samchain/econo-pairs-v1 huggingface dataset:
In sum, the Asia-Pacific region needs more co-operation and exchange of ideas in the monetary and financial sphere, and to achieve that it needs stronger links between economists working in this area in central banks, international institutions and universities. This is exactly what the Australasian Macroeconomics Workshop is all about, and I am delighted that we could tempt you to come to Hong Kong for this year’s meeting. Thank you and let the fun begin. 2  BIS Review 42/2003

Mr Latter gives an overview from Hong Kong of eight Asian economies Keynote address by Mr Tony Latter, a Deputy Chief Executive of the Hong Kong Monetary Authority, at the Asian Financial Markets Conference held in Hong Kong on 26-27 April 1999. Thank you for inviting me to address your conference today. It is encouraging to see such a wide and distinguished representation here from the financial and commercial communities. Indeed, when I looked down the advance attendance list, I quickly realised that there would be very little which I could tell you about market developments in Hong Kong that you didn’t know already. So, if you will allow me, I should like to spend some of my time standing back a little from specific market topics and looking instead of some of the macroeconomic forces which shape their development. I shall focus my analysis on eight Asian economies [see table]. You will note that the list does not include Japan, Hong Kong or Singapore. That is because they can already be regarded as having relatively mature financial infrastructures and they are largely free of capital controls. Thus, for reasons which will become apparent as I proceed, they do not fit into the story. The table shows the level of physical capital investment within each economy (specifically, gross domestic fixed capital formation as a percentage of gross domestic product) for the ten years to 1997.
Current challenges therefore do not call into question the primacy of the ECB’s objective of price stability. On the contrary, it is precisely in this challenging environment that the benefits of price stability for Monetary Union as a whole will be reaped. The credible achievement of price stability reduces overall uncertainty in the macroeconomic environment and thereby keeps risk premia embedded in financial yields lower than would otherwise be the case. In turn, this will foster growth, and thus provide support to those countries facing financing difficulties. At the same time, price stability is a crucial element in restoring stability to financial markets and improving market access for distressed sovereigns and banks. That said, we must be careful not to overburden monetary policy, in both its standard and non-standard incarnations. Obviously, monetary policy cannot take up the slack where fiscal or other authorities fail to live up to their responsibilities. While central banks can, should and do provide liquidity support to financial markets, they cannot provide solvency support. That would represent an encroachment upon the domain of  6  See the analysis presented in Giannone, D., M. Lenza, H. Pill and L. Reichlin (2011). “Non-standard monetary policy measures and monetary developments,” ECB Working Paper No 1290. 7  See the framework developed in Ciccarelli, M., A. Maddaloni and J-L. Peydró (2010). “Trusting the bankers: A new look at the credit channel of monetary policy,” ECB Working Paper No 1228.

As a result of the crisis, these countries have been undergoing a painful adjustment, unwinding the imbalances created during the boom. The recessions affecting them have sometimes been much deeper, with GDP growth several percentage points below that seen  2  BIS central bankers’ speeches  in the euro area as a whole.4 Consistent with this, loan growth has fallen significantly. For example, household loan growth has turned strongly negative in Ireland and has remained stagnant in Greece and in Spain over the past 2 years, while it returned to positive growth rates in 2010 in the euro area average. Has the single monetary policy exacerbated these cross-country differences? The answer depends greatly on the counterfactual scenario you choose. It is certainly possible to construct a theoretical counterfactual within which credible and independent national monetary policies would have ensured price stability in every country now in the euro area, rather than only at the average euro area level. In this scenario, crosscountry inflation differentials would have been reduced, although I should emphasise that these have remained small in the euro area, even when compared with those in different regions of the United States, which is a currency area typically seen as being closer to the optimum size and structure.
22  Such an approach would be consistent with the 2008 CGFS report on Central Bank Operations on this issue: “Insofar as central bank actions might lead to degradation of market participants’ management of liquidity and other risks, a possible offset would be to implement tighter supervisory and prudential policies concerning the management of liquidity and related risks.” It would also seem to comply with the 2008 BCBS Principles on Liquidity Risk Management and Supervision, which say that: “With respect to the composition of its liquidity  BIS Review 67/2009  9  That is the approach that the UK’s Financial Services Authority will be adopting in due course, after a number of years’ discussion. We greatly welcome that outcome. Of course, in the midst of the crisis, any such requirement has to be carefully transitioned, but the eventual destination should be clear enough. For such a policy to deliver its potential, it would be good if regulators, internationally, required all banks regularly to turn over a meaningful share of their “stock liquidity” in the market on a reasonably regular basis. That would also help to put banks in a position to reap the benefits of the Bank’s Discount Window Facility, through which, as I have described, sound banks can borrow gilts.

Underlying inflation is now estimated to be between 2 percent and 2½ percent, which is one percentage point higher than one year earlier. Chart 9: Norges Bank’s key policy rate projections Saving, investment and spending decisions are influenced by expectations concerning future interest rates. Communication on the future course of monetary policy, including the publication of key policy forecasts, therefore plays an important role. Even though the key policy rate has been kept unchanged, Norges Bank’s forecasts for the key policy rate ahead were revised down through 2013. The downward revision of the key policy rate forecasts primarily reflects lower growth forecasts for the Norwegian economy. There are also prospects that wage growth will be somewhat lower than envisaged earlier. Growth among our trading partners and interest rates abroad have been somewhat lower than projected one year earlier. At the same time, banks’ lending margins are somewhat higher than expected. Chart 10: Inflation and capacity utilisation The analyses in the latest Monetary Policy Report published in March suggested that the key policy rate should be held at today’s level in the period to summer 2015, followed by a  2  BIS central bankers’ speeches  gradual increase. With such a path for the key policy rate, there are prospects that inflation will be slightly below, but close to 2.5 percent throughout the projection period. Capacity utilisation may edge down over the next year and thereafter move up to close to a normal level.
4 When formulating the criteria, there is a trade-off between being too general, which does not provide very much information, and being too specific, which might overly restrict policymakers’ room for manoeuvre and be less robust to changes in the economic landscape. The Bank has developed a set of criteria for an appropriate interest rate path. The criteria serve both the purpose of communicating the reasoning behind the interest rate path to the public and of providing an agenda for the Board discussion, which makes it easier to decide on a particular path. The criteria used by Norges Bank to assess the interest rate reflect policymakers’ general views and assessments. They are therefore not “carved in stone”, but can be changed and modified due to new insights. Currently, the Bank uses five criteria, which can be summarized as follows:  4  For example, the Swedish Riksbank communicates the criteria behind the forecasts as follows: “The Riksbank’s forecasts are based on the assumption that the repo rate will develop in such a way that monetary policy can be regarded as well-balanced. In the normal case, a well-balanced monetary policy means that inflation is close to the inflation target two years ahead without there being excessive fluctuations in inflation and the real economy.” (See p.3 in the Riksbank’s Monetary Policy Report). BIS Review 94/2008  3  1. Achievement of the inflation target  The interest rate should be set with a view to stabilising inflation close to the target in the medium term.

The interest rate set by central banks is normally a very short-term interest rate, which in itself has negligible effects on economic decisions. It is mainly expectations about future policy rates that affect market interest rates and thus economic decisions. Most central banks communicate future policy intentions in one way or another. The majority of central banks communicate indirectly through forecasts based on technical interest rate assumptions, and by giving verbal signals about future interest rate decisions in policy statements and speeches. With such indirect communication, the market participants gain information about the sign of future interest rate decisions, but may have less information about the size. Until November 2005, Norges Bank used technical interest rate assumptions in the inflation forecasts, but also on some occasions commented on whether the Bank intended to follow a different policy than what seemed to be reflected in market interest rates. Thus, the Bank gave signals about the sign of future policy intentions relative to market expectations, but not on the size. 3 From November 2005, Norges Bank started to use endogenous interest rate forecasts in the Monetary Policy Report. Norges Bank was the  1  This process has also been acknowledged by the Norwegian parliament: “The majority think that it is a prerequisite for an effective monetary policy that the central bank is open about the interest rate forecasts, and are satisfied with the fact that Norges Bank emphasises this.” (Innstilling frå finanskomiteen om Kredittmeldinga 2007, Innst.S.nr.274, s.11.
I want to avoid the mistakes of lawyers for other organizations who “saw their role in very narrow terms, as an implementer, not a counselor.” 4 I also take steps to improve my understanding of the New York Fed’s operations—even after nearly twenty years working there. In my current role, I try to maintain regular communication and strong relationships with the heads of other groups within the New York Fed. I don’t just talk to them about legal risk. I do an awful lot of listening too, with the hope of better understanding the work they are doing and the issues that concern them. And I think about ways that input from lawyers might help. In those unfortunate instances when legal disputes arise, I look for lessons that I might report back to those colleagues—insights relevant to their primary concerns. This type of information sharing is essential to an organization that seeks to maintain a high degree of public trust in an increasingly complex field of coexisting and interrelated risks. I also believe that lawyers need to reign in their tendency to want to reduce risk—especially legal risk—to zero at the expense of potentially more important goals. Lawyers are worriers. We tend to see what can go wrong. This is a product of training and disposition. And it is part of the value that we contribute to an organization. We must remember, though, that the point of reducing risk must be to aid some broader corporate purpose.

Right idea 3: global standards for globally systemic insurers While much progress has been made on the home front, the focus of the global reform agenda since the crisis has been on putting a third idea into practice: common global standards for systemically important insurers. The goal of this work is to increase systemic resilience; preventing spillovers from the failure of an insurer to the wider financial sector and the real economy. Policymakers agree that traditional insurance activities need not of themselves be a source of systemic risk. Indeed, recent events demonstrated three reasons why insurers are better able to withstand crises than other financial institutions. First, the underwriting cycle is generally not correlated with the business cycle; Second, the inherent resilience of business models that take a long-term view, and Third, an insurer’s production cycle is inverted as they collect premiums today with a view to paying claims tomorrow. This model reduces liquidity risks and immunises insurers against risks of a run. Insolvency takes time to manifest, and wind-down when it happens has historically been more orderly. Given all that, you might ask: why the concern about systemic risk in insurance? The answer is simple: The financial crisis laid bare that the actions of some individual insurers – like AIG – can have broad spillovers; that some insurance markets – like the monolines – are systemic, and that the insurance sector plays a systemic role in diversifying the financial sector thereby reinforcing its resilience. AIG was the extreme case of a systemic insurer.
Cross-border capital movements were also subject to little or no regulation in the decades prior to 3 1914. Capital markets were integrated in countries that had adopted the gold standard. There was solid confidence in the gold standard, and exchange rate risk was regarded as very low. Movement of capital between countries was often long-term, and tended to be associated with specific projects. As a small, open economy, Norway was totally dependent on an open, smoothly functioning capital market. From 1885 to 1913, the fixed investment rate in Norway was on average higher than the saving ratio. Although short-term gross capital movements were far from their current levels, they were nevertheless significant. Monetary policy was restricted by the gold standard. Capital was highly mobile, and the interest rate had to be set to ensure that the exchange rate remained between the gold points. As a result, monetary policy could not normally be used to stabilise economic 4 developments. Countries that suspended the gold standard were penalised with higher interest rates. A look at earlier crises A weak stabilisation policy, relatively ineffective banking legislation combined with a poorly developed financial industry provided fertile ground for many financial crises. The Oppland crisis occurred in 1864. It was a backlash of the boom in the latter half of the 1850s, when a sharp upswing in the timber industry led to widespread speculation. Growth was also very strong in the early 1870s.

The securities and capital markets are another important source of capital for enterprises. During an upturn, many enterprises find that capital is "cheap", because the outlook for the future is regarded as very bright. There is a risk of over-investment. Optimism may rapidly give way to pessimism if investments fall short of expectations and negative news starts to spread. As a result, the risk that has accumulated during the upturn period may materialise. The financial sector may choose to interpret developments as a sign that the risk associated with new projects has also increased, with the result that this risk may be overestimated. A drying up of credit and capital may trigger or amplify a crisis. The costs of financial instability may be very substantial. Therefore, it is necessary to dampen financial cycles. The outlook for financial stability The outlook for the global economy is now weak. The terrorist attacks on the US on 11 September have increased uncertainty. We have witnessed a bubble in technology shares. From 1998, the price of technology shares rose substantially more than earnings, and since March 2000, there has been a sharp correction in prices. Life insurance companies and pension funds, both at home and abroad, have lost a substantial portion of their buffers due to the decline in share prices. Telecommunications companies have been through a phase marked by substantial borrowing. Credit rating companies have downgraded many telelcoms due to high debt levels in relation to future prospects. This has increased funding costs.
A deterioration in terms of trade then means that the price of cars falls relative to the price of wine in a common currency. In  2  BIS Review 75/2001  order to be able to sell more cars with a view to buying an unchanged quantity of wine and thereby leave the balance on current account unchanged, the country’s real exchange rate has to depreciate. Productivity growth. Suppose instead that the country becomes more efficient at manufacturing cars. This can lead to better quality cars for a given input of resources and a given price in the domestic currency. The cars can then command a higher price in the world market and the real exchange rate can appreciate. In practice, high productivity growth tends to be associated with a higher potential GDP growth rate. In a country where growth is higher than in the rest of the world, the real exchange rate can therefore be expected to show an appreciating trend. However, the relationship between productivity growth and the exchange rate is not stable. Economic theory is not clear cut on this point some lines of reasoning could lead to the opposite conclusion. An additional factor that is closely related to the real exchange rate is the balance on current account. A succession of current-account deficits leads to growing external debt and rising interest payments. The real exchange rate must then depreciate if the country is to achieve enough additional exports to finance the interest payments.

The sizeable purchases of foreign securities by Swedish investors have a similar effect; recently, these purchases have mirrored the opportunities provided by the new pension system. Flows that are comparatively small in this context have also been occasioned by the repayment of government external debt. At the same time, purchases of kronor have presumably decreased in that export receipts have fallen significantly for a number of large companies this year and big concerns have increased their cash holdings in foreign currency accounts. Moreover, in recent years increased unrest in the international financial markets has tended to hit the Swedish krona; this was particularly evident during the financial crisis in autumn 1998. It seems to be a consequence of a generally heightened aversion to risk in the major financial centres, such as New York and London. Money is then withdrawn from countries whose currencies and economies took a beating in similar situations in the past; since the crisis in the early 1990s Sweden is unfortunately included in this category even though the current macroeconomic situation does not warrant this. Finally, the generally stronger dollar should be mentioned as a partial explanation for the weak krona. Many economists consider that according to conventional theory the dollar’s strength is inexplicable and the dollar is markedly over-valued. In this situation the Swedish krona, like most other currencies in the OECD area, has depreciated against the dollar. One problem with explanations of this kind is that they come and go. It is also easy to show that they lack universal validity.
Centralising decision-making would bypass many of the current obstacles to effective resolution such as the need for cooperation and coordination between multiple authorities. This would in turn lead to quicker decisions and reduce resolution costs, as early action would help to maintain the economic value of the bank in question. Second, an ERA would be more effective in minimising the cost for taxpayers of bank failures. A bank may be “too expensive”, “too complex”, or even “too well-connected” to resolve at the national level, making bail-out the preferred strategy. An ERA, on the other hand, would have the financial, legal and administrative capability as well as the necessary independence to carry out effective resolution. By imposing burden-sharing on shareholders and creditors and by financing residual costs through a European Resolution Fund financed ex ante by all the banks, the ERA could ensure that the private sector bears the primary burden of bank resolution costs. European resolution, similar to what the FDIC does in the US, is not about bail-out of banks by state recapitalisation efforts, but the use of wide bail-in powers to resolve banks with little use of tax-payers money. Third, an ERA is a necessary complement to the single supervisory mechanism. A system where supervision is European but resolution is national creates frictions. The single supervisor may assess that a bank needs to be resolved, but the relevant Member State may be unable to bear the resolution costs or unwilling to resolve a favoured national firm.

The recent reforms to strengthen the euro area fiscal framework – the so-called six-pack and the fiscal compact – are welcome and go in the right direction. But they remain within the logic of the Maastricht Treaty where responsibility for fiscal policies is exclusively in national hands. This creates an inherent credibility problem, as for fiscal frameworks to be fully credible, they have to enforceable. This is impossible without a further and deeper sharing of budgetary sovereignty. This could be achieved by giving European institutions greater competence to effectively compel euro area Member States – in a graduated manner if and when the situation deteriorates – to take the necessary fiscal policy decisions. This would correspond to a further sharing of national sovereignty. But for both weaker and stronger countries, it is in fact an opportunity to regain substantive sovereignty as opposed to formal sovereignty. For the weaker countries, measures that put the soundness of their fiscal policies beyond doubt will allow them to be fully sovereign, in the sense that they can use fiscal policy in its vital economic stabilisation role and take free decisions about taxes or types of expenditure without fear of excessive discipline from financial markets. For the latter, sharing sovereignty at the European level will allow them to effectively protect their domestic economies from spillovers from the rest of the euro area. Moreover, they will no longer be placed into situations where they are de facto forced into taking decisions to avert imminent catastrophe.