained and enhanced. Hence, the banking union should not create new barriers within the internal market. If countries choose not to join, they should not be discriminated against. Two safeguards will be crucial in this regard: having a single rulebook that sets the same standards for all, and having a strong and effective European Banking Authority with a fair representation of the outs. The relationship between banking and fiscal union Let me now turn to the relation between banking union and fiscal union.
Because it is defined as the unemployment rate at which there is no immediate pressure for a change in the inflation rate, it is a reduced form – not a structural – variable. This difference is reflected in the methods used to generate empirical estimates of the two concepts. The natural rate of unemployment can be estimated only by reference to a structural model of the labour market which has explicit microeconomic underpinnings and which can be used to identify the characteristics determining the natural rate. Empirical estimates of the natural rate would typically be related to inflation only in the long run when the effects of shocks average out. In contrast, the NAIRU is estimated using a system of time-series equations relating inflation to past and present economic shocks. The sole criterion for judging the success of estimates of the NAIRU is their short-term correlation with inflation. Indeed, the NAIRU as defined here – and in recent work by Estrella and Mishkin (1998) – is the level of unemployment such that the difference between it and the current rate of unemployment is all that is necessary to describe short-run inflationary pressure. BIS Review 103/1998  –4–  Although the NAIRU will tend towards the natural rate of unemployment in the long run, there is no reason to expect there to be a close relationship between the two measures in the short run. The natural rate is likely to move only relatively slowly over time in response to changes in its structural determinants.

However, one disadvantage of using different inflation measures in different situations is that it can create uncertainty as to how the inflation measure is defined, even when you try to be clear as to why a particular measure has been emphasised at a particular time. The Riksbank has some experiences of this, which have given us reason to consider ways of reducing the need for different underlying inflation measures. One possibility could be to make forecasts covering longer periods. For the Riksbank the need to emphasise alternative measures of inflation has declined since we, a while back, started to  2  A description of the Riksbank’s goal and strategy for monetary policy can be found in the document “Monetary Policy in Sweden”, which can be downloaded from the Riksbank’s website www.riksbank.com, or ordered as a booklet. BIS Review 111/2006  3  publish forecasts of developments three years ahead instead of two years ahead. With a longer forecast horizon it is possible to illustrate more clearly when various shocks have effects that are temporary and how they dissipate over time without having any lasting impact on inflation. This makes it easier to explain whether the interest rate needs to be changed or not 3 . The target horizon and real stability When the inflation target was announced in January 1993, the Riksbank also formulated a tolerated deviation interval of plus/minus 1 percentage point.
At the end of 2017, the rate on government securities with short maturities was between 20 and 35 basis points lower than the Riksbank's policy rate, depending on the measure used (see Figure 2).6 Event studies show that the rate on government bonds fell by 30-50 basis points in total as a result of the Riksbank's purchases during 2015-2017. Erikson's study indicates that the entire decline in long-term interest rates occurred as a result of the short-term interest rates on government securities being pushed down and expected to remain so. The interest rate effect appears to have arisen through a general shortage of government securities (a negative liquidity premium, even on the very shortest maturities) rather than the term premiums being pushed down. If our purchases entailed lower premiums on government bonds, the rate on government bonds should have fallen in relation to the expected average policy rate over the maturity of the bond. One way of examining this is to compare the rate on government bonds with expectations of the future policy rate, as in the left panel of Figure 3.7 We see a clear fall in the interest rate differential of about 20 basis points when purchases started in early 2015 and then a further fall around  5 See De Rezende, Kjellberg and Tysklind (2015), and Melander (2021).

The lefthand panel in Figure 3 shows that the rates on government bonds have fallen substantially and to very low levels in relation to the expected policy rate in 2022.47 This indicates that there is a high demand for these bonds in the markets. It is not inconceivable that an active sale of the bonds would push up the rate on them. In this case, it could attract foreign capital and to some extent contribute to strengthening the krona. However, before considering such sales, I would like us to evaluate how market pricing develops when we completely stop buying assets after the end of the year. Figure 14. The Riksbank's asset holdings – projection Nominal amounts, SEK billion  Note. The forecast is based on no further asset purchases after 2022. Source: The Riksbank. Asset purchases as a monetary policy tool – final thoughts In many countries, asset purchases are highlighted as an important and successful tool in the monetary policy toolbox. I have no doubt that in many cases the asset purchase programmes have worked well and contributed to stimulating demand and raising inflation when the policy rate has been limited by its lower bound. 46  In addition, the Riksdag has recently adopted a new Sveriges Riksbank Act that will enter into force at the end of the year. The Riksbank's ability to actively phase out the holding is then reduced, since under the new Act we are only allowed to sell (or buy) mortgage, corporate and municipal bonds if there are exceptional reasons.
Actions by governments to restore stability Across the whole euro area, governments are making determined efforts to reverse economic imbalances. They are implementing reforms to redress the misguided policies of the past and to create sustainable long-term growth. It is a difficult road and there is still a long way to go. But the early signs are encouraging. Fiscal consolidation is progressing well in most countries. The International Monetary Fund (IMF) forecasts that the euro area’s primary budget will be almost in balance this year. By comparison, Japan will have a primary deficit of 9% of GDP, the United States 6.5% and the UK more than 5%. We are also seeing some noteworthy improvements in competitiveness. Price competitiveness has improved significantly in several euro area countries. And current account deficits are falling. For example, the countries under full EU-IMF programmes have seen their unit labour costs improve by more than 10% since 2008, relative to the euro area average. Their current accounts have improved by around 8% of GDP since then. Governments have also taken measures to strengthen the rules and institutions that guide economic policies in the euro area. This is important to ensure that the positive developments do not simply reverse when economic conditions improve and markets stabilise. One notable example is the new fiscal compact, which will provide a strong tool for keeping budgets close to balance in the future. Governments have also set up a new framework to prevent and correct unsustainable developments in the private sector.

I want employees to speak up. That’s why, at the start of my tenure as president, I made it clear that I wanted the “best idea to win,” regardless of where it originated or whether it contradicted something that I thought. In some instances, that will require people to admit mistakes. In that regard, I have to set the example that we all make mistakes, and that recognizing and addressing them head on—and, importantly, learning from them—is the best approach. A few years ago we created a new group at the New York Fed called Integrated Policy Analysis. Its purpose was to consolidate teams from many parts of the organization to develop a more integrated view of the economic and financial environment to help inform our policy responsibilities. I was a strong advocate for the idea. But, after two years of effort, it became clear to me and others that it was not working as well as we had hoped. There were a lot of reasons for that, and in the end we dissolved the group and reassigned the work and staff. I let our employees know that I took a calculated risk and it didn’t work out. By doing this, I aimed to show that when things do not go as planned, the best approach is to address it, not to be silent. I hope that, when our people are confronted with disappointing results in their work, they will do the same.