samchain/econo-pairs-v1 huggingface dataset:
As you all know, the first lockdown led to an enormous drop in economic activity, of over 20%, during the first half of 2020. And despite a very sharp recovery in the summer, as the first lockdown was lifted, it’s likely that GDP in the fourth quarter of last year was around 10% lower than at the end of 2019. That would make it the sharpest decline, through any calendar year, at least since 1920 (as far back as quarterly estimates go). Yet, perhaps befitting a year of extraordinary events, last year’s downturn was very unusual not just in its size and speed, but in its shape as well. If you had only this correlation to go by, and knew what had happened to GDP, you’d also expect to have seen a steep decline in retail sales. The two series don’t always move in lockstep but, as you can see, they’ve been reasonably well correlated over the past. If that’s been a rule, however, then what we saw in 2020 was a very clear exception to it: GDP growth may have been the weakest on record but retail spending growth is just about the strongest. Chart 1: Weak GDP growth, strong retail sales  Chart 2: Big divergence across consumption  Sources: ONS and Bank calculations. Retail sales data have been adjusted for the switch to CPI deflation in 2001. The figure for 2020Q4 is based on data to November, GDP growth on the MPC’s November projection. Sources: ONS and Bank calculations.

First, since banks that do not directly participate may benefit from the overall improvement in the market conditions, a free rider problem arises. Therefore, intervention should be conditional on the participation of a critical mass of banks. Second, if the conditions are very favourable, banks may choose strategically to participate in the programme, thus increasing its overall cost. Hence, it is paramount that the intervention entails some costs for the current shareholders. I don’t need to stress how relevant these issues became, especially in the aftermath of the financial crisis, when massive intervention in the banking industry had imposed very large costs on Europe’s taxpayers and had significant consequences for the sovereigns. Indeed, a key concern for policy-makers is that the large support offered to the financial sector may spur opportunistic behaviour and generally distort financial institutions’ risk-taking incentive, possibly magnifying the costs of the intervention while reducing its effectiveness. Thomas Philippon’s analysis is timely and tackles a very relevant issue as new rules for intervention and resolution of banks are currently being implemented. The new EU rules surrounding  3  See, for example, Heider, F., M. Hoerova, and C. Holthausen, (2009) “Liquidity hoarding and interbank market spreads: the role of counterparty risk”, ECB Working Paper No 1126 on the role of asymmetric information in the interbank market freeze during the recent financial crisis. Moreover, the de Larosière report pointed to the lack of transparency as being one of the causes of the financial crisis (EU Commission, 2009).
BIS Review 162/2009  7  Conclusions My conclusion is thus that there may be a possibility for central banks to conduct a policy that counteracts the emergence of bubbles in asset prices for the purpose of preventing them from arising and having substantially negative effects on the real economy. However, this should not be done mechanically, and asset prices should not be target variables for monetary policy. However, together with, for instance, credit growth and indebtedness they may be used as indicators that can be highlighted when interest rate decisions are taken, as a broken bubble means that resource utilisation in the longer term risks being too low and inflation will therefore undershoot the target. More research is needed though in this field to improve the analysis. It is desirable that better indicator models are developed to detect bubbles and that the financial market’s functioning is better incorporated into the models that are regularly used in the forecasting work. The process has already started, both at the Riksbank and in the international cooperation. I consider this to be a positive development. I also consider that one should examine the possibility to extend the instruments at the disposal of the Riksbank so that we can take other measures than raising the policy rate when the risk of financial bubbles is assessed as high. This could be a question of allocation of responsibility between public authorities and of extended power of authority for the Riksbank.

7 Moreover, raising the policy rate to prick a hole in a potential housing market bubble could damage the economy more than if one allowed the bubble to burst on its own. 8 Leaning against the wind is thus a policy that is not without its problems. The welfare costs of making wrong decisions could be high. Moreover, many of the bubbles that have corrected themselves have not led to any major problems for the real economy. Perhaps, on the whole, it is not the role of monetary policy to steer developments in, for instance, the housing market. There are other means of preventing excesses, such as tougher regulations and supervision as well as demands for increased transparency in the  6  Kohn (2008). 7  Mishkin (2007). 8  Greenspan (2002) and Kohn (2006). 4  BIS Review 162/2009  financial system. A number of measures have recently been proposed to bring about a change in this direction, and this could mean there is less risk that bubbles will arise in the future. One can also argue that it is primarily the responsibility of other authorities – such as the financial supervisory authorities and the finance ministries to take measures to prevent bubbles arising in the housing market. Arguments for But it is nevertheless the case that burst bubbles can have serious consequences for developments in the real economy and thereby also for monetary policy.
Whether such innovations have led to more efficient markets for end-users to invest and to manage their risks are still subject to some debate. Regulators worldwide also have been keeping abreast with innovative developments to understand newer forms of risks and market linkages, as well as to embrace the opportunities that these may bring. I will highlight a few examples that will be relevant to the world of exchanges. 43. I think we can expect innovations in distributed ledger technology that will be applied to the “plumbing” of financial markets, areas which we hitherto tend to take for granted. A distributed system should in theory improve resilience as it theoretically removes the risk of a single point of failure. If the clearing and settlement of equity trades can be reduced from the existing standard of 2–3 days to as little as 10 minutes, this will further reduce settlement risk. Some have said that the near instant settlement of transactions can transform the financial system and free up billions of dollars’ worth of collateral that is locked up during the trade settlement period. 44. Technology can also lead to “commoditisation” of certain financial intermediation functions. Just 15 years ago, the cost of brokerage for retail investors was as much as 1%. But now our retail investors are able to access global markets at significantly lower brokerage costs. There will be no let up on cost pressure.

To ensure we balance the risks and opportunities appropriately, the Bank of England is researching machine-learning deployment. Together with the UK’s Financial Conduct Authority (FCA), we surveyed firms across the financial sector to understand the current state of deployment. Our ‘Machine learning in UK financial services’ report, published earlier in October, is the first structured study of its kind, anywhere in the world.2 This work has generated many interesting, policy-relevant findings.   Two thirds of the financial services firms report they already use machine learning, live, in their business.   Most firms stated that they did not identify UK regulation as a major barrier to their deploying machine learning, focussing instead on challenges internal to their organisation.   The majority of users apply existing risk management frameworks. Several felt these frameworks might need to evolve as this technology becomes more sophisticated. Having this up-to-date picture of AI/ML deployment is crucial to informing our perspective, as we continue to explore how policy can support the safe deployment of machine learning. We are continuing our engagement with industry, building on the results of this survey, with a public-private AI working group, which will be jointly chaired by the Bank and FCA. This will be a forum to gain deeper insights into AI deployment, the needs of the private sector and the steps they are already taking to reduce risk. We also want to learn from and collaborate with international colleagues. 2  Available online at https://www.bankofengland.co.uk/-/media/boe/files/report/2019/machine-learning-in-uk-financial-services.pdf.
It is also easier to raise prices, as competitors do the same. We saw an example of this in the Riksbank's Business Survey last autumn, where more than two out of three companies responded that they were now raising their sales prices more often than normal and that this is mainly because costs are rising all the time. In turn, the price increases affect other companies' input costs, raising expectations of future cost increases for which they want to compensate with higher prices – and so on. Companies' labour costs are also affected if wage increases are pushed up by demands for compensation for the high inflation. Another problem is that if inflation is high, it varies more over time than if it remains at a low level. This makes it more difficult for households and companies to plan and make financial decisions and it leads to a poorer functioning of the economy as a whole. In such an environment, it becomes more difficult, for example, to interpret the cause of price increases on individual goods and services. Is the price increase a sign of a general price increase in the economy, or has the price of the product actually increased more than other similar goods? The risk is that consumers become hardened in the long run and accept all price increases as part of inflation, making it easier for companies to keep raising prices. It is therefore important to remain active and compare prices.

It is the Riksbank's task to stabilise inflation around 2 per cent and we have assessed that it is better to act with monetary policy than to wait and see and risk being surprised by continued high inflation that requires even greater tightening later on. 5/10  BIS - Central bankers' speeches  Inflation thus needs to fall clearly this year, and it is important that underlying inflation also falls. We assessed in February that the interest rate needed to be raised and that we will probably need to raise it in April as well. As usual, it is the outlook for the economy and inflation that is decisive for monetary policy, and we are well aware that it takes time for the Riksbank's policy rate increases to have a full impact on the economy. As it is difficult to know how quickly the impact will be and how great the effects of the increases will be on the real economy and inflation, it is still important to follow new outcomes and new indicators to obtain a picture of inflation prospects. Inflation has already started to decline in some countries, but as we noted in February, we see few signs that underlying inflation has started to decline in Sweden. Nor has this picture been changed by the new information on inflation that has come in since our decision. On the contrary. In February, inflation excluding energy prices rose and the outcome was significantly above our latest assessment.
Chart 12: Short and long-term interest rates Percent Short-term rates Long-term rates  25  20  15  10  5  3000  BC  1  1575  1735  1775  1815  1855  1895  1935  1975  0  AD  Sources: Homer and Sylla (1991), Heim and Mirowski (1987),Weiller and Mirowski (1990), Hills, Thomas and Dimsdale (2015 forthcoming), Bank of England, Historical Statistics of the United States Millenial Edition , Volume 3 and Federal Reserve Economic Database. Notes: the intervals on the x-axis change through time up to 1715. From 1715 onwards the intervals are every twenty years. Prior to the C18th the rates reflect the country with the lowest rate reported for each type of credit: 3000BC to 6th century BC – Babylonian empire; 6th century BC to 2nd century BC – Greece; 2nd century BC to 5th century AD – Roman Empire; 6th century BC to 10th century AD – Byzantium (legal limit); 12th century AD to 13th century AD – Netherlands ;13th century AD to 16th century AD – Italian states. From the C18th the interest rates are of an annual frequency and reflect those of the most dominant money market: 1694 to 1918 this is assumed to be the UK; from 1919–2015 this is assumed to be the US.

Behind the physiological shift from the ridge brows of Neanderthal man to the flat foreheads of modern man may have been a more important neurological one. Flat foreheads allowed growth in the pre-frontal cortex region of the brain. Modern-day MRI scans tell us this region is responsible, among other things, for patience. What we may have seen, tens of thousands of years ago, was Darwinian natural selection of patient homo sapiens over impatient Neanderthals. 42 And with that came rising living standards. The secular struggle – innovation or stagnation? From the distant past, then, to the present and future. Today’s great debate is where next for growth. The sunny uplands of innovation-led growth, as after the Industrial Revolution? Or the foggy lowlands of stagnant growth, as before it? Which of the secular forces – innovation versus stagnation – will dominate? And if growth is going back to the future, on which side of the Industrial Revolution will it land? The balance of these arguments matters greatly for future well-being and public policy. Indeed, it is hard to think of anything that matters much more. More parochially, for central banks setting monetary policy one of the key judgements is the appropriate “neutral” level of interest rates. You can think of this as the interest rate that would align desired saving and investment over the medium term. But what is the “neutral” level of interest rates today? Secular innovation might imply a level at or above its historical average of 2–3%, in line with historical growth rates.
As of late June, the annual decline in actual registrations is estimated to have eased, such that the level of actual registrations was 11.4% down on the figure a year earlier. Should the epidemiological situation not change significantly, the recovery observed in Q2 will continue over the summer and give rise to high quarter-on-quarter growth in Q3. Nonetheless, interpreting this growth calls for caution, since we should not lose sight of the fact that the level of activity will continue to be significantly below that observed prior to the pandemic breaking, such that the process of recovery will be far from complete. We can thus talk of an incomplete recovery, using the first of the three adjectives I referred to at the start of my address. The conditioning factors I mention for the short-term outlook to materialise - the absence of any material changes in the course of the pandemic in Spain - are no minor matter. Indeed, economic developments would be adversely affected in the coming months, perhaps severely so, if the outbreaks seen in recent weeks in different territories after the easing of the restrictions on movement could not be controlled with local-level and temporary measures. Accordingly, health-related uncertainties will persist for some time until effective treatment for the illness or widespread access to a vaccine against the virus are achieved. Moreover, the doubts over economic developments in the coming quarters are not confined to the health area.

That includes ensuring that the common monetary policy is properly transmitted to all sectors of the economy and to all countries, and to prevent the financial fragmentation of the area. We also stand ready to adapt all our instruments should it be necessary. Naturally, we must also remain vigilant regarding the risks to financial stability. Evidently, the banking sector is facing this crisis from a healthier position than in the previous recession, which highlights the importance of the far-reaching changes made in this sector over the past decade. The ECB has also taken resolute action here. Among other measures, it has allowed banks to use the capital buffers available, which were created precisely for situations such as the present one. But, undoubtedly, the crisis will significantly impact the quality of banks’ credit portfolios, on a scale that will depend on its ultimate severity and which will be uneven across banks. The outcome will depend on banks’ starting position, on their business model and on the distribution of their exposures to the sectors and regions most affected by the pandemic. Accordingly, we supervisors must continue to closely monitor the risks to financial stability and we must be ready to provide a forceful, panEuropean response should such risks materialise. In short, European and national economic authorities must share the objective of preventing the current crisis from being accompanied by an across-the-board tightening of financing conditions or from seriously harming the stability of the financial system.
David Clementi: Crisis prevention and resolution two aspects of financial stability  Speech by Mr David Clementi, Deputy Governor of the Bank of England, at the Inaugural Lecture at the South Bank University Centre for Monetary and Financial Economics, London, on 6 September 2000. *  *  *  Introduction Ladies and Gentlemen, When I was invited to give the inaugural lecture at the Centre for Monetary and Financial Stability, I was pleased to accept. It is obviously an honour to be asked to inaugurate any academic institute but supporting the foundation of a centre dedicated to the pursuit of monetary and financial stability is, for a central banker, a particular pleasure! After all, monetary and financial stability and the interaction of the financial system with monetary policy are at the heart of the Bank’s mission. The first of the Bank’s core purposes is maintaining the integrity and value of the currency or, in other words, monetary stability; the second is maintaining the stability of the financial system. I intend to focus my remarks on this second core purpose. Financial stability has always been an integral concern for central banks. We have been reminded of its importance by the events of recent years. The Asian Crisis in particular set in train a programme of international work and discussions, looking at ways to prevent a recurrence and to handle one if it did.

Corporate bankruptcy law grew up as it became clear that market forces delivered losers as well as winners and that some orderly means was needed of dealing with the losers. In this way, bankruptcy law supports the market mechanism. The situation is no different in a sovereign context. A well-articulated framework for dealing with sovereign liquidity problems should reduce the inefficiencies and inequities of the current unstructured approach to standstills. It would support the international capital market mechanism. It would be no  7  BIS Review 70/2000  more likely to induce debtors to default than bankruptcy law is to induce corporate debtors to default. In neither case is default a soft option. We would of course hope and expect sovereign standstills to be the exception rather than the rule. But it is better to plan for all contingencies, and to articulate these plans, than have international public policy made on the hoof. In this respect, crisis-fighting shares many similarities with fire-fighting. Fire-prevention is ideal, but will never entirely prevent fires occurring. So it makes sense to have a fire-fighting plan, which everyone understands and abides by, to minimise the damage when fires do occur. Would standstills work? The issue of whether standstills should form a part of the official sector’s toolkit of responses remains under active debate. A number of arguments against the use of standstills have been made by policymakers, academics and the private sector. Let me try and articulate some of the concerns.
In reality there continue to remain some important imperfections, which have always been with us and which tend to re-emerge in a new shape whenever measures are taken to eliminate them. I would now like to discuss some of these imperfections and their implications for your industry. 2. Some imperfections of the financial system  Among the imperfections that affect the smooth functioning of a financial system I shall focus on asymmetric information, on negative externalities and on limited competition. A first imperfection that typically impairs the smooth functioning of a financial system is asymmetric information (Mishkin, 1997). Indeed, information may not be universally or commonly shared within the financial system. Differences in information endowment – another way to define asymmetric information – are likely to lead to differing behaviour by different classes of agents. This will have an impact on price formation and will affect market exchange. The first example is known as adverse selection and derives from Akerlof’s seminal contribution on the market for “lemons” (1970). For those of us who are not native English speakers: In colloquial English a lemon is a good of very low quality. What is going on in a market for “lemons”? According to Akerlof the seller knows the intrinsic quality of the good or services supplied, while the buyer has no means of knowing it. The buyer will then be ready to pay a price reflecting an average quality.

However, independent of specific events, the question arises whether regulatory and oversight control has kept up with this development everywhere. It is indeed rather problematic that custody activities lie in a grey area between banking supervision and system oversight. In some countries where the tasks deriving from banking supervision and system oversight are performed by separate authorities the regulatory and oversight  4  BIS Review 28/2003  framework is very likely to be incomplete or at least sub-optimal unless the two authorities succeed in establishing a strong and effective co-operation. This aspect seems all the more important as large custodians tend to become direct competitors to traditional market utilities like CSDs and ICSDs. This said, I must admit that regulatory and oversight authorities should address this issue with the aim of allowing an acceptable level playing field among large custodians and providers of market utilities. The aim here is not the protection of incumbents against efficient predators - or of Little Red Riding Hood against the big bad wolf - but rather to restrict the use made by large individual suppliers of their powerful market position which eventually could lead to outright dependency of the former customers of CSDs and ICSDs on huge and incontestable financial service suppliers. In view of these challenges, there is good reason to critically reassess rules and regulations related to securities clearing and settlement systems as well as to the way regulatory and oversight responsibilities are implemented in practice. A predominantly national approach no longer serves market needs.