samchain/econo-pairs-v1 huggingface dataset:
Goodhart and Tsomocos (2007). BIS Review 37/2008  1  open-market operations that we have conducted so far in the euro area (they include in particular targeted ELA to an illiquid credit institution). 2 To make my point more explicit, let me briefly recall a standard result by William Poole (1970), which implies that, when demand for central bank money is uncertain, it is optimal to stabilise the short-term interest rate, letting money supply adjust endogenously. That is precisely what has happened in the euro area over the last few quarters. Indeed, the bulk of liquidity injections since last August has merely been an attempt to align the timing and maturity of liquidity supply with changing demand within the reserve maintenance periods, in order to stabilize the very short-term interest rate on the interbank market. Of course, this is always a difficult task, since the increase in the precautionary demand for liquidity altered the behaviour of banks and rendered the forecasting models we use to calculate the benchmark need for liquidity less effective, at least temporarily. However, since the Eurosystem acted as a price-taker during these liquidity injections, it is obvious that the interest rates at which these fine-tuning and longer-term operations were settled had no information content for the monetary policy stance.

F. Mishkin has expounded in a recent speech on “Monetary policy, risk management and financial disruptions” (Mishkin, 2008). Over the last few decades, research in macroeconomics has focused on two main types of uncertainty: -  uncertainty about the current state of the economy, commonly called data uncertainty,  -  uncertainty about the structure of the economy, which includes: 1/ uncertainty about some key parameters of the economy (e.g., the slope of the Phillips curve) which may be seen as a benign form of model uncertainty, with some parameters varying in the neighbourhood of an unknown true value; and 2/ a more radical uncertainty about the true model in a given model space (e.g. what is the true probability distribution of shocks, is it Gaussian or not, what is the magnitude of the “tail risks”?). Issues like: “What are the non-linear dynamics that financial disruption may trigger?” are here of the essence. Regarding data uncertainty, a general principle of conduct is certainty equivalence: a policy rule that is optimized under the assumption of an absence of data uncertainty is still optimal in the presence of such uncertainty. Regarding the consequences of “simple” parameter uncertainty, a key reference is the Brainard (1967) principle of caution, which suggests that the monetary policymaker should react more cautiously to shocks to variables associated with uncertain parameters in the monetary policy transmission process. However, what central banks, and in particular the US Fed, face today may be seen as a radical kind of model uncertainty.
student loans)  Percentages of households  NMG Survey  3.00  160  2.50  140 120  2.00  100 80  1.50  60  1.00  40  0.50  20 0 1994  97  00  03  06  09  12  15  18  Sources: Bank of England, ONS and Bank calculations. 0.00  91 93 95 97 99 01 03 05 07 09 11 13 15 17 Sources: British Household Panel Survey/Understanding Society (BHPS/US), NMG Consulting survey and Bank calculations. There has been a substantial reduction in corporate debt since the crisis as commercial real estate companies have repaired their balance sheets after over-extending them before the crisis (Chart 9). Banks  7  All speeches are available online at www.bankofengland.co.uk/news/speeches  7  and investors have had strong appetite for corporate lending but corporate debt has only just outpaced the growth of the economy (Chart 10).

Whether a quake seems likely to occur soon has no bearing on this. For resilience in structures, the best indicator of underlying vulnerability is how close the city is to the fault line or plate boundary. On that basis, Apple’s new California HQ uses new earthquake resilient technology. 3  For resilience in the financial system, it is how much debt there is in the economy (or economies) to which it’s exposed. That’s why, when we come to decide how big the banking system’s buffers of loss-absorbing capital should be, we don’t focus on any economic tremors we may feel. We don’t insist on tougher standards just because trade tensions threaten to slow the world economy or changes in sentiment hit financial markets, or because uncertainty is weighing on the domestic economy. Instead we focus on debt – a key driver of how far up the Richter scale economic earthquakes tend to be. 4 Think of a build-up of debt as being the economic equivalent of building close to a fault line. When a quake hits, the impact is greater and more resilience is needed in the structures. This focus means we can appear contrarian. Debt has a habit of increasing in calm periods, when those in the financial system think it’s safe to take more risks. So we can find ourselves demanding tougher standards when risks are thought by many to be low. And we don’t start demanding them when the tremors start, when risks are thought by many to suddenly be high.
Policy rules, especially those with fixed values for r*, cannot capture all of the information that is relevant for policymaking. In particular, such rules do not capture the fact that the linkage between the federal funds rate and both financial markets and global conditions can be very loose and shift over time. This is a critical shortcoming because this looseness affects the stability of the relationship between monetary policy and economic outcomes. If the relationship between monetary policy, financial conditions and the real economy were tight and stable over time, then following a relatively simple and unchanging policy rule would likely generate acceptable results. However, if the transmission of monetary policy to the real economy is more variable and uncertain, as I believe it is, then monetary policy cannot be put on autopilot guided only by a fixed policy rule. As an example, one significant conundrum in financial markets currently is the recent decline of forward short-term rates at long time horizons to extremely low levels – for example, the 1-year nominal rate, 9 years forward is about 3 percent currently. My staff’s analysis attributes this decline almost entirely to lower term premia. In this case, the fact that market participants have set forward rates so low has presumably led to a more accommodative set of financial market conditions, such as the level of bond yields and the equity market’s valuation, that are more supportive to economic growth.

Már Guðmundsson: To what extent do international and EU reform proposals address the fault lines in cross-border banking? Keynote address by Mr Már Guðmundsson, Governor of the Central Bank of Iceland, at the Eighth High-Level Meeting for the Middle East & North Africa Region “Recent policy developments for strengthening the resilience of the financial sector”, Abu Dhabi, 28 November 2012. *  *  *  Governor, chairmen and participants, Let me begin by thanking the organisers for inviting me to address this impressive gathering and thus enabling me to visit this fascinating place. In my speech I will discuss the risks in cross-border banking that manifested themselves in the crisis and what has been done since to address them. The bottom line is that, at the global level, we had developed significant cross-border banking operations that were only very partly covered by the safety net of lender of last resort (LOLR), deposit insurance and adequate resolution powers, and the associated regulation and supervision. I use the metaphor of a fault line to describe this. But first I want to tell you a little more about the origin of my perspective on these issues. It comes first from my tenure at the Bank for International Settlements (BIS) from 2004–2009, where I was involved in work on these issues, with the BIS International Banking Statistics providing a constant point of reference.
BIS Review 88/1998  -3-  And the potential for external shocks, with asymmetrical effects on different Euroland countries, of course remains. A particular worry is that macro-economic stability - vitally necessary though it is will not, on its own, be sufficient to prevent the persistence of unacceptably high levels of unemployment in a number of the major Continental European economies. Unemployment has been for some considerable time, and remains, much the most urgent and important economic issue confronting us in Europe. I do not suggest for a moment that the right answer would be to abandon macro-economic discipline and revert to old-fashioned demand management policies. In anything other than the very short term that would be likely to make matters worse. I share the broad consensus view that Europe’s unemployment problems originate essentially in rigidities on the supply-side of the economy. The point is that unless we are all more successful in bringing down this structural unemployment, through micro-economic policies designed to improve structural, supplyside flexibility, then some countries could find it difficult to continue to live with a common macroeconomic discipline without significant tensions. The nagging doubt is whether the necessary commitment to fiscal discipline, alongside monetary stability, will prove - in the terms of the Maastricht Treaty - to be sustainable.

The big questions now - for all of us, not just for the euro countries - are, first, and most immediately whether we can avoid new financial shocks; and, secondly, how we should manage the economic fall out from the financial shocks that have already occurred. Developments since the IMF/IBRD meetings in Washington have in my view been quite encouraging. The Japanese financial package is reassuring, and the strengthening of the Yen has brought welcome relief to much of the rest of Asia. United States Congressional approval of the IMF quota increase and of the New Arrangements to Borrow (NAB) has paved the way to a vitally necessary increase in IMF resources. Brazil - which has been widely seen as the next potential emerging market domino - is clearly committed to taking strong corrective domestic policy action, which would command broad international support. And while there evidently has been a sharp contraction of wholesale market lending, within the financial sector in particular, in the United States, and suggestions there of a possible wider credit crunch, no new problems on anything like the scale of LTCM have in fact been uncovered. We are certainly not yet out of the wood, but the financial situation looks rather better than might have been expected two or three weeks ago. If we can avoid a new financial shock - and I am hopeful that we will - we still have to manage the global economic slowdown already underway.
In several countries a series of bold structural reforms have been implemented. In Portugal in particular, the reform agenda has been broad-based and far-reaching. It has included public administration, health and pension systems, education, judicial systems, competition frameworks, industrial relations, labour markets, energy markets, network industries, services sectors and regulated professions. Some concrete examples of structural reforms The overall approach to structural reforms in stressed countries has been to proceed in a comprehensive manner. This is not only because certain reforms are mutually  4  BIS central bankers’ speeches  complementary – for example, the competitiveness benefits of a labour market reform may not materialise without accompanying product market reforms, as wages adjust but prices do not – but also because an encompassing approach ensures that the burden of reform is spread more fairly across society. However, implementation obstacles to this approach have been significantly higher than initially expected. In general, it has been easier to change institutions and rules in the labour market than in product markets; it has been easier to change rules for “outsiders” than denting the vested interests of established “insiders”; and it has been easier to increase taxes rather than cutting expenditure. While these difficulties are in many cases gradually being overcome, the process is far for completed. Still, one should not underestimate the achievements so far. Let me give you a few examples: Looking at a well-established summary indicator of employment protection, the OECD index, Portugal, Spain and Greece have recorded notable improvements in 2013.

Asia’s urban population has risen from 33% of total population in 1990 to 43% in 2010. The United Nations projects that Asia’s urbanisation rate would rise to 56% in 2030, and further to 64% in 2050. Accompanying this urbanisation has been the growth of mega-cities with populations exceeding 10 million. Twelve of the world’s 21 mega-cities are in Asia, including Tokyo, Delhi, Mumbai and Shanghai to name a few. Urbanisation has become particularly more pronounced in Malaysia during this period. The proportion of the Malaysian population living in urban areas has increased from less than 50 percent in 1990 to more than 70 percent in 2010, and is expected to rise further to 75 percent in 2020. The improved education and higher income levels that has come with urbanisation has enhanced opportunities for greater access to financial products and services. Indeed, financial institutions and markets have responded to the changing profile of financial consumers by offering a broader range of financial instruments and providing convenient access to meet the changing consumer preferences. It is recognised however that economic growth and development, no matter how stellar, will begin to fade when inequality sets in and when income disparities widen. Balanced growth is therefore an important imperative if socio-economic progress is to be achieved and if conditions that limit opportunities for employment and which deepen inequalities of income and wealth are to be avoided.
Given the important role of trade and global financial channels in the contraction of domestic economic activity during 2009, we believe that global developments would continue to be the main determinant of the outlook for domestic activity and inflation in the forthcoming period. Accordingly, in this part of my speech, I will cover both the possible trends of global and domestic economic activity, as well as their impact on the domestic inflation outlook jointly. Rising budget deficits and ongoing problems in credit and real estate markets continue to pose downside risks for global activity, especially for developed economies. Although the probability of another disruption in global economic activity has been decreasing, it is still an important source of downside risk on domestic economic activity and inflation. Should global conditions deteriorate again, and consequently delay domestic recovery, the CBT would consider further monetary easing. Despite the prevailing downside risks on global and domestic economic activity, upside risks have also been emerging since the second half of 2009. The extent of recovery in global economic activity in the second half of 2009 reminds us of some of the upside risks in economic activity as well. Moreover, it should be noted that the impact of the unprecedented expansionary policy measures that have been taken since the last quarter of 2008 would become visible with a lag. Similarly, it should be considered that the 1025 basis points of cumulative easing in CBT policy rates between November 2008 and November 2009 would also be fully conveyed with a lag.

Commodity prices continued along a rising trend during the last quarter of 2009, with the improving perception regarding the global economic recovery (Figure 32). Accordingly, oil prices hovered above our assumption of 70 USD per barrel for the fourth quarter (Figure 33). Therefore, oil price assumptions stated in the previous Report have been revised in line with futures prices registered during the first half of January. In this context, the previous assumption of oil prices have been revised up from 75 USD per barrel to 80 USD for 2010, and from 80 USD to 85 USD for 2011 and thereafter (Table 1). This revision has added around 0.2 percentage points to the 2010 inflation forecasts. Moreover, in line with oil prices, imported input prices are also assumed to increase gradually throughout the forecast horizon in response to the gradual recovery in the world economy. BIS Review 31/2010  13  The October Inflation Report envisaged annual food inflation to be 5.8 percent for 2009 and 6 percent for the years to follow. However, as I have mentioned earlier in my speech, unprocessed food prices exceeded our forecasts. Therefore, we revised our assumptions for food inflation up from 6 percent to 7 percent for end-2010 (Table 1) and this added around 0.3 percentage points to the 2010 inflation forecast. Similarly, assumptions for 2011 food inflation have been raised to 6.5 percent from 6 percent. We maintain our 6 percent annual food inflation forecast for subsequent years.
In these cases, appropriate valuation techniques coupled with adequate guidance on the application of these techniques are needed in order to arrive at a reasonable estimate of the price at which an orderly transaction would currently take place between market participants. An entity should have in place adequate models that have been tested for accuracy in case the market is severely disrupted. Moreover, in rare circumstances, if the market dynamics are such that an institution may be forced to change its respective business model (i.e. shifting from a “day trading” to a “buy and hold” business model), then it should be able to reclassify financial instruments at amortised cost. These are important lessons to be learnt from the financial crisis. BIS Review 58/2010  1  Hence the ECB is of the opinion that fair value measurement should only be required if it is consistent with the institution’s business model and the characteristics of the particular underlying asset or liability. Which would be the worst drawbacks, if any, deriving from applying fair value in the light of the events happened in the last two years? Which are the positive aspects? In my view, the financial crisis has clearly highlighted the heightened pro-cyclicality stemming from two mutually reinforcing channels in the accounting framework: fair value accounting and the current loan loss provisioning practices (impairment methodologies). Fair value accounting – while certainly not being the “root cause” – served as an amplifier of stress in the financial system.

This event also serves very well to highlight the second reason, namely the political factor, which explains the temporary nature of the milestone steps mentioned earlier. Unless the so-called political “gridlock” is dealt with effectively in the U.S., passing and approving laws will remain a daunting task that needs to wait until the last minute. And unless the Eurozone leaders collaborate unreservedly, full resolution of the Eurozone crisis seems to be too lofty a goal to materialize. Ladies and Gentlemen, High risks and uncertainty surrounding the crises in the U.S. and the Eurozone contribute to higher risks in the global economy and financial markets, and Thailand will be affected in three primary ways – through international trade, financial market volatility, and inflation. I would like to touch briefly on each of these three channels respectively. The impacts through the first channel, namely international trade, are natural given Thailand’s strong tie with the global economy, with G3 economies accounting for almost one-third of Thailand’s exports. Slowdown in the U.S. and the Eurozone, and their spillovers to the global economy, will dampen global demand for Thai exports. But fortunately, the impacts through trade can be cushioned to some degree, given that Thailand has moved toward more intra-regional trade within Asia and also has succeeded in diversifying to alternative export markets. Although I have mentioned before that Thailand’s economic fate next year will be in the hands of domestic demand recovery, further contribution from exports will be very helpful.
The line in the chart will therefore move further down and to the left with a more credible monetary policy. 3. Norwegian monetary policy and cyclical fluctuations  In the long term, we cannot influence growth potential or prosperity by means of monetary policy - not even in Norway. But we can influence the fluctuations in the economy, the short-term cyclical movements. Norges Bank also takes into account that monetary policy should not cause unreasonably sharp fluctuations in output by setting a relatively long-term horizon for the attainment of the inflation target, and allowing deviations in the intervening period. It would probably be possible by a very aggressive use of instruments to force inflation back to the target within a time frame of 3-4 quarters - perhaps even less if the foreign exchange channel is strong. This would cause very pronounced fluctuations in the real economy, however. In this sense, variations in output enter our “loss function”. The thinking that follows from the theoretical research is to a large degree present in the actual setting of interest rates. For practical purposes, we, and other central banks with inflation targeting, make estimates of future price inflation. Our instruments are oriented in such a way that there are prospects of attaining the inflation target two years ahead. The theoretical literature has given us useful knowledge as to how far forward in time this horizon should be set. The result of using too short a horizon will be considerable instability in output and in nominal and real interest rates.

The operational objective of monetary policy is low and stable inflation. The inflation target is set at 2½ per cent. A monetary stance resulting in high and varying inflation would have led to wider swings in output and employment. It would also have been a recipe for turbulence in the foreign exchange markets. There is therefore a close link between the third paragraph of the regulation - the inflation target - and the first paragraph concerning stabilising economic developments and exchange rate expectations. Monetary policy affects the economy with considerable and variable lags. The current level of inflation does not provide an adequate basis for determining the level at which interest rates should be set today. Our analyses indicate that a substantial share of the effects of an interest rate change will occur within two years. Two years is thus a reasonable time horizon for attaining the inflation target, and also makes it possible to avoid unnecessary output and employment variability. See also the formulation of the regulation about contributing to stable developments in output and employment. If we should attempt to attain the inflation target in the very short term, by lowering the key rate and thereby contributing to a depreciation of the krone and higher price inflation, we would very probably be compelled to raise the interest rate even more a year from now in order to attain the inflation target than we did the last time we raised interest rates. Such a short-term policy would have contributed to greater demand and output instability.