samchain/econo-pairs-v1 huggingface dataset:
The Exchange Rate In small, open economies, the exchange rate has an important influence on inflation. At the same time, it is a variable that has fluctuated considerably in recent years for reasons which have not always been easy to foresee and interpret. How changes in the exchange rate should be handled in practical policy depends above all on how lasting a change in the exchange rate is judged to be. More enduring changes that have an effect on inflation forecasts obviously have to be taken into account In order to decide on the duration and what is a reasonable reaction, one normally has to know what brought about the change. Several different cases can be discerned: A nominal change in the exchange rate can be a result of a change in the real equilibrium exchange rate. This case is in principle simple to manage since it normally does not lead to a changed picture of inflation and thereby does not occasion any specific policy measures. Changes in the real equilibrium exchange rate have not been an especially common reason for changes in the exchange rate in recent years, at any rate since the krona fell in connection with the changeover to a flexible exchange rate in 1992. A change in the nominal exchange rate may also have to do with a change in the long-term view of the steadfastness in economic policy, or what is termed credibility.

In practice it is not always so easy to distinguish between what is important for credibility and various factors can interact in a complicated manner. Two cases can, however, be discerned:  BIS Review 56/1997  -6-  - In the first case, the problem of credibility is primarily based on a lack of confidence in the central bank as such and in monetary policy. In the long-term perspective, the task is then the establishment of a trackrecord. Laws that guarantee independence can be an important support in this process. In the short term, there is probably most often not much that can be done other than to show by action--increases in interest rates--that one is sticking to one’s objectives. - More difficult to assess and manage are situations in which the currency’s depreciation is a consequence of weakening credibility in the general direction of economic policy. Investors in the financial market may, for example, think that the risk has increased for a change of regimes in the future, when the target for price stability may be abandoned at least temporarily as a result, for example, of government financial problems. In Sweden this was probably the most common explanation for the recurrent periods of exchange rate turbulence during the 1990s. In situations of this type, monetary policy itself cannot do the job, and what is worse, in the short term the costs of monetary policy measures may be considerable.
11 But the proposal presented by the committee still entailed a fairly unclear allocation of responsibility and the Riksbank assessed in its consultation response that this could lead to uncertainty over who should take action and thus weaken decisiveness too far. 12 We advocated that responsibility should be given to one decision-making body with a clear responsibility for macroprudential policy. A few weeks ago, the Government came to a decision. 13 Many details still remain to be decided, and it will take some time still before a complete framework is in place. But it is clear that Finansinspektionen (the Swedish Financial Supervisory Authority) will have the overall responsibility for macroprudential tools. The Riksbank will be part of a financial stability council that also includes the Government, Finansinspektionen and the National Debt Office. The council is to identify risks and discuss measures, but it should function as a discussion forum and not give explicit recommendations. The most important thing is that the uncertainty surrounding the allocation of responsibility has now been resolved in that it has been made clear and that responsibility will rest with one authority. I do not believe that the institutional set-up is otherwise of absolutely critical importance – within reasonable boundaries. Various solutions may very well prove to function equally well in practice and provide equally good economic development. Ultimately, it remains to be seen how things work out – “the proof of the pudding is in the eating”.

The purpose of our policy has been to prevent Sweden falling into the deep recession suffered by many other countries in connection with the crisis. It has thus been a question of wanting to manage our task of maintaining price stability and macroeconomic balance in the best way possible. 9 As I see it, there is no doubt that the Riksbank’s mandate allows us and even requires us to take into account risks linked to a credit boom and rising house prices. So, neither in the light of the international debate conducted today nor the mandate given to the Riksbank, has the monetary policy conducted been particularly “unusual” or “strange”. The monetary policy strategy the Riksbank has applied in recent years is also worth mentioning. What we have tried to do is to find a suitable balance where we support the recovery, but at the same time do not accelerate as hard as we might have done if we did not need to take into account housing prices and indebtedness. This has not, as one might sometimes think, been a question of braking hard. When all is said and done, the repo rate is currently no higher than 1 per cent. Difficult balancing act if the repo rate is the only tool But let me now return to Figure 1 and the discussion I started with. Stabilising two cycles – the business cycle and the credit cycle – with the aid of only one tool – the policy rate – is of course not easy.
One sign of this is the historically high September figure for the 12-month increase in the number of bankruptcies world-wide among companies with a credit rating from Moody’s. According to Moody’s assessments, we can expect an increasing number of bankruptcies up to the end of March. This has been accompanied by appreciably higher borrowing rates for companies with a low rating, as well as a down-grading of more and more companies. The group of firms with the highest credit rating has shrunk to a proportion that is small and even lower than at the time of the latest major slowdown in the early 1990s, for example. In view of the increased financing costs for firms with a low credit rating, there is a risk of more bankruptcies in the future, with contagious effects among other firms and sectors. For firms with a higher credit rating, on the other hand, the generally lower level of interest rates implies if anything that financing costs have been reduced. So the risk of increased problems with credit should not be exaggerated, though it does look as though to some extent at least, the present fall in activity stems from the supply side. Above all, it appears to concern an overly rapid and abnormally high investment in the IT and telecom sectors.

Finally, the (in)famous duality between the core and the peripheral countries emerges as a theme here as well, as country groups tend to cluster in terms of real and financial cycles. All of these notions call for further research and better understanding, but they are nevertheless useful information for shaping policy responses. The expectations of convergence in real and financial cycles due to increased trade and financial integration, pursued strongly within Europe (the euro zone) during the last few decades, have far from materialized. In addition to some old suspects, theoretical and empirical literature have identified some new channels at work to explain for such a phenomenon 7. The traditional view that increasing trade integration may, or may not be, supportive for the synchronisation of business cycles, depending on the specific trade pattern, has certainly been warranted (Krugman vs. Frankel-Rose hypothesis). Further on, stronger financial linkages have also proven to be an elusive channel for engineering sustainable convergence of real and financial cycles. While debt flows remain a theoretical channel that might increase the extent of international risk sharing, the actual effect depends on what happens during the crises. For example, an increased risk premium and depressed collateral prices in a country hit by an asymmetric shock may reverse capital flows exactly during the period when higher inflows are most needed.
What might be more significant than impact of deflation via the interest rate is the effect of the deflationary process on real incomes and profits. If prices are driven down by competitive forces, profits are squeezed, which may impact adversely on future investment. It may serve as a harsh signal of the need to restructure or diversify. At the same time, if nominal wages remain unchanged, workers will have a gain in real income. We witnessed this in Hong Kong, but it did little to sustain consumption 5  See Philip Schellekens, "Deflation in Hong Kong SAR", IMF Working Paper, forthcoming; and Jiming Ha and Kelvin Fan, "Price convergence between Hong Kong and the Mainland", HKMA Research Memorandum, forthcoming. 6  For a full analysis see Wensheng Peng, "What drives property prices in Hong Kong? ", HKMA Research Memorandum, forthcoming. BIS Review 38/2002  3  because of caution over job security. After a while, both nominal pay began to adjust downwards and unemployment began to rise. Although it may still be true that many of those in work are better off (having suffered reductions in pay of less than the amount of price deflation over the four year period), many others have lost their jobs or have had to settle for lower-paid positions. Meanwhile, the reduction in real profits corresponding to the buoyancy of real wages may have dampened investment spending, although supporting empirical evidence is scarce.

After two years of market stress and decline in economic activities, we can now cautiously look forward to a return to growth. Looking back, the last two years have also been an important testing time for Thailand as the impact from the global financial crisis has been large and quite unprecedented. As it turns out, the economy has been able to weather the impact of the global crisis quite adequately. This is to say, while the decline in output was unavoidable, economic and financial stability was maintained, the banking sector remained resilient, and the economy was able to adjust to the impact of the turmoil in an orderly manner, with output growth now recovering. In my view, these things were of no accidents. Instead, they manifest a number of inherent qualities embedded in the Thai economic system that have contributed to the relative resilience of the economy. Such qualities include: first, a strong and resilient banking sector resulted from good risk management practices by financial institutions and careful supervision by financial regulators at home; second, a disciplined conduct of macroeconomic policy that emphasizes prudent fiscal and monetary frameworks with a clear focus on maintaining growth with price and financial stabilities; and third, the promotion of economic flexibility as a mechanism for the economy and the private sector to adjust to macroeconomic shocks. To me, these qualities are of no accidents.
Our monetary policy decisions have indeed given predictability for the whole year to come, and we will during this period look through transient inflation changes to focus on the medium term inflation outlook for the euro area as a whole. Lastly, interest rates do not depend on monetary policy alone, they also stem from economic growth. It is therefore in the savers’ interest that growth should be more vigorous in Europe. Yet, as my colleague, Jens Weidmann, said last spring, “people are not just savers” [ “ Menschen sind nicht nur Sparer”]. In Germany and in Bavaria, businesses, employees, consumers and home buyers benefit from the ECB’s low interest rates. Our measures create particularly favourable financing conditions for businesses and households. Lending has grown significantly: in Germany, lending to businesses had grown by 3.5% year on year in the 12 months to November 2016. Moreover, borrowing costs less as bank interest rates have fallen steadily. As has been confirmed by several studies, monetary policy has also boosted GDP growth – for more than 1.5 percentage points from 2015 to 2018. The definitive stability of exchange rates within the euro area and the more favourable effective rate observed outside the euro area are clear advantages for German and Bavarian exporters, from Airbus to Dräxlmaier or BrauKon. The economic studies all agree: the benefits linked to the euro have been good for all the member countries but it is the German economy that has benefited most from belonging to the euro area.

The euro area as a whole must aim for stronger and more lasting growth. Monetary policy naturally plays a vital role: it ensures the price stability required for growth; this is my first point. However, on its own, it can never be enough. To accelerate growth, the other economic policy levers must be brought into play; I shall come back to this later. Lastly, I will share some thoughts on the new international environment that heightens the urgency of taking action in Europe. ** 1. Our monetary policy is an asset for the euro area. I am perfectly aware that the ECB’s monetary policy is the subject of lively debate in Germany. I would first like to explain the reasons for this policy and what the situation is today. a) Why have we been pursuing this monetary policy? Our European Central Bank, it should be remembered, was constructed on solid foundations shaped according to the model of the Bundesbank and its successes. And I sincerely believe that our present monetary policy is very much in accordance with the German values that I fully share: independence, respect of the Treaties, price stability and a long-term approach. Contrary to what some critics suggest, our monetary policy is not some sort of Latin fantasy. It is decided collectively by the Council of Governors and we take the mission entrusted to us – ensuring price stability – very seriously. This means ensuring that inflation is neither too high nor too low.
Distinguished Guests, As a result of the steps taken towards macroeconomic stability and the implementation of prudent policies, the level of dollarization in Turkey started to decrease after 2001, despite some pauses. As of November 2006, the share of foreign exchange deposits in the total deposits 12 and in the broad money supply were 38 percent and 35.5 percent respectively. Also the ratio of foreign currency loans to total loans in the banking sector decreased to the level of 16 percent in the same period. Moreover the share of the foreign currency denominated and the indexed debt of the government to total domestic debt decreased to 15.8 percent as of October 2006. By any measure, this, I believe, is a remarkable performance. But all these positive developments do not enable us to call it a persistent and permanent dedollarization process, for sure. It is apparent that the level of dollarization in Turkey is still high, which is an important challenge for monetary policy-making. Obviously, the dollarization is not declining fast naturally. This confirms the evidence that even if the inflation falls and the macroeconomic stability is maintained to great extent, the memories of the past inflationary and unstable economic environment can cause economic agents to carry on their past habit of holding foreign currency assets and create an inertia. Therefore, even a small threat to the macroeconomic stability or any kind of internal or external development that increase uncertainty perceptions can easily lead to a deterioration in expectations and give rise to an increase in dollarization.

This concerns the extent to which the authorities should be involved in the development of the financial infrastructure. I am sure you are aware of the huge amount of public money spent in all jurisdictions in the development of the physical infrastructure, building highways, bridges and airports to take people and goods from one place to another safely and efficiently, thus facilitating the conduct of economic activities for the benefit of all. Authorities, however, seem to devote only disproportionately small amounts of resources to the development of the financial infrastructure to move money and financial instruments from one entity to another safely and efficiently for the purpose of enhancing financial efficiency that promotes economic prosperity. To some extent, the development of the financial infrastructure can be left to the market, with SWIFT being a sterling example of private sector initiative in this area. But many of the important elements of the financial infrastructure are public goods, the provision of which, in a form that serves the public interest best, may not be financially viable for the private sector. Furthermore, the conflict I mentioned earlier often comes in, affecting the willingness or the enthusiasm of the financial intermediaries to develop and use a financial infrastructure that promotes financial efficiency.
We are certainly moving into calmer waters for the banks but there are strong currents, and a few sharp rocks, underneath the surface. The fact is that the competitive environment for banks in Hong Kong is changing radically as it is for all banks around the world. The current competition in mortgage lending is a case in point. Banks are increasingly prepared to lend at margins well below prime. We are getting to the point where it is becoming difficult to earn an economic return from this business once funding costs and other expenses are taken into account. It can be argued that this in part reflects the current excess liquidity in the market and that margins will start to move up again as loan demand and the property market recover in line with the economy. There is some truth in this, but it is difficult to see margins on mortgage business recovering too far. Certainly they will not get back to where they were in the boom years before the crisis. There are too many active players in the market, both domestic and foreign, to allow this to happen. What this means is that the banks are going to have to work harder to earn a profit than they have done in the past. They will have to do this at a time when the last stages of interest rate deregulation in Hong Kong are taking place, starting in the middle of this year and finishing in the middle of 2001.

And this, coupled with the challenges that lie ahead, has led us to look at ways in which corporate governance among the banks might be further enhanced. If I could sum up our objective, it would be to try to reassert the role of the board of directors in banks. While the day-to-day running of banks should certainly be left in the hands of the management, the board must play a leadership role in approving the objectives, strategy and business plans of the bank, monitoring the performance of management and ensuring that the internal control and risk management systems of the bank are effective. The board must also make sure that the bank conducts its affairs with integrity and in accordance with high ethical standards. The board is part of the system of checks and balances that ensures that neither large shareholders nor management abuse their power and that decisions are taken with the bank’s best interests in mind. If the board does not play its full part, a vacuum in leadership will be created. This vacuum may be filled by the shareholders becoming directly involved in running the bank’s affairs, or by the executive management acting more or less in isolation. In either case, the board of directors is bypassed and checks and balances are lost. The HKMA has recently issued for consultation a draft guideline for banks and other authorized institutions which sets out what the HKMA expects of them in relation to corporate governance. The guideline aims to establish minimum standards.
If banks cannot use deposits for that purpose, how would their lending then be financed? And without a supply of bank credit, how would the real economy, in particular the part of it that cannot easily access securities markets, itself be funded? There is no easy answer to these questions. As far as the non-financial economy is concerned, it’s clear it would be hard seamlessly to replace bank loans with securities issuance. There are good reasons why it’s difficult for young firms, in particular, with little invested capital, to sell shares or bonds13. The same goes for households. If bank lending became scarcer, or more expensive, it’s likely that investment and economic activity would suffer. Furthermore, several economists argue that there’s a degree of complementarity between making loans, on the one hand, and issuing liquid liabilities on the other14. If so, you’d naturally expect to find the same institutions doing both – banks don’t exist in the form they do simply  10  Ricardo, writing at a time when money was held largely as physical cash, argued the note issue should be separated and protected from commercial lending (Ricardo (1823)). The specific proposal in the Chicago Plan was 100% reserve requirements on demand deposits of commercial banks (Simons et al., (1933)). The postcrisis case has been put by Pennachi (2012) and, amongst others, by Martin Wolf of the FT (Wolf (2014)). Lainà (2015) describes how calls for full-reserve banking tend to intensify after financial crises.

It would become more a matter of prudential policy, not to say the fundamental structure of the financial system. Conclusion The word “digital” has become so ubiquitous that its meaning isn’t always clear. The word seems to get tacked on to just about anything, no matter how tenuous its connection with computers, simply in order to convey an appealing sense of the modern. A brief search – on the internet, appropriately enough – reveals advertisements for a course in “digital humanities”, opportunities in “digital agriculture” and even something called “digital parenting”, whatever that is. (If it means having to ask your 11-year-old son what’s gone wrong with the computer then I would certainly qualify as a “digital parent”). Whether or not “digital currency” is the right way to describe something like bitcoin, or its central bank counterpart, is also unclear. A better term for the underlying technology, the distributed ledger, might be “decentralised virtual clearinghouse and asset register”. But there’s no denying the technology is novel. Prospectively, it offers an entirely new way of exchanging and holding assets, including money. It’s an irony, therefore, that some of the economic questions it raises have actually been around for a long time, for as long as economics itself. Some admirers of bitcoin see it as a means of bypassing central banks altogether. They are in some ways the descendants of the supporters of “free banking” in the 19th century.