samchain/econo-pairs-v1 huggingface dataset:
BIS Review 65/2010  1  After the foundations for a potential turnaround became discernible, the policy debate turned to the appropriate exit strategies from these expansionary policies. In the case of monetary policy, the central banks of the main developed countries have already announced – and begun to implement in some cases – plans to withdraw their unconventional liquidity-support measures. In the case of fiscal policy the challenge is successfully to apply fiscal consolidation. That will require a significant effort if public finances are to be set on a sustainable path. However, it is also time to shift our focus from the short to the medium and long run and start to address the structural problems of our economies. There are several arguments justifying this need for a shift in policy perspective. First, the historical evidence suggests that output may remain well below pre-crisis trends in the medium run. The associated losses in capital, employment and total factor productivity during the crisis could be long-lasting, leaving an enduring imprint on productive capacity. And medium-term output dynamics may also be affected. In particular, investment has fallen dramatically in the crisis, resulting in a slowdown in the rate of accumulation of productive capital. This, when combined with higher rates of capital obsolescence, is lowering potential growth in the short to medium run. In addition, these adverse effects could persist in the long run if there is a permanent step-up in the cost of capital due to changes in attitudes towards risk among investors.

These three elements broadly correspond to the current structure of this seminar, and will therefore be treated in one way or another. Let me conclude with two final points on the link between labour market reform and other policy measures. First, labour market reform is also the best case where the complementarities with the exit strategies needed are most obvious. If we take the Spanish case as an example, we can see that unemployment benefits amounted to around 3% of GDP in 2009. And the employment losses associated with this increase in unemployment have also had a significant negative impact on public revenues. Thus, a non-negligible part of the huge increase in the deficit in the past two years is directly or indirectly related to labour market trends. Preventing this increase in unemployment from becoming structural would greatly smooth the fiscal consolidation process. That leads to me to emphasize a second point: it is important that different reforms should be pursued in unison, and in particular that labour market reforms be accompanied by product and services market reforms. In this regard, it is vital to push through structural reforms  BIS Review 65/2010  3  providing for the elimination of obstacles to effective competition and of those that may hamper the reallocation of productive resources. Indeed, only with competitive and flexible product and services markets, would labour market reforms translate into higher activity and employment rather than higher rents.
The other parts – I am thinking in particular of the delineation between the Commission and the Council – still require clarification. The proposal put forward by Jean-Claude Trichet of a “euro area Treasury” would be an important step in that direction. The ECB is independent and fully accountable, but it needs clearly identifiable and fully empowered interlocutors. 6  Peter Bofinger, Jürgen Habermas and Julian Nida-Rümelin: “Einspruch gegen die Fassadendemokratie”, Frankfurter Allgemeine Zeitung, 3 August 2012. 7  Dirk Schoenmaker (2011): “The Financial Trilemma”, Economic Letters 111 (2011) 57–59. BIS central bankers’ speeches  5  We all have in mind Robert Schumann’s prediction that “Europe will be built through concrete achievements which first create a de facto solidarity”. Now that the euro area crisis has created de facto solidarity, there is a need for concrete achievements to complete EMU. This, together with the individual commitment of each government to restore balanced growth and employment, is a necessary condition for lasting stability. I thank you for your attention. 6  BIS central bankers’ speeches

2  In short, I expect the Law on Real Estate Lending, along with the new bank culture in respect of customer relations, to provide for an appropriate framework for the development of the mortgage market. It may thus cast off once and for all the legal uncertainty that has been trailing it. I would like to refer to an essential aspect the Law addresses: the obligation to evaluate in depth the solvency of the potential borrower, surety or guarantor before entering into a loan agreement. As you may well imagine, I fully share the caveats set out in the regulations. We must never forget that the essential element for consideration in granting a loan is not the value of the collateral, but the ability of the borrower to pay. Evidently, when analysis prior to the granting of the exposure is based excessively on the value of the collateral put up, there is no effective, practical restriction on the continuous growth of the loan, at least while the collateral value also continues to rise. The incentive to ease appraisal stringency is greatest when the appraisal value is practically the only parameter justifying the granting of the loan. The law also makes it very clear that the value of the collateral should not be the fundamental factor when it comes to granting financing. This is a factor of protection for the customer since it places all responsibility for analysing ability to pay on the bank.
If inflation two years ahead was expected to be lower than two per cent, this was a signal that the interest rate needed to be cut, and if it was expected to be higher, the rate needed to be raised. Of course, this rule could not capture all of the nuances in the monetary policy considerations, but it provided a rough explanation of the monetary policy decisions. However, there were also disadvantages. In normal cases it is not, for instance, particularly realistic that the policy rate would remain unchanged a couple of years ahead. The fact that the forecasts were based on this assumption made it difficult to assess our forecasts and to compare them with those of other forecasters. Nor was it easy to implement the assumption of a constant rate in a consistent manner in the forecasting process. These problems would have been aggravated when we extended our forecast horizon. The transition to the new interest rate assumption at the same time meant that the simple policy rule used to explain monetary policy had to be abandoned. This rule was easy to understand and was therefore a good educational tool: if the forecast of a constant repo rate showed inflation close to target the interest rate would be held unchanged. However, it gradually became clear that this rule could sometimes form an obstacle in our communication. It created an exaggerated focus on the current interest rate decision and on the inflation forecast exactly two years ahead.

Naturally, one cannot ascribe all success to the changeover in stabilisation policy – the general economic developments have also been favourable. But there is no doubt that the new regime with an inflation target for monetary policy has given a steadiness and stability to economic policy that was lacking before. There have also been significant developments in the monetary policy framework during the ten years or so since we have practised inflation targeting. As deputy governor during the years 1994 to 1998, I was involved during the first years when the course was set and the work on building up competence and analysis tools for the bank’s main tasks, monetary policy and financial stability, began. Other important tasks we were facing at that time were improving communications and increasing transparency, both internally and externally. Since my return to the bank at the beginning of this year, I have been able to note that these processes have continued since 1998. In many ways the Riksbank of today is a different bank from the one I left. The most fundamental change is that the Riksbank has gained increased independence in relation to the Swedish parliament since 1999 and it is now managed by an Executive Board consisting of six persons who make all of the strategic decisions. The price stability target has also been stipulated in the law text since 1999. The Riksbank’s monetary policy strategy has been developed and modified.
It may take longer for households to work out the  10  BIS Review 68/2002  impact of low inflation on real interest rates than to realise that the rate of increase of prices of everyday purchases has fallen. Learning takes time. Chart 7 One-year ahead inflation expectations and inflation outturns in the UK, 1988-2002  Note: Inflation is the four quarter change in the RPI. Expected inflation is based on the quarterly Barclays Basix survey of inflation one year ahead. It is the weighted average across all surveyed sub-groups, excluding the general public. Expected inflation is lagged on year in the chart, so that expectations and outturns for the same period can be compared. Source: ONS and Basix. One possible consequence of a slow adjustment to low inflation is that households may mistake too much of the reduction in nominal interest rates for a permanent fall in the real rate. As a result, asset prices are bid up to levels that prove unsustainable when learning finally occurs - and at the LSE you know that in time we do learn. How far this theoretical argument applies to the British housing market at present is difficult to say, but it demonstrates the risks from current house price to earnings ratios that are close to the peaks reached in the late 1980s. *** So much for the costs of unanticipated inflation. What are the costs of anticipated inflation? Time permits me to comment only briefly on the four costs of anticipated inflation noted by Lord Kingsdown.

If uncertainty about inflation creates an option value to waiting, then it will reduce investment. And there is growing  8  BIS Review 68/2002  empirical evidence that inflation is a key explanatory variable for cross-country differences in 5 investment to output ratios. (ii)  Redistribution of wealth between debtors and creditors. Unexpected changes in the price level - the standard of value used to define contracts - produce arbitrary redistributions of wealth. As Keynes wrote in his powerful advocacy of price stability in A Tract on Monetary Reform, “We leave saving to the private investor. We leave the responsibility for setting production to the business man. These arrangements have great advantages. But they cannot work properly if the money, which they assume as a stable measuring-rod, is undependable. Unemployment, the precarious life of the worker, the disappointment of expectation, the sudden loss of savings, the profiteer - all proceed, in large measure, from the instability of the standard of value”. Or, as Lenin remarked, the best way to destroy capitalism is to debauch the currency. It is arguable as to whether it is high inflation or serious deflation which results in the greater economic damage. In Europe in the 1920s hyperinflation undermined economic and social arrangements, as it has done more recently in Latin America. But deflation has proved just as unpopular as inflation. In 274 A.D. the Roman Emperor Aurelian tried to restore the integrity of the coinage which had been adulterated by workmen in the Mint.
Regarding the financial sector more specifically, the new legislative framework provides much better support for reducing non-performing loans (NPLs) compared with the situation a couple of years ago. This will help banks support economic growth and job creation more effectively. But let’s not forget where it all started. Never again should a euro area country end up in such an unsustainable position as Greece’s in 2010. We need responsible national fiscal and economic policies, and a better euro area governance framework. As for enhanced surveillance, it is not a new programme but rather a strengthened form of cooperation between Greece, the European institutions and the euro area countries to support the transition towards full market access. Make no mistake, the burden of gaining the trust of markets and depositors has now fully shifted to the Greek government. Don’t expect building trust among investors to be easier than convincing the institutions. What will be the ECB’s role in the context of enhanced surveillance? Will you provide your contribution as in the past? We will remain involved in the enhanced surveillance, as mandated by the European regulations underlying this framework (the so-called two-pack). But the end of the programme is also an opportunity for us to refocus our activities, as already indicated in the opinion we published in April 2018. Looking ahead, our work in Greece will now be focused on financial and macro-critical issues. More specifically, this includes financial sector stability, macroeconomic projections, headline fiscal targets, and sustainability and financial needs.

In part the explanation for this encouraging development may lie in the dampening effect of the strong exchange rate or in the lower and more stable inflationary expectations we are now seeing. But other possible explanations include exceptional competitive pressure in goods markets, structural changes in labour market behaviour or an underlying improvement in productivity growth, or in some combination of all three. Whatever the underlying cause, it is possible that, at least for a time, we can sustain a higher rate of growth of overall demand and output without inflationary pressure than we could in the past. The jury frankly is still very much out on all of this. The difficulty is that most of these possible developments cannot be directly observed in the data, and, even if they could be, we would still not know whether or not, or for how long, they might persist. BIS Review 98/2000  2  We certainly have not closed our mind to a continuation of such benign “new economy” effects, indeed we make conscious allowance for them as best we can in our projections. But we cannot bank on them. All we can - and do - do is, continuously and meticulously, to monitor the evolving evidence. We watch it, in fact, like a dove. What that means is that while we can’t realistically rule out further interest rate increases, we don’t rule out the possibility that the next move will be downwards either. In the final analysis, Mr President, we have a choice.
A first source is the “too big to fail” (TBTF) problem – that the Swiss banking sector has several banks with balance sheets that are large in relation to GDP. A second key source of risk resides in the substantial imbalances that have been building up in Swiss real estate and mortgage markets and the high exposure of domestically focused banks to these markets. Let me mention here that other possible system-wide sources of risk discussed on the global level, in particular those in the “shadow banking” sector, are considered less of an issue in Switzerland. One reason is that shadow banking assets in Switzerland carry low to moderate bank-like systemic risks. Another reason lies in the fact that bond funds and other investment funds, which make up 60% of shadow banking assets in Switzerland, are supervised by FINMA. 8 Switzerland has made considerable progress in addressing its two main sources of risk to financial stability. With respect to the risks stemming from the real estate and mortgage markets, a countercyclical capital buffer (CCB) has been introduced. The CCB was activated on a sectoral level in early 2013 and increased in 2014, as a complement to further administrative and self-regulatory measures aimed at increasing the resilience of the banking system and preventing excessive credit growth. Experience with this policy mix has so far been encouraging, and has flowed into the preliminary assessment indicating that these measures have contributed to a recent dampening of corresponding market dynamics.

Just as important is how these rules are put into practice. In normal circumstances, such as those before the crisis, this is a rather easy task, since the public and politicians understand “conventional” monetary policy quite well. People have a clear picture of how central banks act and communicate. In such times, the requirements of accountability and transparency are satisfied without undue controversy through a number of measures, namely, the annual accountability report submitted to parliament, regular  4  Cf. the National Bank Act (NBA) and Message concerning the revision of the National Bank Act. Functional independence means, in particular, that the SNB fulfils its mandate without seeking or accepting instruction from any of these bodies. Financial independence includes both the budgetary autonomy of the SNB and the prohibition against granting loans to the Confederation, thereby barring the state from using the banknote press. The SNB’s independence in personnel issues, finally, is ensured by the fact that Governing Board members and their deputies can only be dismissed during their term of office if they no longer fulfil the requirements for exercising that office or if they have committed a grave offence. 5  Specifically, art. 99 of the Federal Constitution states that “as an independent central bank, the Swiss National Bank shall follow monetary policy which serves the general interest of the country; it shall be administered with the cooperation and under the supervision of the Confederation.” Art. 5 of the NBA sets out in detail the SNB’s constitutional mandate.
However, as I have mentioned in the past when referring to public policies in general, the different social and economic transformations that we advocate and support have transitory costs and affect the public at large in different ways. The digitalisation phenomenon in banking is a good example of these adverse and uneven effects. Something that will deliver great benefits for society overall in the medium term may, nevertheless, entail costs and lead to frustration, inconvenience or even exclusion for certain population groups, as a result of the difficulty or inability to adapt to these changes. These are real problems, as the testimonies we have received from many members of the public in recent months show. Some of these individuals are here with us today and I would like to take this opportunity to thank them for putting together this information and bringing it to the attention of the authorities. As I say, these problems are real and, as such, require real solutions. The Protocol that the banking sector is presenting here today must, of course, be part of the solution. It provides specific answers for individuals with fewer digital skills or difficulties in accessing these new channels and thus require more support and assistance in the digital transition. Naturally, we will have to analyse the practical implementation and sufficiency of the protocol in the coming months.

However, beyond the banking sector’s response, if society is to derive maximum benefit from digitalisation while minimising the costs of the transition, I believe that a comprehensive response is required from the public authorities. A response which surely transcends the financial sphere, to which the financial authorities can no doubt make an important contribution. That is why we are going to focus precisely on improving digital skills in the coming years using, for example, the Financial Education Plan launched jointly by the Ministry of Economic Affairs and 1/2  BIS central bankers' speeches  Digital Transformation, the CNMV and the Banco de España. Because we are fully aware that digital literacy is also part of our financial education. That is also why the Banco de España has long identified the economic and population differences in urban and rural areas (also in terms of access to general services and, more specifically, to banking services) as phenomena that warrant priority analytical attention. Such analysis must provide the basis for informed decision-making. Our most recent annual report, presented before Parliament last year, included a chapter dedicated to these issues. In the coming months we shall present the findings of several studies which examine in depth the phenomenon of financial exclusion in relation to digitalisation processes. Specifically, we are going to present a comparative study of access to cash in Spain and in other euro area countries, focusing particularly on the differences between rural and urban areas.
Well-known problems and deficiencies With regard to measures involving correcting well-known problems and deficiencies, I see three main priorities. One priority is to gain a better overview of the mortgage market. Although we have information on aggregate changes and mean values with regard to household indebtedness,  2  For a review of how different studies evaluated the housing market in the United States prior to the crash, see Gerardi, K.S., C. L. Foote and P.S. Willen, (2010), “Reasonable People Did Disagree: Optimism and Pessimism About the U.S. Housing Market Before the Crash”, Public Policy Discussion Papers No 10–5, Federal Reserve Bank of Boston. 4  BIS central bankers’ speeches  how much of their income goes on paying interest, etc., this type of data can disguise a substantial underlying variation. If we view it uncritically, there is a risk we will be lulled into a false sense of security. It may be enough for some households to be so much in debt that a fairly modest increase in the mortgage rate forces them to sell their homes. If a sufficiently large number are in this situation, it may start up a spiral of falling prices forcing further sales and leading to further price falls. But as I said, we do not know how many households are in this situation. We also need to gain a better idea of the extent to which households amortise their loans. We hope to achieve this now.

I would like to emphasise that the question of if and when we should take action ultimately depends on the risk aversion we have and the subjective assessments we make. One can never know in advance when the time will be right to take measures. It is not possible, for instance, to “calculate” that at exactly this particular level of household debt or of housing prices it will be the time to take action. 2 Different countries have experience problems at rather different levels of debt, both higher and lower than the one we currently have in Sweden. This uncertainty is something we have to live with; we must nevertheless make the best possible assessments and make decisions on the basis of them. Given the uncertainty regarding whether or not the recent slowdown is a break in the trend, what measures do I think are needed? For the sake of clarity, I would like to distinguish here between three types of measure. The first type concerns remedying well-known problems and deficiencies. The second covers slightly more revolutionary changes in the longer run – measures that would improve our management of the type of problems caused by the mortgage market. The third type of measure involves strengthening the banking sector in general, regardless of whether future problems are caused by developments in the mortgage market or by some other market or phenomenon. I will now describe what I consider to be the most important priorities in these three areas.