samchain/econo-pairs-v1 huggingface dataset:
This volatility in itself argues that a central bank with an inflation target should not focus unduly on exchange rate fluctuations.2 If the central bank were to react to every such fluctuation, monetary policy would also be volatile. This is obviously undesirable as it may mean that the central bank itself becomes a source of unnecessary disruptions in the economy. A volatile exchange rate can be regarded as particularly problematic if the central bank allows the exchange rate to take a very prominent position in its analysis, for example by  2  This is closely linked with Krugman’s (1989) assertion that exchange rates are so volatile because the fluctuations are of so little significance to the economy. This effect is generated by a feedback loop in which increased volatility reduces the exchange rate’s effect on trade, which, in turn, leads to an even more volatile exchange rate. 4  BIS central bankers’ speeches  relying on what is known as a Monetary Conditions Index (MCI). An index of this kind is intended to summarise, in one measurement, the effects of interest rates and the exchange rate on inflation and resource utilisation. Somewhat simplified, the idea behind the MCI can be described as this: all other factors being equal, if the exchange rate is strengthened, the interest rates should be lower, and vice-versa.

These strengths are found in the sector’s strong capital base, its limited exposure to subprime-related and other toxic assets, and its low reliance on external funding. As a result, the impact of the crisis on the Thai banking system so far has been limited. The Thai banking system is resilient with good fundamentals, and continues to function normally to support the economy. In the last two quarters, despite the consecutive negative GDP growths, the performance of the Thai banking sector remains satisfactory. The sector continues to see profits in the last two quarters, while the increase in the non-performing loans has not been large. This robust performance reflects a number of common responses that have been undertaken by the banks to manage the increase in credit and market risks. The responses include parring down of investment in foreign assets, lowering the loan growth target in line with the economy, strengthening risk management and credit standards, paying close attention to liquidity, and acting early to assist clients to adjust to the impact of the shock. These measures have helped banks to contain credit risk, and so far we have seen the gross NPL ratio rising slightly to 5.5 percent in March from 5.3 percent in December. As for the Bank of Thailand, our approach to bank supervision during this time of global stress is to ensure that the banking system is healthy, and the system continues to operate fully to support the economy with good risk management and adequate capital.
Global losses on these securitised assets are now believed to lie anywhere up to £ trillion.6 As losses accumulated, trust in these securities was undermined and with it trust in the banks issuing them. As credit was cut, trust in the viability of some non-financial companies was questioned. Corporate distress began to rise internationally during the course of 2008. And as corporate distress rose, in particular after the failure of Lehman Brothers, distrust between companies mounted. The stream of trade credit extended between firms dried to a trickle at the end 2008 and in the first part of 2009. At that time, a survey by the Bank’s regional agents  6  For example, Bank of England Financial Stability Report, June 2009. BIS Review 108/2009  3  reported that around a quarter of contacts had had to turn down potentially profitable orders as a result of tighter trade credit. This progressive hardening of the credit arteries also had dramatic effects between countries. Cross-border flows of credit have reversed dramatically in the past year. “Home bias” by investors – a lack of trust in foreign investments – has returned with a vengeance. Cross-border lending by international banks grew by 20% per year between 2003 and 2007. In 2008, it fell 5% (Chart 5). This has had adverse effects on UK companies, around a third of whose borrowing comes from foreign lenders.

In essence, events of the past two years can be retold as a story of the progressive breakdown in trust. The proximate cause of the crisis was a breakdown of trust between banks and households, specifically sub-prime mortgage-holders in the United States. The upshot was a loss of credit, and in many cases the homes, of these borrowers from 2006 onwards. Repossession rates on US mortgages have more than tripled in the past two years (Chart 1). UK arrears and default rates, although lower, are rising. Some borrowers are now rationed out of the mortgage market. In July 2007, there were around 9500 sub-prime mortgage products being advertised in the UK. Today, there are virtually none (Chart 2). As losses on these mortgages and other toxic assets accumulated, trust among banks was impaired. This saw a seizing-up of inter-bank money markets from the second half of 2007 onwards. Before the crisis, banks required about 10 basis points of compensation for making a three-month loan to one another (Chart 3). By September 2007, that compensation premium had risen tenfold to around 100 basis points. By September 2008, it had risen more than thirty-fold from pre-crisis levels. It has since fallen back to around 35 basis points. These persistent funding pressures have constrained banks’ ability to lend to the real economy. Damaged by losses on assets and constrained by funding costs, questions began to be raised during 2008 about banks’ future profitability and, in some cases, viability.
They make that expectation by considering the past trends and what is happening right now. If they expect that the prices on average would rise, then, they can be said to be harboring high inflation expectations. A central bank can gauge this situation by conducting periodical inflation expectation surveys. Second, a consumer price index, compiled to measure the changes in the cost of living of a given group of people, may show a continuous increase over a substantial period of time. It indicates an unstable situation in the macro economy leading to an upward movement in the general price level. The presence of either situation requires a central bank to go into action against fighting inflation. This means that, even if the consumer price index shows stability or a relatively low growth, the central bank cannot stop taking inflation fighting measures. What a central bank should do is to eradicate the cause rather than pampering with the symptoms. It is similar to a physician who does not take delight when he observes that the high fever of a patient has subsided. The physician would not stop his curative treatment, until the cause of that high fever is totally eliminated. There appears to be a general tendency for equating increases in the cost of living with inflation. An increase in the cost of living occurs when the basket of commodities consumed by a given group of people entails a higher cost. As mentioned earlier, this is measured by compiling a consumer price index.

In this regard, a stress testing system, introduced in 2007, already contributes to better assessing banks’ risk management and evaluating adequacy of capital assets to potential risks. In view of the large number of foreign banks presently operating in Algeria, continued efforts are being made to develop bilateral cooperation on their supervision. In conclusion, prudent management of resources and continued strengthening of the financial and banking system stability allow Algeria to consider its medium term economic objectives with a relative confidence. However, the deepening of the international financial crisis and its drastic spillover effects on the world economy is already affecting the country through a number of channels, notably: •  a reduction in its savings capacity. The sharp decline in oil prices is drastically reducing hydrocarbon export receipts and consequently government’s savings capacity. A prolonged weakness of oil prices would inevitably erode the financial wealth accumulated in the stabilization fund with a correlative reduction in international reserves;  •  a reduction in the yields on the investment of international reserves, as a consequence of low interest rates in international markets. 2  BIS Review 21/2009
The UK was one of the first countries to embed in legislation a commitment to achieve net-zero greenhouse gas emissions by 2050.4 Meeting that goal will require an unprecedented structural shift in the economy, particularly on the supply side. Everything from the way we produce and consume goods and services will need to change for this economy-wide transition to take place. The primary levers for driving that transition rest not with central banks, but with governments through setting climate policy, with industry through innovation and investment, with private finance through allocating investment, and with consumers through the choices they make. These important and difficult decisions bring both social and economic consequences.5  Role of central banks 1/5  BIS central bankers' speeches  So what then is the role of central banks? Let me start by emphasising what it is not. We are not here to “solve” climate change or drive the transition. Those with the mandate and the tools to lead this fight sit elsewhere. But central banks do have a role to play, and an important one at that. Our economy and financial system are not immune to planetary-level changes or society’s response to them, indeed it would be absurd to suggest otherwise. Elon Musk aside – we cannot diversify away from our exposure to the planet. In that sense climate change is the ultimate systemic risk.

However, from Q4 this year we will make adjustments to our approach to the composition of this portfolio in order to incentivise companies to take actions contributing to an orderly transition to a net–zero economy. Given the relatively small scale of these holdings – in the context of sterling and global capital markets – we hope this change will by example influence how larger investors take account of climate risks in their own asset allocation decisions. Some may worry this change moves us away from central banks’ core responsibilities, into territory best left for governments. However, the case for taking this action is clear, it is in line with the change in the MPC’s remit I described earlier, and far from impeding the effective execution of our policy objectives, it may well contribute to a future outcome that delivers a more stable monetary and financial system. Conclusion I have spoken about the relevance of climate change and the transition to a net-zero economy to central banks. It is about faithfully executing our mission for monetary and financial stability, taking into account those structural shifts on the horizon. That brings with it several analytical challenges and demands new ways of thinking – we welcome this. But it is clear that the biggest component of the journey to net-zero rests not with central banks, but with government, through the delivery of sector-level climate policy pathways – without these the real economy cannot adjust effectively.
3  See Atif Mian and Amir Sufi (2011), ‘‘House Prices, Home Equity-Based Borrowing, and the U.S. Household Leverage Crisis,’’ American Economic Review 101, 2132–56, and (2011), ‘‘What Explains High Unemployment? The Aggregate Demand Channel,’’ University of Chicago, unpublished paper. BIS central bankers’ speeches  3  reversal reduced the aggregate wealth of homeowners and, in the worst case, left many “underwater,” meaning that the amount of mortgage debt secured by their home exceeded its current value. This outcome is reflected in the dramatic decline in owners’ equity in household real estate, seen in Chart 3 (Result was a Huge Decline in Owners’ Equity in HH RE). It is interesting to note that while home prices rose during the boom, homeowner’s equity share remained constant. Thus, prior to the end of 2006, on average for each 1 percent increase in home prices, homeowners increased their mortgage debt by 1 percent (through higher balances on first mortgages, cash-out refinances, second mortgages, and home equity lines of credit). When house values began to fall, so did corporate equity values, which depressed household wealth further Chart 4 (Stock Market Wealth also Fell Sharply), limiting households’ options for reducing their debt burdens or sustaining their prior levels of consumption. Consequently, and in line with the logic of the research I discussed earlier, U.S. households decreased the cash flow available for consumption by paying down debt during the recession and early recovery.

Through another field experiment embedded in our American Life Panel survey modules, we have examined how respondents update their expectations after receiving information about either past food price inflation or future inflation forecasts by professional forecasters. Before the information treatment, and again after the provision of information, respondents were asked for their inflation expectations. We also asked for respondents’ priors about the information that was provided, to see whether those who have larger perception gaps are more likely to update their expectations, and if they would do so by a larger amount. We found that respondents revise their expectations in the direction predicted by theory after receiving new information. Further, the extent of revisions is correlated with the size of their perception gaps. Finally, respondents are more receptive to the new information when the uncertainty expressed in their baseline expectations is greater. All three findings are consistent with rational, Bayesian updating of expectations. Moving beyond average effects, we also found that our information treatment leads to a significant decline in the cross-sectional dispersion of inflation expectations, and causes the 4  BIS central bankers’ speeches  distribution of inflation expectations to converge toward its center – particularly for those who had high baseline expectations and were less informed ex ante. In fact, average revised expectations were nearer to actual realized CPI inflation as a result of our intervention.
It was the vicious circle that developed between the state of a country’s banking sector and its perceived sovereign credit quality. And why did this vicious circle emerge? Because of the lack of banking union: •  In a monetary union, capital can circulate freely and rapidly from one country to another, which can amplify the potential fallout from “banking panics”, unless there  BIS central bankers’ speeches  1  are effective supranational mechanisms in place for supervision, resolution and the guarantee of deposits; •  As long as the financial health of the euro area remains at the mercy of the difficulties encountered by one of its member countries, there is a threat that negative interactions may develop between sovereign credit risk and banking risk;  •  In reality, the lack of a banking union allowed a high degree of fragmentation to develop within the euro area banking system and this, in turn, nourished doubts about the “singleness” of the euro. The crisis thus made it clear that a uniformly healthy financial system was vital to safeguard the stability of the euro area and ensure the effective transmission of a single monetary policy. Once we had agreed on this reasoning, we had to come up with a concrete solution. The key to banking union can be summed up as follows: the aim is to find a way to ensure that banks in the euro area are considered precisely as that, as “euro area banks”, and not as “Irish”, “German” or “Italian” banks.

In other words, the goal is to ensure that credit conditions in the euro area will not depend on where you are but on who you are, which is what should be expected of an efficient financial market. To achieve this, we need to have three things in place: i)  Federal bank supervision, to guarantee that all institutions are subject to the same rules and same methods of control. A supra-national supervisor is in fact better placed to assess the risks of cross-border activities and therefore to protect and encourage such activities; it is not subject to national biases that can lead to the temptation of economic introversion. It is therefore more credible and strengthens stability and confidence in the area;  ii)  A unified mechanism for the resolution of banking crises, so that individual countries no longer have to shoulder the burden of major upheavals on their own;  iii)  A unified deposit-guarantee mechanism to avoid banking panics. Over the past year, these ideas and words have translated into concrete actions, and Europe has demonstrated that it can carry out rapid, in-depth reforms, to ensure it emerges stronger from the crisis. I would just like to tell you where we stand currently in the move towards banking union. As you know, the area in which we have made the most progress is in supervision.
The UK has recently put in place an explicit macro-prudential regime. In July of last year, the UK government announced a new Financial Policy Committee (FPC) to execute macro-prudential policy.7 The FPC is housed in the Bank of England and met for the first time in June this year. The FPC’s objective is to protect and enhance the resilience of the UK financial system against risks including “unsustainable levels of leverage, debt or credit growth”. Therein lies a key FPC challenge. There is evidence of unsustainably high levels of leverage in some sectors. But elsewhere, there is evidence of credit growth being unsustainably low. Some companies remain over-leveraged. Yet others are suffering a credit shortage, with bank lending to companies continuing to contract over the past 12 months. 5  For example, Graham and Narasimhan (2004), Malmendier and Nagel (2011). 6  For example, Cogley and Sargent (2008), Barro (2006). 7  HM Treasury (2010). BIS central bankers’ speeches  5  In framing macro-prudential policy today, both these factors need to be weighed: on the one hand, enhancements to the risk-bearing capacity of the financial system to repair balance sheets; on the other, encouragement for the risk-taking capacity of the system to boost credit supply. These factors can sometimes point in subtly different directions. The first might point to higher buffers to boost banks’ risk-bearing capacity, while the second might point to lower buffers to boost their risk-taking capacity.

The real estate sector is identified using SIC (2003) and SIC (1992) codes (the sample ranges from around 450 to 1,600 firms). BIS central bankers’ speeches  13  Chart 15:  Chart 16:  Changes to UK gross government debt ratio in crisis periods  Public debt ratios in G7 countries  1929 crash 1990 recession  cumulative pp change since start of recession 30  2008 financial crisis  PPP weighted  Percentage of GDP 140 120  25 100  20 80  15 10 5  0  1  2  3 4 years since crisis  5  40  0  20  -5  0 1940 1950 1960 1970 1980 1990 2000 2010  6  Sources: Office for National Statistics, Thomson Reuters Datastream and Bank calculations. 14  60  Sources: IMF Historical Public Debt Database, IMF World Economic Outlook (April 2011), Angus Maddison historical statistics and Bank calculations.
In addition, the euro zone has undergone tremendous changes in the institutional settings by the establishment of the Single Supervisory Mechanism by the ECB, along with the Single Resolution Mechanism and other accompanied ongoing or upcoming reforms. Another area of reforms in the European Union was the strengthening of fiscal and macroeconomic policy through the Fiscal Compact and accompanying macroeconomic surveillance mechanism, aiming at sound public finances and preventing from macroeconomic imbalances. What urgently came to our knowledge during the last crisis was the importance of the financial stability for the overall macroeconomic stability, but also the so-called “doom loop” between banks and sovereign that emerged from this crisis, adding yet another specific experience that we should all be aware of in the future. BIS central bankers’ speeches  1  On the recovery process and sustainable growth The data since mid of the last year and the forecast for this year are pointing to an upturn of the global economy, although it is still fragile and surrounded by risks. The economic recovery of the European Union is crucial for stronger revival of the region, considering the trade relations, although due to specific factors, countries in the region differ in terms of their position in the economic cycle. In 2013, the Macedonian economy grew by 3.1%, mainly driven by the strong net export and the strengthening of private consumption in line with curbing down of the unemployment.

In this view, it is worth mentioning the positive contribution of the new FDI inflows in tradable sector, which contributed to both higher and more diversified net export and higher employment. In addition, economic recovery was supported by the fiscal stimulus as well as the accommodative monetary policy stance. Since July last year, the main policy rate is at the historical lowest level of 3.25%. Moreover, during the crisis period, a combination of standard and non-standard measures have been undertaken by the central bank aimed to give additional support specifically to the credit growth and accordingly, to the economic growth, while still preserving the price and financial stability in the economy. The outlook for this year is also positive. We expect GDP growth of close to 4%, and therefore we see economy going up on the cycle. What one can learn from our experience is the fact that the implementation of sound structural reforms can definitely move the economy upward – even during the crisis – that is an important message for the macroeconomic policy afterwards. When discussing the recovery from the crisis, we need to point out some related issues that are dealing with the exit of non-standard policy measures and turning towards fiscal consolidation, currently being the topical issues between the policy makers worldwide. The tapering decision by the FED by the end of the last year somehow announced the need of this reversal that will eventually be recognized in other countries, too.