samchain/econo-pairs-v1 huggingface dataset:
However, as I will discuss below, in practice the rationale for considering monetary aggregates is a little different. What variables should a central bank consider when setting the interest rate? In the regime I just described, the answer to this question is pretty simple: anything affecting inflation over a two-year horizon. Variables such as inflation expectations, wages, output, the exchange rate, commodity prices, and so on, have important effects on inflationary forecasts and must be taken into account when deciding the future path of monetary policy. There are other variables that have caught particular attention and I would like to take a brief look at them. These are the prices of assets (e.g., stocks, housing), the exchange rate and monetary aggregates. Two questions arise with regard to asset prices. One is, should they influence monetary policy decisions? And the other is, what must be done when those prices contain speculative bubbles? I will address this second question in the next section. But it must be noted that we must avoid the confusion between inflation and financial stability. Concern about asset price bubbles and distortions is at the core of financial stability analysis, but its impact on inflation is different. If stock or housing prices affect future inflation, they should be taken into account in monetary policy decisions. And this actually occurs via the effect of these prices on aggregate demand, output and, in the end, inflation. Hence, the monetary policy seems to have a stabilizing effect by leaning against the wind.

Now things have changed dramatically. As of last year, financial stability became the protagonist in monetary policy management in developed countries. 6 At the industrialized countries, particularly the United States, the potential distortions in financial markets were swept under the carpet. Furthermore, concern about the existence of an asset price bubble was nobody’s priority. An asset price bubble means that the price may be driven by variables other than its fundamentals. For example, stocks may be overpriced in comparison with the companies’ future stream of profits, or homes may be appraised at more than the living services they can provide. In other words, prices may be pushed up artificially, and the problem is that when the bubble bursts, it splatters across the financial markets and the overall economy. Regarding how can monetary policy deal with the bubbles, as with the downfall of technological company stocks early this decade, the best strategy during the Greenspan era was believed to be “do nothing and clean up the mess when the bubble bursts” (Blinder and Reis, 2005). Laissez-faire is based on the idea that bubbles are hard to identify and also difficult to affect through monetary policy. Cleaning up afterwards consisted in providing liquidity, which normally was accompanied by aggressive interest rate cuts. A major criticism to this strategy was that it favored bubbles, because financial markets internalized the final rescue.
As I have argued in earlier speeches, the globalised economy we now inhabit may have many potential sources of instability, including the potential upside pressure on energy and commodity prices as well as volatility in financial markets. 7 In addition, we have learned through this recession that inflation has not performed in the way conventional economic models and our earlier forecasts suggested. As spare capacity has not exerted much downward pressure on inflation so far, there must be a high degree of uncertainty about its future impact. In the highly integrated world economy we now inhabit, the margin of spare capacity in the UK economy may have less impact on our inflation prospects than global inflationary pressures – which have been less benign in recent years. And the exchange rate can play a key role in the transmission of these global price pressures to the UK economy, which may help to explain the above-target inflation the UK has experienced in the last three years. For a legendary rock band like Led Zeppelin, the song should indeed remain the same. When the band reformed at the end of 2007 at the O2 Arena, everyone wanted to hear “Stairway to Heaven”, “Dazed and Confused”, “Whole Lotta Love” and their other classics. But in monetary policy, we need to adapt our tune to the changing performance of the economy, and to absorb what we learn about the economy in new and unprecedented circumstances, such as the recent financial crisis.

UK inflation performance That brings me to the final area where the UK economy has performed very differently to expectations last summer – headline inflation. The UK has just experienced the second significant upward spike in inflation in the last couple of years. Since the beginning of 2008, when the financial crisis and the ensuing recession might have been expected to push down inflation, consumer price inflation in the UK has averaged 3% – above the 2% target and more than one percentage point higher than average CPI inflation in the pre-recession period of growth. Our inflation rate is clearly influenced by external factors in the world economy, such as a volatile oil price, and these have clearly made the control of inflation more difficult over the last two or three years. But if these global forces were solely to blame for higher inflation, they would be having a similar effect in other major economies. As Chart 6 shows, the US and the euro area have seen lower and more stable inflation over the last couple of years, with inflation averaging around 1¾% since the beginning of 2008. US inflation has recently been pushed up to over 2% by higher petrol prices, but to a much lesser extent than in the UK. 5  According to the Labour Force Survey measure, unemployment peaked at 11.9% in mid-1984 and 10.6% in early 1993. Approximately two years after the start of the recession in both cases, unemployment was 10.2% at end-1981 and 10.4% at end-1992.
We have seen that the long-term real interest rate in Sweden largely follows international levels, but that there can be some deviations. This could be a sign that domestic factors also play some role for the long-term level. One such factor could be indebtedness in relation to other countries. If the indebtedness is very high in relation to income (production), it is likely that investors will demand compensation for the extra risk that high levels of indebtedness imply. The long-term real interest rate in a small open economy like Sweden’s is therefore the sum of the global real interest rate plus a risk premium 𝜌𝜌, that is to say, 𝑟𝑟 ∗ = 𝑟𝑟 ∗𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔 + 𝜌𝜌  A complete adjustment of the long-term real interest rate to international levels thus only occurs when the risk premium is zero. In principle, the risk premium could be both positive and negative. Small open economies with a very high level of saving abroad could have a negative risk premium, which could be expressed as a lower long-term real interest rate than the global one. In Sweden we have had large surpluses in the current account. This means that we have built up large net foreign assets. Given this, our risk premium should not be very high, but one cannot rule out the possibility that other factors may also affect the risk premium.

For instance, a report that received considerable attention recently warned that every second job in Sweden would disappear within 20 years. 4 At the same time, there is another ongoing debate about demographic developments, with an increasing ageing population and several people therefore saying that we need an increase in labour immigration and better integration to maintain welfare at the current levels. 1 I would like to thank Magnus Jonsson for his help with writing the speech and Emelie Theobald for her help  with data and figures. I would also like to thank Mattias Erlandsson, Jesper Hansson, Goran Katinic, Åsa OlliSegendorf, Cecilia Roos-Isaksson, Marianne Sterner, Ulf Söderström and Anders Vredin for valuable comments and Elizabeth Nilsson for helping to translate the speech into English. 2 See Keynes (1930). 3 See Leontief (1952). 4 See “Vartannat jobb automatiseras inom 20 år – utmaningar för Sverige” (Every second job will be automated in 20 years – challenges for Sweden), Swedish Foundation for Strategic Research. 1 [24]  Changes in trends are difficult to predict, as they are not visible until a certain amount of time has passed, as illustrated by the predictions of Keynes and Leontief. I will therefore not make any attempt to predict developments in the labour market today, but instead look back at what has happened. There are many indications that there have been several trend changes in the labour market in the period following the financial crisis 2008-2009.
In January 1817 it was the only bank in the country. It received deposits, but charged a fee for that service. Thus, today’s situation with depositors having to pay for keeping their money in the bank is not entirely a new phenomenon. In the 1870s Norway joined a currency union with Denmark and Sweden that lasted until the outbreak of the First World War. The Scandinavian countries enjoyed strong economic growth during this period. Large cross-border capital flows supported the industrialization of the Scandinavian countries, and financial integration driven by the gold standard and the currency union was probably a contributing factor to the favourable development. Both Sweden and Nor-way were relatively poor countries situated on the outskirts of Europe when Norges Bank was founded 200 years ago, but with the advent of industrialization in the late  BIS central bankers’ speeches  1  19th century both countries began their journeys to become two of the richest nations in the world. Economic and political developments in Norway and Sweden have also showed similar patterns in the period since the Second World War. The role of the central banks was very limited in both Sweden and Norway. The monetary policy decisions were made by the government and Norges Bank became more of a technical implementer of government policy. For much of the 1970s and 1980s, economic policy in both Norway and Sweden lacked a long term strategy and credibility. Inflation and wages soared, and lost competitiveness resulted in repeated devaluations.

So to round off: Norway and Sweden have followed one another through the centuries, in war and peace, through crises and growth. And we can be thankful that we have succeeded in moving from poverty to wealth and becoming two of the world’s wealthiest nations. Often the central banks have been able to contribute to higher welfare, but sometimes monetary policy has unfortunately been destabilizing. Our joint history is continuing, we have common challenges to face going for-ward. Higher capital and labour mobility throughout the world opens new possibilities to raise welfare even further, but globalisation also require that we try to find common strategies across countries. We can also enjoy our similarities and continue teasing one another when we meet on the sports field. As Sweden now follows its team in Euro 2016, we can’t help but ask, oh where’s Norway? But on the other hand we can expect a lot of teasing from you in the next world cup ski event! BIS central bankers’ speeches  3
This might involve higher rather than lower interest rates because of a risk premium, plus greater uncertainty. Before moving on from the subject of competitiveness, let me leave you with a couple of thoughts. If Hong Kong has, in some underlying sense, been suffering from severe uncompetitiveness, how does one explain the continuing strength of the trade and current account performance...  … and the fact that the pace of recession in Hong Kong over the last two years has not been significantly different from that in a number of other economies in the region? 6  BIS Review 17/2002  I am drawn to conclude that the criticisms of the peg on competitiveness grounds do not stand up too well under scrutiny. Even if the foregoing analysis and discussion does not prove unequivocally that fixing is superior to floating, it does challenge the contention that perceived problems of competitiveness would dissipate if only we had a floating exchange rate. Living with deflation Let me turn now to the other focus of criticism of the monetary regime that I mentioned earlier, namely deflation. There are four main factors which have been contributing to falling prices in Hong Kong. First, there is the state of the global economy. A combination of recession and remarkable success in taming inflation in recent years have left policy makers in several countries facing the unusual situation of deflation. Hong Kong has not been alone, although the process has perhaps been more prolonged here than in many other places.

From the monetary policy perspective, the prospect of persistent deflation presents the possible concern that, even with near-zero interest rates, people may prefer to sit on money balances rather than to spend, and that this may hinder recovery in real activity. To a certain extent the problem may only be illusory. Behaviour should be no different when interest rates are zero and inflation (or, strictly speaking, projected inflation) minus 2%, than when interest rates are 5% and inflation plus 3%; the real rate is the same in each case. But deflation does prevent real interest rates from going negative. It is a matter for debate as to how much of an impediment to recovery this limitation could be. Possibly it would only become significant if the expected pace of deflation was rather sharper than it has been. In assessing the causes and impact of deflation, and the possible remedies, it is appropriate to distinguish between the price level for goods and services on the one hand, and that for assets whether financial or real estate - on the other. For goods and services, the consensus view is probably that a low, stable positive rate of inflation is preferable to a negative one. Nevertheless, both the economy and society may be able to cope for a certain period with modest deflation - in the range of, say, 0-2% pa - without too much difficulty.
Real interest rates may need to be higher than what we have seen in the period of “great moderation”. The costs will certainly be felt, but compared with the situation 30-40 years ago, the macroeconomic framework is now well established and central banks have accumulated credibility over a number of years as witnessed by fairly stable long-term inflation expectations. In this sense, the economy is now more robust to shocks and costs should be smaller. There is reason for us all to be braced for a negative supply shock of considerable magnitude in the years to come. If global warming is a threat to mankind – and much evidence suggest it is – then carbon dioxide (and other) emissions must be reduced. That will entail costs, real costs. Our future consumption path will be lowered, perhaps sharply. But as compensation we should have improved prospects for mankind. We have a choice however in how we go about reducing emissions: The efficient way, taxing emissions (or auctioning permits) and using the markets; or the truly costly one of trying to subsidise away the problems with highly uncertain results. The debate and actual efforts so far give only moderate hope of a good outcome. But let us be optimists – at least for the time being. To combat climate change, the relative price of fossil fuels must increase. This can be regarded as a negative cost-push shock. Is there a role for monetary policy here?

One of the aims of the merger is to be better positioned to compete with global companies. New market entrants and lower entry barriers promote competition, but there are other mechanisms that could weaken competition in the longer term. One example is if one or a small number of multinationals become dominant payment service providers at the global level. The key words are digital platforms and network effects. Marketplaces such as stock exchanges and shopping centres have existed for a long time. But digital marketplaces, known as platforms, are far more scalable. Well-known examples of digital platforms are Google, Facebook and the classified ad portal Finn.no. These platforms achieve competitive advantage by gathering information about customers, eliminating time-consuming tasks and simplifying users’ everyday lives. Platforms have network effects. Competition can be impaired if platform companies exploit their market power. A large user base makes it profitable for other service providers to develop complementary services. Because of network effects, dominant platforms can achieve a nearmonopoly position. Operators that control parts of the payment infrastructure can shut out competitors. For instance, Apple Pay is the only option for contactless payments based on near-field communication (NFC), using Apple’s iPhones. A number of countries are considering whether this constitutes abuse of a dominant market position. In Norway, this would be a matter for the competition authorities. 1/5  BIS central bankers' speeches  Payment solutions should build on a common underlying infrastructure that enables payments to be carried out swiftly, safely and at low cost.
Over the business cycle, the real interest rate required to sustain output at potential and inflation at target, can fluctuate around the long-run real rate as a result of shorter-term influences on the economy. At any given time, other factors like fiscal policy, uncertainty and global growth prospects may push the real rate required to bring inflation back to target further above or below the long-run real rate. But given the slow moving nature of the underlying drivers of the long-run real rate, one would expect the downward shift in the overall interest rate cycle to persist into the foreseeable future. It is this downward shift in the long-run real rate that has lain, in part, behind the Bank of England’s message that any future increases in rates will be limited and we should not expect to see a return to the levels of policy rates we saw before the crisis. And this is exactly what motivates me today to speak about the implications of this low rate environment for financial stability. Financial stability challenges of low for long: the financial sector  I want to look today at the three main challenges to financial stability that this environment could pose and briefly consider possible policy responses. The first challenge is that a slow or an unwilling adjustment to the lower returns implied by low for long can lead both to greater risk taking and less resilience in the financial sector. 7  Holston et al (2017).

The SNB will continue to monitor developments on the mortgage and real estate markets closely, and to assess whether further measures are necessary to mitigate the risks to financial stability. Page 3/3
Let me emphasize that under this policy proposal, core inflation reaching 3 percent is only a risk – and not a certainty. Indeed, simulations of standard models suggest that core inflation is likely to remain below 3 percent even under a policy of extended monetary accommodation. But the economy may behave differently than expected. Still, 3 percent inflation is a risk that we should be willing to accept. If, contrary to most evidence, the natural rate of unemployment is higher than 7 percent, then under this policy inflation will rise more quickly and without any improvements to the real side of the economy. In such an adverse situation, the inflation safeguard triggers an exit from what would be evidently excessive policy accommodation. And it would do so before inflation expectations would be in much danger of becoming unhinged. We would not have the desired reductions in unemployment, but then again, there wouldn’t be anything that monetary policy could do about it. We would suffer some policy loss in that a 3 percent inflation rate is above our 2 percent target. But we certainly have experienced inflation rates near 3 percent in the recent past and have weathered them well. And 3 percent won’t unhinge long-run inflation expectations. We are not talking about anything close to the debilitating higher inflation rates we saw in the 1970s or 1980s. Most importantly, we would also know that we had made our best effort.

(3) Exports of goods and services minus imports of goods and services. Source: Central Bank of Chile. 8  BIS central bankers’ speeches  Figure 6 Output gaps (*) (percent) 6  6  4  4  2  2  0  0  -2  -2  -4  -4  -6  -6  08  09  10  11  IPoM Sep.10  IPoM Dec.10  (*) Gray area, as from fourth quarter of 2010, indicates forecast. Source: Central Bank of Chile. Figure 7 Consumer perception index  Labor market (percent, millions of persons)  90  140  70  120  50  100  30  80  10  60  03 04 05 06 07 08 09 10 IPEC (1)  U. de Chile (2)  12  7,5  11  7,0  10  6,5  9  6,0  8  5,5  7  5,0  Mar.09 Sep.09 Mar.10 Sep.10 Unemployment rate Employment  (1) IPEC: value above (below) 50 points indicates optimism (pessimism). (2) Index, March 2001 = 100. Sources: Adimark, Central Bank of Chile, National Statistics Institute (INE) and Universidad de Chile.
In the first round, heightened competition affects companies’ profit margins. But enterprises will respond by reducing their costs. This will occur in part in the enterprise itself, but subcontractors will also be required to reduce their prices and enhance efficiency. Increased competition therefore usually triggers higher productivity growth in the economy. Low inflation may thus be matched by higher productivity. Low inflation in the Nordic countries Norway is not the only country where inflation has been low. In Sweden, underlying inflation fell sharply. Excluding energy prices, core inflation stands at 0.8 per cent in Sweden. Inflation has also slowed in Finland and Denmark. One explanation for this, common to all these countries, appears to be intensified competition, which has led to high productivity growth. Real exchange rate and competitiveness High wage growth over several years as from 1998 has eroded the competitiveness of the Norwegian business sector. The nominal krone exchange rate, as measured by the trade-weighted index, has now reverted to around the level prevailing in the mid-1990s, while labour costs in manufacturing have risen considerably more than among our trading partners in the same period. However, the business sector is still feeling the effects of the loss in competitiveness that resulted from high wage increases. The exposed sector has been scaled back. Companies that are still in operation may be in a better position to cope with the high wage level. A more effective service sector may also have strengthened the export industry. Nevertheless, costs may limit activity and employment.

I am looking forward to learning from what I hope will be both an open-minded and a constructive dialogue about the future of monetary and macroprudential policies. Thank you. BIS central bankers’ speeches  1