samchain/econo-pairs-v1 huggingface dataset:
In the UK that will now be enshrined by putting a Financial Policy Committee alongside the Bank of England’s existing Monetary Policy Committee. The Committee has recently been established, on a non-statutory basis for the interim. But that poses a host of questions. How do we define financial stability? What is the FPC and what is its objective? Why should it be separate from the microprudential supervisor, which is also being moved to the Bank? What will be the FPC’s instruments? Are they all directed at banks? Will they conflict with monetary policy? And, more prosaically, how will the FPC operate and be accountable? I shall set the scene with some general reflections on financial stability, including how it might be defined, and how its scope extends to the resilience of capital markets as well as that of banks (and shadow banks). After those more general observations, I shall try to answer some of the key questions about the FPC. What is financial stability? Why financial stability matters Under legislation introduced in the UK in 2009, the governing body of the Bank of England, Court, is required to set out a strategy for the Bank’s financial stability work. We publish it in our Annual Report. We have tried to clarify why society should care about financial instability.

Its first order challenge would be to reach a judgment on whether the financial system was undermining its own resilience by getting carried away in extending credit in an environment of rising asset prices and optimism about future output levels. The FPC would need neither to obstruct an improvement in the underlying performance of the economy, nor let the party get out of control. But that is what Taking Away the Punchbowl is about. The same difficult judgments would face a combined monetary-and-macroprudential decision maker. And a separate monetary policymaker would have a shared interest in the downside risks to inflation not being exacerbated by the prospect of a credit bust following an unchecked boom. In those kind of circumstances, we should be helped by the tempo of the two endeavours differing. The FPC is less likely to make frequent course changes. That is reflected in its meeting routinely on a quarterly basis, contrasting with the MPC’s monthly meetings. So, as in the relationship between monetary policy and fiscal policy, the MPC will be able to take into account perturbations to aggregate demand from the FPCs interventions. Both committees are part of the Bank of England, so the executive of the Bank will ensure that there is a common information base. FPC members are invited to the monthly briefing for MPC members. And vice versa, consistent with MPC members already being free to attend the internal financial stability briefings established over the past year or so.
Rather than go over all that ground today, I’d like to pick out two themes that span many of these six vulnerabilities: first the increased competitive pressure on financial firms, and second the way in which changes to the structure of our financial system that have made it more efficient at sharing risk may also have made it more efficient at transmitting shocks. A changing financial landscape Over the past decade technological change, financial innovation, cross border financial consolidation and the increasing demands of investors for better performance have had a profound effect on financial markets and institutions (Charts 1 and 2), and have increased the flow of savings across markets and national boundaries. These changes have brought with them a shift away from bank-dominated finance, with its emphasis on a “special relationship” between lender and borrower, towards “anonymous” markets and armslength asset management. Traditional worries about bank runs – where vulnerabilities lay on the liability-side of the balance sheet – have not disappeared but these days there is equal concern about the reliability of apparent liquidity on the asset side of the balance sheet. The changing nature of financial activity is illustrated by developments in credit derivatives markets. The availability of these instruments is enabling a change in the nature of banking itself towards business models based on origination and distribution rather than the retention of credit risk. The notional amount outstanding on CDS contracts globally reached $ trillion in 2005, up from $ billion in 1996.

Meanwhile, the head of the Czech National Bank goes by the name of Singer, his deputy is a certain Mr Hampl, and our executive directors include a Mr Schmidt and a Mr Bauer. In other words, there is some truth in the idea that we are close. I believe this is something we can build upon. I am very much looking forward to discussing with you. Vielen Dank für Ihre Aufmerksamkeit. 2  BIS central bankers’ speeches
The Bank has excellent access to both:  -  Many years ago, we set up our own survey of households in the UK – the NMG survey – to ask the questions that are most important to us. Every six months, a sample of six thousand households is asked questions about their financial position and outlook that help inform decisions by the FPC (and other Bank policy committees).19  -  The Bank does receive comprehensive data about the flow of new mortgages.20 And Bank staff have developed a model to use this – and information about how incomes are changing in the UK – to project the distribution of indebtedness relative to incomes in the stock of mortgages. A working paper on that modelling is being released today.21  We can use the surveys and models to estimate the distribution of current loan to income characteristics of the households with mortgages and compare that to the distribution in 2014. Surveys and model outputs involve uncertainty, for different reasons. But it is reassuring that in this exercise they give us broadly consistent results. 19  The survey is weighted to be representative of the age, gender, region, housing tenure and employment status distributions of Great Britain. 20 The Bank does also receive a snapshot of the stock but some variables crucial for risk assessment are not captured in this. 21 Levina et al (2019).

Risk assessment The risks to the outlook for economic growth have become more balanced. Russia's unjustified war against Ukraine and its people continues to be a significant downside risk to the economy and could again push up the costs of energy and food. There could also be an additional drag on euro area growth if the world economy weakened more sharply than we expect. Moreover, the recovery would face obstacles if the pandemic were to re-intensify and cause renewed supply disruptions. However, the energy shock could fade away faster than anticipated and euro area companies could adapt more quickly to the challenging international environment. This would support higher growth than currently expected. The risks to the inflation outlook have also become more balanced, especially in the near term. On the upside, existing pipeline pressures could still send retail prices higher in the near term. Moreover, a stronger than expected economic rebound in China could give a fresh boost to commodity prices and foreign demand. Domestic factors such as a persistent rise in inflation expectations above our target or higher than anticipated wage rises could drive inflation higher, also over the medium term. On the downside, the recent fall in energy prices, if it persists, may slow inflation more rapidly than expected. This downward pressure in the energy component could then also translate into weaker dynamics for underlying inflation. A further weakening of demand would also contribute to lower price pressures than currently anticipated, especially over the medium term.
This needs to be more than feeding a handful of macroeconomic assumptions into a model. It requires an understanding of the events that could lead to that macroeconomic outcome, and what other indirect effects might be likely to occur. Who should be responsible for regular, thoughtful stress testing? Risk managers, CEOs, and boards of directors should all understand key risk drivers – and should consider whether a stress scenario is sufficiently severe, and whether the direct and indirect effects are reasonably captured. Rating agencies and stock analysts should be increasingly demanding better quality stress tests, and that the results be made available to them. Finally, regulators should be able to compare and contrast the quality of stress tests across organizations and hold accountable those organizations that are not keeping up with their peers. As I mentioned at the outset, challenging assumptions and understanding risks should not only be the responsibility of the risk manager. These things also need to be better ingrained in CEOs, members of boards of directors, and regulators. Operationalizing this point is not going to be easy, but it is critical. At a fundamental level, debunking a myth requires individuals to go against strongly and widely held beliefs, to convince decision-makers, and to build consensus. For this to happen we may need significant changes in the governance of risk management at banks and other parties in the financial system.

The composite output Purchasing Managers’ Index – which has a high correlation with growth in the euro area – remains above its long-term average and is close to six-year highs. Overall, survey data continue to point to growth in the quarters ahead. Moreover, Eurostat’s Economic Sentiment Indicator is near a ten-year high. The ongoing recovery has led to solid employment gains. The number of people employed in the euro area has increased by almost 7 million since hitting a trough in mid-2013. This means that all of the employment losses recorded during the crisis have been offset. Additionally, the unemployment rate is now at its lowest level in eight years and continues to decline, notwithstanding an increase in labour force participation. Employment growth, together with the gradual increase in employee compensation, supports households’ disposable income and is underpinning solid consumption dynamics. Robust consumer spending is driven by buoyant sentiment, favourable bank lending conditions and the notable progress achieved with respect to deleveraging. The investment outlook is also positive, supported not only by a need to modernise the capital stock after years of subdued investment and an improving outlook for profitability, but also by easy financing conditions as our policy measures have passed through financial markets to affect the borrowing conditions of businesses and their customers. Since the announcement of our policy measures in June 2014, bank lending rates for euro area non-financial corporations have fallen by around 120 basis points and those for households by around 100 basis points.
9, 10 Growth has certainly been high over the last 12 months, so isn’t this a reason for tightening monetary policy? Here it is important to remember that monetary policy does not aim to stabilise growth. It aims to stabilise inflation and resource utilisation. The impact of increased growth on monetary policy depends on the impact of this growth on the forecasts for inflation and resource utilisation. Whether high growth indicates higher or lower resource utilisation depends on the reasons for the higher growth. In this respect there is no difference between growth and other indicators of the state of the economy. The extent to which they affect monetary policy depends solely on how they affect the forecasts for inflation and resource utilisation. If monetary policy is well-balanced in the initial position – a strong assumption – and growth shifts both the inflation forecast and the resource-utilisation forecast upwards, then increased growth is a reason for tightening monetary policy. However, if monetary policy is not well-  6  See for example Dagens Industri (2011), Eklund and Svensson (2010), Financial Times (2011a, b) and Frisén (2010). 7  See Svensson (2005) and Svensson and Tetlow (2005). 8  One possible exception may be if the repo-rate path were to pose a threat to financial stability and there were no other means that could be used to tackle the problem. See the discussion in Svensson (2010b, c). 9  See Giavazzi and Mishkin (2006) and Mishkin (2010).

Compared to other measures of resource utilisation, the unemployment gap offers the best possibility for external and internal verification and assessment of the assumptions about, and the calculations of, the sustainable rate of unemployment. One may ask, however, whether the independence of the Riksbank would be put at risk if external parties were involved in determining the right sustainable rate of unemployment. Nor would I go so far as to propose that another authority should decide on the appropriate rate of sustainable unemployment. I do, on the other hand, think that it would be a good thing if  4  BIS central bankers’ speeches  the Riksbank’s estimate of the sustainable rate of unemployment could be debated freely and assessed by external analysts, evaluators and authorities. This is in practice not possible with the other measures of resource utilisation. The fact that the Riksbank tries to stabilise both inflation and unemployment does not mean that it disregards the fact that the inflation target takes precedence. As inflation is stabilised around the inflation target, inflation will on average be equal to the target. The Riksbank fulfils in this way its mandate to maintain price stability at the same time as it can be said to be supporting the objectives of general economic policy through its endeavours to stabilise unemployment around a sustainable rate. The mean squared gap: a measure of stability A well-balanced monetary policy normally thus entails achieving a balance between the stabilisation of inflation and the stabilisation of resource utilisation.
According to the OECD, meanwhile, the density of industrial robots in the UK is one of the lowest in the OECD. 11  Although this doesn’t appear to be a positive news story,  it demonstrates the potential the UK has to increase the quantity and quality of capital intensity. Investment 8  Hauser (2017) Central Banking (2018) Office for Life Sciences (2017) 11 OECD (2017) 9  10  6  All speeches are available online at www.bankofengland.co.uk/speeches  6  in new technologies could indeed support a pickup in productivity. And on that positive note, I look forward to the panel discussion and your questions for us. 7  All speeches are available online at www.bankofengland.co.uk/speeches  7  References Bell, J (2017) ‘Life sciences industrial strategy: a report to the Government from the life sciences sector’, 30 August 2017, available at: https://www.gov.uk/government/publications/life-sciences-industrial-strategy  Carney, M. (2016) Opening remarks at the May 2016 Inflation Report Press Conference, available at: https://www.bankofengland.co.uk/inflation-report/2016/may-2016 Central Banking (2018), ‘Initiative of the year: Bank of England’s FinTech Accelerator’, 23 January 2018, available at: https://www.centralbanking.com/awards/3333176/initiative-of-the-year-bank-of-englands-fintechaccelerator Haldane, A. (2017) ‘Productivity Puzzles’, Speech given at the London School of Economics, available at: https://www.bankofengland.co.uk/speech/2017/productivity-puzzles Hauser, A.

At a US Congressional hearing, Peter Fisher of the Federal Reserve qualified the interventions as successful because they had contributed to improving market psychology and reducing the implied volatility in the options market. Sveriges Riksbank intervened in the foreign exchange market in June with the aim of strengthening the Swedish krona. The Riksbank found that the Swedish krona was weaker than implied by fundamentals. This was followed by an increase in interest rates. The Bank of England has seldom intervened in the exchange market after the UK left the ERM in 1992. The currency crisis in 1992 appears to have reduced their faith in interventions as an instrument. However, the Bank of England has made it clear that interventions remain an instrument at their disposal. Canada has had a floating exchange rate for 30 years, and has used intervention operations actively in the 1970s, 1980s and 1990s. However, in 1997 the Canadian central bank was not able to prevent the depreciation of the Canadian dollar, and since then has not intervened. Australia still uses interventions, and the Reserve Bank of Australia maintains that they have benefited substantially from their intervention operations during the period with a floating exchange rate. New Zealand has not intervened after introducing an inflation target in 1990. An evaluation report on monetary policy in New Zealand, written by Professor Lars E. O. Svensson, supports the Reserve Bank of New Zealand's assessment that interventions would hardly have made a significant contribution to increasing stability in New Zealand's economy in 4 recent years.
Chile has managed to navigate this period with no accumulation of imbalances. Still, we will inevitably be affected. The cycle of high commodity prices is starting to reverse and the copper price will thus approach its medium-term levels. As I noted, the recent reduction in investment is partly associated with this factor and is also one defined risk in our baseline scenario. Thankfully, our policy regime provides us with the tools to mitigate the effects of a more adverse scenario. Moreover, our country is well prepared to deal with future challenges. The depreciation of the peso has been a buffer, especially because it allows relative prices to adjust and thus rebalance resources and lessen the impact on output and employment. It also has an effect on inflation. This effect has been limited, in line with our economy’s fundamentals and the state of capacity gaps. This is also related with the credibility of our monetary policy’s commitment with the inflation target. Inasmuch as macroeconomic conditions warrant, the Central Bank has the room and the determination to continue contributing to mitigate the cyclical slowdown of the economy. But we also reaffirm our commitment to achieving price stability, indicating that we will do everything necessary to ensure that projected inflation is aligned with the 3 percent target over the policy horizon. As we have said time and again, this is the main contribution that monetary policy can make to the development and well-being of our country. Thank you.

This means that this year investment will fall short of projections, with an annual growth rate that is now estimated closer to 1 percent (4.1 percent in December). It also inputs first-quarter data available, as well as the downward revisions to investment in 2013 and the turn of 2014 shown by the latest survey of the capital goods corporation CBC. Another factor behind the lower growth forecast for the immediate future is the upward correction to inventory levels, meaning that this source of expansion will provide a smaller impulse. The baseline scenario also estimates that, as has been occurring for some quarters, private consumption will post a moderate slowdown, grounded on a looser labor income and a stable borrowing trend. This year, growth will go from less to more. Such a trajectory assumes that investment will stabilize, due to several elements coming together. On one hand, the CBC survey shows an increase in investment plans in engineering works in the second half of 2014 and for the period 2015–2016. On the other, there is housing construction that should continue the trend of last year, considering that the supply of homes is still low, housing sales are strong, and financial conditions (i.e. credit cost and volume) remain favorable. Meanwhile, the fiscal budget for 2014 is expected to be more in line with historical patterns, implying greater public spending with respect to 2013, especially investment. Machinery and equipment imports have been stable for some months.
While the impact on individual businesses may be large, their direct impact on aggregate activity is likely to be modest. The measures affect only a sub-set of spending, notably hospitality (7% of total consumption) and work-related travel (also 7%). If both categories were to fall to their levels at the start of summer, as lockdown began to be eased, this would take a little over 3% off levels of consumption in the fourth quarter and 2% off GDP. But there are good reasons to think this is likely to be a significant over-estimate. Measures announced so far are nothing like as severe as earlier in the year. Even during that earlier period, we saw significant substitution between spending categories, partially insulating aggregate spending. In this respect, it is notable how quickly spending in the worst Covid-affected US States bounced back recently following their second wave. Of course, it is possible the indirect effects of lockdown measures hit spending harder. The most important of those effects would arise if they caused a further significant dip in consumer and/or business confidence. But that rather underscores my central point – the importance of avoiding over-pessimistic commentary on the economic outlook which fuels anxiety, heightens caution and risks becoming self-fulfilling. On the risks to jobs, this is clearly real and it is very likely further losses lie ahead. In its August projections, the MPC expected unemployment to rise to around 7.5% (or 2 ½ million people) by the end of the year.

This figure, more than any other, underlines the gravity of the shock the UK economy has faced this year. The better news is that the economy began its recovery from this dramatic fall earlier, and has since recovered far-faster, than anyone expected. The speed and scale of the UK’s recovery has surprised to the upside, persistently and significantly, for at least the past four months. Back in May, the Bank expected GDP to be around 18% below its pre-Covid level on average during the third quarter. Consensus forecasts by professional economists were, at the time, weaker still. Four months on, we now expect GDP to be around 3-4% below its pre-Covid level by the end of the third quarter. In other words, the economy has already recovered just under 90% of its earlier losses. Having fallen precipitously by 20% in the second quarter, we expect UK GDP to have risen by a vertiginous 20% in the third quarter – by some margin its largest-ever rise. Put differently, since May UK GDP has been rising, on average, by around 1.5% per week. The pace of recovery has varied, starting slowly in May, picking up pace rapidly during June and July and is then expected to have slowed a little during August and September. Even if our GDP nowcasts for August and September come to pass, there remains an average recession-sized gap between output and its pre-Covid level.