samchain/econo-pairs-v1 huggingface dataset:
And we want to ensure the financial system provides the sort of funding – long-term and stable – which supports business investment. Corporate debt and financial stability The FPC’s primary objective is to ensure the resilience of the UK financial system by detecting, monitoring, and – where possible – countering systemic risk. These risks are often not contained within the financial system. As we saw at the onset of the pandemic, tight linkages between the financial system and the real economy mean that shocks emanating from one can transmit to the other. One potential source of risk we monitor closely is corporate debt. [1]  Page 3  Of course corporate debt is an integral part of the functioning of the real economy. It allows companies to smooth cash flows, and – as I’ll talk about later – fund investment. But corporate debt can come with spillovers – where actions after a shock can amplify its effect on others (externalities and market failures as an economist would say), with potential consequences for the stability of the financial system. The FPC has identified two main channels through which this could happen. Figure 1: Lender and borrower resilience channels  The first operates through lender resilience and brings the risk of a ‘credit crunch’. Over-indebted companies might face challenges servicing their debt. And if they default, lender losses can test lender resilience and hence provision of credit to the economy more broadly. The second operates through borrower resilience and brings the risk of ‘debt overhang  ’.

The bank can sell its credit risk on the company, entirely or partially, without needing to cancel the loan or to have any discussion at all with the company. At the same time, the buyer of the credit risk (the seller of the credit derivative) does not need to tie up more than a fraction of the capital that would have been required to take over the credit directly. Moreover, the buyer of the credit risk can in turn easily sell the risk to another party, wholly or partially. Reinsurance thus becomes both simpler and cheaper to manage than with regard to traditional credit insurance. Large investors such as mutual fund companies and insurance companies often want to have a particular amount of credit risk in their portfolios. The credits can actually reduce their total risk, as the prices of the credits do not have such large covariation with other prices, for instance, the prices of shares and real estate. A certain share of credits provides a more diversified portfolio, which gives lower risk for a given expected return. Credit derivatives also makes it possible to divide up credit risks into small parts and to trade these parts at a low cost. This is not possible with traditional credit insurances. As the trade is so extensive, the pricing of credit risk becomes much improved. From the economy’s point of view, it is essentially positive that the credit risk is spread to institutions outside of the bank system.
iii)  Reputation  Lastly, a third challenge that I consider particularly important in the present environment is to rebuild the industry’s reputation with investors and customers, restoring to full health what is the banking industry’s main asset and one which, although it does not figure on banks’ balance sheets, is of vital importance to ensure their viability. An unwanted legacy, worldwide, of the banking crisis has been the erosion of general public trust in financial institutions which have all too frequently breached current standards of conduct and, in some cases, have been involved in unlawful practices. In Spain, the reputational damage suffered by the industry is associated in part with the allegations of irregular practices followed by former executives at institutions that subsequently received large amounts of public money and which are currently being investigated by the courts. Moreover, a number of banks have been ordered, through administrative proceedings or through the courts, to pay costs arising from breach of standards of conduct, especially relating to mis-selling of financial instruments and banking products. Fortunately, Spain’s banks have responded well, increasing the attention they pay and the resources they allocate to complying with legislation and honing their selling practices. Nevertheless, further measures could be envisaged, for example relating to the arrangements in place for settlement of bank customers’ complaints and claims. Under the existing two-tier complaints system, in the event of a dispute bank customers must first contact the bank concerned, which must necessarily have a customer service department or unit.

This is putting pressure on lending margins, most obviously in the residential mortgage market where pricing has now reached more than 2.25% below prime rate. In 2000, the impact of this on the banks’ overall net interest margin was mitigated by the fact that the ample liquidity kept funding costs low and the prime-HIBOR spread at record levels. But the net interest margin is likely to come under increased pressure as more loans are refinanced at cheaper margins and if funding costs rise relative to lending rates. Interest rate deregulation So conditions for the banks are, as they will tell you, currently quite tough. And they could become tougher when the final stage of interest rate deregulation takes place. This is due to happen at the beginning of July and will involve removing the interest rate cap on savings accounts and the prohibition on the payment of interest on current accounts. This move is a central feature of the reform  BIS Review 29/2001  1  measures that we announced in 1999. But it is part of a continuing process that began in 1994 with the progressive removal of the interest rate controls on time deposits. Deregulation is undoubtedly the right thing to do. While the interest rate controls did serve a useful stabilising function in the past they have become increasingly outdated in a mature banking system like Hong Kong’s.
2  In 2020, the growth in savings essentially took place through the acquisition of financial assets, mainly the most liquid ones. Specifically, investment in financial assets stood at € billion, of which € billion was allocated to cash and deposits, while investment in housing amounted to € billion. In 2021, as the pandemic restrictions were gradually eased, the level of savings lessened and there was a pick-up in new bank lending for investment in real estate. The net acquisition of financial assets amounted to € billion in the year and a total of € billion was invested in housing. Of the total invested in financial assets, 40% was accounted for by assets other than cash and deposits, most notably net purchases of investment fund units € billion). The high rates of inflation observed from late 2021 have prompted growth in nominal consumption, which, as I have said, reduces household savings. New lending to households remained very robust in 2022, essentially due to buoyant lending for house purchase. This marked a continuation of the trend observed since early 2021, although a clear slowdown has been evident in the last few months, shaped by the tightening of financial conditions. The net acquisition of financial assets declined sharply in 2022, although we do not yet have data for the final quarter.

3 Swedish consumers do not usually pay any charges to the banks for cash withdrawals and pay only an annual charge for holding a card. The retail trade pays charges to the banks for cash and for card payment services, but does not explicitly price these services to its own customers. The costs the retail trade has to bear in connection with payments are instead transferred to the consumers by means of general markups on goods prices. This means that nor does the retail trade give any signals to consumers regarding the costs of one form of payment or another. 1  See Humphrey, D., Kim, M., Vale, B., (2001) “Realizing the gains from electronic payments: Costs, pricing and payment choice”, Journal of Money, Credit & Banking 33, 216 -234 and Nyberg, L., Guibourg. G., (2003) “Card payments in Sweden”, Economic Review 2003, vol.2, Sveriges Riksbank, 29-39. 2  According to information from Norges Bank this was partly due to a combination of changed pricing and mergers of different card systems. 3  Guibourg, G. and Segendorf, B., (2007), “A note on the price and cost structure of retail payment services in the Swedish banking sector 2002”. Journal of Banking & Finance 31, 2817-2827. 2  BIS Review 68/2008  When are cash payments cost effective? But are cash payments more expensive to produce than card payments? Our study shows that this is often the case.
In the meantime, the UK labour market continues to tighten – low inflation won’t be the only influence on pay growth this year – and the boost imparted by lower commodity prices to real incomes is already apparent in higher consumer spending, here and in other countries too. Finally, history tells us these episodes are rare – rare, in the case of developed countries with floating exchange rates, almost to the point of uniqueness. Thank you. 12  BIS central bankers’ speeches  References Bachmann R, Berg T and E Sims, 2015, “Inflation expectations and readiness to spend: cross- sectional evidence”, American Economic Journal, 7(1), pp. 1–35. Bordo, M, Filardo A, Velasco, A and C Favero, 2005, “Deflation and monetary policy in a historical perspective: remembering the past or being condemned to repeat it?”, Economic Policy, Vol. 20, No. 44, pp. 801–844. Borio, C, Erdem M, Filardo, A and Hofmann B, 2015, “The costs of deflations: a historical perspective” BIS Quarterly Review, March. Broadbent B, Daly K and S Carlson, 2010, “Global economics weekly”, Goldman Sachs Global Economics, No. 10/32. Campbell J Y and N G Mankiw, 1989, “Consumption, income and interest rates: reinterpreting the time series evidence” NBER Macroeconomics Annual 1989, Volume 4, MIT Press. Canzoneri M, Cumby R and B Diba, 2005, “Euler equations and money market interest rates: A challenge for monetary policy models”, Journal of Monetary Economics, No 54, pp. 1863–1881.

If the two fall rise and fall together – to the extent nominal interest rates can accommodate movements in nominal income growth – there’s no impact on debt accumulation: whatever proportion of income was needed to service debts beforehand is sufficient after the fact. It’s when income growth falls a lot further  1  Economists call the sensitivity of consumption to a change in its relative price over time the “inter-temporal elasticity”. That coefficient is poorly measured in the data but usually found to be relatively small and significantly less than one. At the same time, a permanent gain in real income should, even it’s expected to arrive only a year from now, prompt an immediate and almost one-for-one response of spending today. So, at least in principle, the positive “income effect” of a prospective drop in prices – holding fixed nominal pay – should be expected to outstrip the negative “inter-temporal substitution effect”. 2  If the appropriate real rate is r* then the central bank would ideally want to set a nominal rate of r*+ π , where the second term is inflation expectations. But nominal rates can’t be lower than zero – or whatever number, e close to zero, constitutes the effective lower bound – so if r*+ π < 0 the actual real rate will be higher than it should be. Note that this can happen either if πe is well below zero or if, as has been the case since the crisis, the same happens to r*.
The standard response to the question of whether missing a target leads to real-economic costs is no. This is because average unemployment, according to established theoretical and empirical research, is independent of monetary policy and the inflation rate. However, this presupposes that inflation expectations adjust to  8  The fact that the monetary policy conducted in the period 1997 to 2011 led to an unemployment rate that on average was 0.8 percentage points higher than would have been the case if the average inflation rate had been on target means that average disposable income has been lower – that is, that disposable income has grown at the same average rate but at a somewhat lower level. However, this does not affect the ratio between average housing prices and disposable income – which depends on the low mortgage rate after tax – and thus, at a given loan-to-value ratio, not the debt ratio either. 9  See Assenmacher-Wesche and Gerlach (2010), Claussen, Jonsson and Lagerwall (2011) and Kuttner (2012) for similar results regarding the impact of monetary policy on housing prices. 4  BIS central bankers’ speeches  actual inflation and thus fall if the rate of inflation falls. The long-run Phillips curve, which illustrates the relationship between average inflation measured along the vertical axis and average unemployment measured along the horizontal axis, then becomes vertical and average unemployment thus becomes independent of the average rate of inflation.

It is a well-known phenomenon that long-term unemployed have greater difficulty in obtaining jobs, for several reasons. A person who finds  17  See, for instance, Sveriges Riksbank (2012c). 18  According to the Swedish Public Employment Service, there are four groups who have a relatively vulnerable position on the labour market and who find it difficult to get a new job if they become unemployed: those born outside Europe, people with less than upper-secondary school education, people in the age group 55–64 and people with a physical disability which reduces their capacity to work. 8  BIS central bankers’ speeches  themself outside of the labour market suffers not only personal loss and a feeling of isolation, they also find that their skills become outdated after a while, which makes it more difficult to get a new job. A high rate of unemployment over a long period of time can become entrenched and requires a very large demand for labour so that the long-term unemployed can find work. One says that unemployment becomes persistent. The longer unemployment has been high, the more difficult it is, the longer it takes and the larger the labour demand that is needed to bring down unemployment. The fact that unemployment has been high for a long time and that long-term unemployment has increased, is also an argument now for a more, rather than a less, expansionary monetary policy.
BIS Review 108/1999  4  Thus, there are still no signs of more widespread shortages that might generate unsettling inflationary impulses; but the risk spectrum has shifted. Moreover, the situation can change at short notice and the Riksbank has to be alert to this. We must be ready to take preventive action. In earlier upward phases, in the 1970s and 1980s, a tightening of economic policy often came too late. The normal result was that the growth of production and employment was checked and unemployment rose. That must not happen this time. The purpose of normalising the repo rate in time is to bring GDP growth into line with the path for long-term growth, with a continued increase in employment and as low a level of unemployment as the structure of the economy allows. This is the starting point as we face the future challenges to monetary policy. That is what is meant by price stability. It is also how we, as members of the Executive Board, perceive the task assigned to us by the Riksdag. 5  BIS Review 108/1999

For example, by December 2008 nearly all our respondents were sure the U.S. economy was in a recession; thus, the 70 percent probability of being in a recession in six months can be interpreted as a 30 percent probability of an expansion in June 2009. The NBER subsequently declared July 2009 as the turning point into an expansion. Another approach to predicting recessions, which is a form of the wisdom of the crowd, is to use financial market asset prices. The well-known argument is that because large amounts of money are on the line, this different form of aggregation of diverse views will tend to be more accurate. Of course, asset prices also include compensation for risk, and much of modern asset price theory is focused on how fluctuations in this compensation drive much of the asset market volatility we observe. In the technical language of modern asset price theory, the probabilities from our surveys are physical ones, whereas those that use asset prices without adjustment for risk aversion are risk neutral probabilities. The classic variable to use here is the term spread, the difference between a long-term interest rate and short-term interest rate. The seminal paper showing the power of the term spread to predict recessions, measured as the 10-year Treasury rate less the three-month rate is by Arturo Estrella and Rick Mishkin.
Following the financial crisis in Japan at the beginning of the 1990s, prices fell and households postponed their consumption as they were expecting prices to continue to fall. The Japanese central bank cut its policy rate to zero and let it remain there, but falling prices meant that monetary policy was nevertheless too tight, in real economic terms. The liquidity trap problem meant that growth was very low over a long period of time. For the three decades prior to the outbreak of the financial crisis in the early 1990s, the average GDP growth in Japan was just over 6 per cent a year. Following the financial crisis it has been just over 1 per cent a year. 5 Because of the risk of a liquidity trap it was difficult for the US central bank, on the basis of the information available at the time, to do anything other than cut the policy rate – the Fed  2  OTC instruments are bilateral financial instruments that are traded outside of the usual stock exchanges and market places, i.e. “over the counter”. 3  Bean (2009). 4  Bean (2009) and Taylor (2009). In BIS (2008) it is pointed out that low policy rates globally may have contributed to the crisis. Bubbles have also arisen on the housing markets in a number of other countries that burst in recent years. 5  See Figure 8 in the presentation material. BIS Review 162/2009  3  Funds Target rate – to 1 per cent.

That is, that risk-taking will increase if there is an expectation that the government will always bail out the financial sector when bubbles burst, but will remain passive while they are building up. A monetary policy that is characterised by leaning against the wind may reduce this tendency. If the central bank acts more symmetrically (that is, not merely sweeps up after the crisis but also tightens policy when a bubble arises), it may encourage more responsible behaviour by investors and thus reduce the risk of new crises arising. Scope for a more active policy My opinion is that in the light of the severe impact this crisis has had on the economy, there is justification for central banks being more active in reducing the risk of financial bubbles arising. However, I am dubious about a policy where the interest rate is used not merely to stabilise inflation and resource utilisation, but also asset prices. This would quite simply be too many aims for one single instrument. However, I do feel that it may be important to take into account indications that a bubble is building up when we make our monetary policy decisions. If these motives for a tighter monetary policy are communicated clearly, it should increase the general awareness of the risks with financial imbalances.
However, the inflation targeting regime was also “implicit” rather than “full-fledged”, reflecting the fact that the preconditions such as a strong fiscal position of the government and further stability in the financial markets were not yet fulfilled. During the last four years, sound monetary and fiscal policies together with structural reforms, changes in the institutional framework and adaptation of the economy to floating exchange rates, however painful this might have been, have resulted in remarkable achievements on the way to price stability. During this period, the monetary policy of the Central Bank put greater and greater emphasis on ensuring the credibility of inflation targets. To this end, the Central Bank has often publicly stressed the importance of continuing with a tight fiscal policy and completing structural reforms without delay or compromise. As a result, inflation targets have been reached for four years in a row, significantly enhancing the credibility of the monetary policy. I am so glad to be able to say that today inflation is at its lowest level in thirty-seven years. Annual CPI inflation, which was 73.2 percent as recently as January 2002, is now down to single digit figures; it stands at 7.72 percent as of end of 2005. This performance in disinflation has obviously positively affected the economy. First of all, economic growth rates have been positive again in the last four years. Not only they have been positive, but very high levels have been attained. Total growth in real terms since 2001 is 31 percent.

At that time, the long “fiscal dominance” history of the Turkish economy that severely restricted the efficiency of monetary policy and shallow financial markets that were not well developed were the primary characteristics of the Turkish economy. All these limited the economy’s room for maneuver on the eve of the adoption of the new monetary policy regime. Independence of the Central Bank of Turkey that came in 2001, was almost the only institutional factor in hand at that time on the way towards the ultimate objective of price stability. Given this overall framework and conditions, the Central Bank of Turkey preferred a smooth transition towards inflation targeting whereby it would wait until all these factors that restrict the efficiency of monetary policy would weaken. In early 2002 following the achievement of relative stability in financial markets after the 2001 Crisis, the Bank announced its new monetary policy regime in a public statement as implicit inflation targeting. As it was emphasized in the same now historical statement, the final aim was to adopt the full-fledged inflation targeting regime, once the preconditions were met. This ‘new’ regime was defined as inflation targeting since the central bank announced a numeric target for annual inflation jointly set by the government according to its law and price stability was now its primary objective. Furthermore, it was similar to inflation targeting in the sense that the decision making process was shaped in a forward looking manner by exploiting the broadest set of information available.