samchain/econo-pairs-v1 huggingface dataset:
3  EBA (2011): EBA recommendation on the creation and supervisory oversight of temporary capital buffers to restore market confidence (EBA/REC/2011/1)  4  Ekholm (2009): Some lessons for monetary policy from the financial crisis, speech held on 4 December 2009. 5  See for example Bernanke (2010): Monetary Policy and the Housing Bubble, speech held on 3 January, 2010, and Dokko, Doyle, Kiley, Kim, Sherlund, Sim and Van der Heuvel (2009): Monetary Policy and the Housing Bubble, Finance and Economics Discussion Series 2009-49, Federal Reserve Board. 2  BIS central bankers’ speeches  Figure 1 Policy rates minus actual inflation (CPI change), 1998–, per cent  Sources: Central banks and statistics agencies in the respective countries  Countries such as Ireland and Spain have also seen a bubble-like development of their housing markets: first a situation with gradually rising prices over a long period of time which was then followed by a rapid fall. Would it have been possible to avoid this if the ECB had conducted a tighter monetary policy and what would this tighter policy have cost in terms of unemployment and possible deflation in countries such as Germany, where the economy was developing quite differently? 6 I have no clear answers to these questions. But even though it is possible that an expansionary monetary policy contributed to the development of housing-price bubbles in some countries, it is still the case that other factors were the prime causes of the global financial crisis.

Instead, imbalances in the labour market would be counteracted by means of a counter-cyclical policy. Substantial emphasis was placed on the importance of wage formation for developments in employment. Only when wage growth dropped below the level of our trading partners did unemployment begin to fall and the manufacturing sector began to pick up. Thus, the fixed exchange rate policy was not introduced in order to strengthen the internationally exposed business sector. On the contrary, it was a breach in the approach whereby monetary policy and “exchange rate policy” had been oriented towards safeguarding these sectors. The fixed exchange rate was an intermediate target for achieving low and stable inflation. The exchange rate remained stable until the autumn of 1996, partly because wage growth was low and aggregate demand did not contribute to pressures in the economy. Gradually, the krone began to fluctuate more. The experience of the last half of the 1990s showed that monetary policy cannot fine-tune the exchange rate. Developments in international financial markets provided fertile ground for more pronounced fluctuations. And more fundamentally, when labour market pressures rose and incomes policy failed, exchange rate developments were no longer providing signals for wage formation and fiscal policy. High petroleum revenues, fiscal slippage and expectations of increased use of petroleum revenues contributed to this. Therefore, the exchange rate was no longer suitable as a nominal anchor. The introduction of new guidelines for economic policy in March 2001 and the conduct of fiscal policy have altered the interplay between economic policy components.
The projections in the Inflation Report are based on the assumption that the interest rate moves in line with financial market expectations. This implies that Norges Bank maintains the key interest rate at the current level in the period to summer 2005, with a gradual increase thereafter. It is the Executive Board’s assessment that the projections seem to provide a reasonable balance between the objective of increasing inflation and at the same time avoiding excessive growth in output and employment. The projections imply a sight deposit rate in the interval 1¼ - 2¼ per cent in mid-March 2005. This is conditional on economic developments that are approximately as projected in the strategy period. The interest rate should be assessed regularly on the basis of new information emerging during the strategy period that is of significant importance for the outlook for inflation and output. Particular weight must be given to factors that may delay an increase in inflation. Uncertainty as to the effects of previous monetary policy easing and the unusually low interest rate level imply, on the one hand, that we should exercise caution with regard to further interest rate reductions. On the other hand, the prospect of continued low inflation for a period ahead implies that wide deviations from projected economic developments would be required before interest rates should be increased. The prospect of continued low inflation in Norway also implies that we should lag behind other countries in setting interest rates at a more normal level.

The effects of changes in the current account on net demand for the Norwegian krone can be illustrated by adjusting the basic balance for transfers and earnings to the Petroleum Fund and oil companies’ estimated cash surplus. Even though the current account surplus is increasing from 2003 to 2004 as a result of high oil prices, the adjusted basic balance is falling. In isolation, this is contributing to a decline in demand for the Norwegian krone. The decline is due to high import growth, which is reducing the current account surplus. In the Government’s budget proposal, the use of petroleum revenues remains virtually unchanged between 2004 and 2005. In spite of this, the krone exchange rate has appreciated recently. This reflects short-term capital inflows and may indicate that foreign exchange market operators expect that the use of petroleum revenues will increase in the years ahead. Themes in foreign exchange markets shift. In periods, investor focus on stock returns feeds through to exchange rate movements. During periods of political and economic unrest, investors may choose individual currencies as a safe haven - often the Swiss franc. In the autumn of 2002, the Norwegian krone was probably also perceived as a safe haven. In addition oil prices rose as a result of the uncertainty associated with the war in Iraq. Fluctuations between major currencies also affect the krone exchange rate. In recent weeks, investors have withdrawn from the US dollar and a number of currencies have appreciated.
8  BIS central bankers’ speeches  Figure 3  CPI inflation (*) (annual change, percent)  CPIX inflation (*) (annual change, percent)  10  10  10  10  8  8  8  8  6  6  6  6  4  4  4  4  2  2  2  2  0  0  0  0  -2  -2  -2  -2  -4  -4  -4  -4  07 08 09 10 11 12 13 14  07 08 09 10 11 12 13 14 Report Jun.2012  Report Mar.2012 (*) Gray area, as from second quarter of 2012, shows forecast. Sources: Central Bank of Chile and National Statistics Institute (INE). Figure 4  Non-performing banking consumer loans index (percentage of consumer loans)  Commercial stores' delinquency (*) (percentage of total portfolio)  1.2  15  15  1.0  14  14  13  13  12  12  11  11  10  10  0.8 0.6 0.4 01  03  05  07  09  11  Dec.10 Dec.11 Mar.12  2001-2012 average (*) Considers over 30-day delay, using a simple average of the six largest commercial chains. Source: Central Bank of Chile based on SBIF and SVS data.

We have seen continuing tensions in world financial markets, doubts over the future behavior of the global economy, together with risks appearing, disappearing and reappearing again. As time has passed, with no evident signs of improvement in these economies’ outlook, problems have been exacerbated. Weak growth and the need for households, firms, banks and governments to reduce their debts, have created a vicious circle that hampers the solution to the macroeconomic and financial problems facing the advanced economies. Certainly, the case of the United States is different from the case of the Eurozone, because their institutions and the way they solve their internal imbalances are different. In the Eurozone, the situation of some economies is hardly sustainable. However, there are differences. While the economic block as a whole has a practically balanced current account, it varies from one country to the next. Germany has kept excess savings for several years, which has resulted in a current account surplus, while many peripheral countries post a deficit (figure i). Exchange rate and wage rigidities do not help resolve the imbalances within the region. Overall, in the past few quarters part of the necessary adjustments have been taking place. Germany has increased imports from peripheral Europe, and has cut down its exports to the same countries. Solving the imbalances of the Eurozone will take time and it will not be easy. Any solution will be costly, without a doubt.
The process of globalisation is not, as we are frequently reminded, a universally benevolent force. But the process has largely ensured that international capital is allocated to where it can be most efficiently used, and that nations produce goods and services for which they have a competitive advantage. And, whatever the risks and shortcomings, the more efficient the global financial system, the more effective the process of globalisation is. As a result, global growth and development benefit. 11. It is possible to discuss this subject from a number of angles and for a very long time. But I should like to focus on two aspects today. One is how globalisation, as we are experiencing it today, is changing the role of governments. The other is the implication of globalisation for the choice of exchange rate regimes by individual jurisdictions. 12. To benefit from globalisation, national economic systems have made a distinct movement towards what Alan Greenspan has called ‘market-oriented capitalist structures’. Fifty years or more ago, the clear trend was towards state regulation, centralisation, and – at the extreme – nationalisation. Today, it is in the opposite direction: the themes are liberalisation, privatisation and deregulation. Indeed, economies are now graded on the extent of their market orientation. Governments have become smaller relative to the economies they serve. Market competition, freed from distorting regulation or dirigiste policies, has come more fully into play, with lower transaction and information costs and increased market efficiency.

This phenomenon has gained some interest in international media over the last couple of years. Let me give you some figures: The value of cash in circulation in relation to GDP has decreased steadily from approximately 10 per cent in 1950 to around 1.5 per cent today. Over the past decade even the nominal amount of cash in circulation has decreased, which is quite unique. The decrease has been substantial, between the peak in 2007 to 2016 the number of outstanding notes and coins decreased by more than a third. Most of this * I would like to thank Erik Lenntorp for his help in writing this text  1 [4]  decline has taken place in the last two to three years, driven partly by changing consumer habits, partly by our ongoing changeover of banknotes and coins. Value of banknotes and coins in circulation SEK billons (annual average)  Cash in Circulation/GDP  120  12,0%  100  10,0%  80  8,0%  60  6,0%  40  4,0%  20  2,0%  0  0,0% 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Nominal value (SEK bn, left scale) Value in relation to GDP (per cent, right scale)  Note: Banks’ holdings are excluded. Sources: Statistics Sweden and Sveriges Riksbank. Although there are many drivers explaining the move from cash to electronic payments, I would like to highlight two actions by the Riksbank.
The rational actions taken by even the strongest financial institutions to reduce exposure to future losses have caused significant collateral damage to market functioning. This, in turn, has intensified the liquidity problems for a wide range of bank and nonbank financial institutions. In this environment, banks have faced several different types of liquidity and funding challenges. They have been called on to fund a range of different contingent liquidity and credit commitments, as is typically the case in crises. The substantial impairment of securitization and syndication markets has been an additional challenge because it has reduced banks’ access to liquidity and their capacity to move assets off balance sheets. As the market value of many securities has declined, and investors have reduced their willingness to finance more risky assets, liquidity conditions have eroded further. In response, even the strongest institutions have become much more cautious, building up large cushions of liquidity, bringing down leverage and reducing financing for their leveraged counterparties. Policy measures The self-reinforcing dynamic within financial markets has intensified the downside risks to growth for an economy that is already confronting a very substantial adjustment in housing and the possibility of a significant rise in household savings. The intensity of the crisis is in part a function of the size of the preceding financial boom, but also of the speed of the deterioration in confidence about the prospects for growth and in some of the basic features of our financial markets.

We have the capacity to become a regional breadbasket and this is something we must explore wholeheartedly. It is important to note that there are predictions of a looming worldwide shortage of grain. In Italy, the cost of wheat has increased significantly to the extent that, in protest, people boycotted eating pasta for a day. With our natural resources, this is an agricultural avenue that we ought to explore. However, I must hasten to state that concentrating on agriculture alone also bears a risk as it is prone to the vagaries of weather. So whilst we have been able to reap well in the past, we must also consider diversifying into other economic sectors. Mr. Chairman, I have in mind sectors such as gemstone mining, tourism and manufacturing. The Luangwa region is said to be an area abundant with precious stones. However, we do not appear to have concerted efforts aimed at formalizing the process of explorations in this area. With regard to tourism, the Eastern Province has varied fauna as well as abundant  BIS Review 15/2008  1  wildlife and thus has the potential to become a leading tourism zone. Furthermore, the Eastern Province provides a gateway to the export markets in Malawi and Mozambique. This presents an opportunity for the manufacturing industry to explore what goods and materials are on demand in the two countries. We know for a fact that a great deal of trade is already conducted with the two countries.
It is important to note that the big changes which occurred in the repo rate and thus in the interest costs of housing in recent years were linked to the transition from the high inflation regime of the seventies and eighties to a regime of price stability. A continued confidence in the low inflation regime would imply that such large changes in the interest rate component are less likely in the future. It is evident from what the Riksbank has said earlier in various contexts that there are price effects, which will not be caught within the tolerance interval and which we do not need to counteract fully by monetary policy measures. Attempts to do so could destabilise the economy further, partly due to time lags in the effects of monetary policy. Consequently, if unexpected disturbances were to occur, or if taxes and subsidies were to be changed, for example in connection with a major change in the tax system, we would have to accept that this would have an immediate effect on the price level. Temporary deviations from the targeted inflation rate may therefore happen. What is important with respect to such deviations is to drive inflation back to the target within the horizon where monetary policy has its biggest effect on price developments. The possibility to achieve the inflation target is accordingly affected not only by how the target variables are defined, but also by what time perspective is used when the policy is evaluated and how wide the applied tolerance level is.

As in the euro area as a whole, inflation rose notably at the beginning of the year to levels of 3% in January and February, according to the year-on-year rate of change in the CPI, and declined to rates of close to 2% in March. Its quickening in January and February responded, in particular, to the strong increase in electricity prices and the base effects of oil prices. Consequently, this increase is expected to be temporary and will begin to fade as the impact of the acceleration of the energy component dissipates. Thus, after an average 4/9  increase of 2.2% in 2017, the CPI will foreseeably slow to 1.4% and 1.6%, in 2018 and 2019, respectively. The risks The scenario which I have just outlined is not without both external and internal risks. Noteworthy on the external front is the higher degree of uncertainty concerning global economic policies and their possible impact on world trade and the capital markets. In particular, the current buoyancy on financial markets reflects, at least partly, the expectation that the new US Administration will apply economic policies favouring higher growth and inflation in the short term – such as a possible fiscal expansion – perhaps underestimating the effect of such policies on the pace of the monetary normalisation in the United States, as well as other less favourable aspects, such as the shift towards the lower international mobility of goods and people. A trend towards consideration of the introduction of protectionist barriers in certain developed economies has been observed recently.
The fall in output from peak to trough was around 6% (Chart 4). And output is some 10% below where it would have been, had it continued to grow at its pre-recession trend (about 2 ¾ % between 1998–2008). 1  May CPI data were published after the date of this talk: inflation fell back to 3.4%. BIS Review 91/2010  1  One might have expected a recession of this depth to exert considerable downwards pressure on inflation – such that the current CPI inflation rate could easily have been negative. The recovery in inflation seems to reflect two factors. First, given the scale of the fall in demand, the downwards pressure from the recession doesn’t appear to have been as strong as it might have been. Second, there have been a number of temporary factors pushing upwards. Taking the impact of the recession first, the UK economy appears to have behaved differently during this downturn than in previous recessions. The number of company bankruptcies has been fewer than in the early nineties (Chart 5) – despite the fall in output being twice as big, and despite there being more than twice as many companies in existence now. And even though there are over 850,000 extra people out of work following the recession, and the unemployment rate has reached 8%, (Chart 6) a 6% fall in output could have been expected to generate much more unemployment than it has.

And, of course, there could be further shocks in either direction. So it is important to use whatever cross-checks on our projections that we can. One way to do that is to look for any nominal indicators that might signal risks of persistently above target inflation in the medium term, such as money or wage growth. Underlying money growth is currently just over 1% on an annual basis. And underlying wage growth is around 2%. There are some tentative signs that money and wage growth are rising, but neither of these figures are even close to being consistent with above-target inflation in the medium term. Taking these indicators together with the degree of slack in the economy – and given some of the factors likely to restrain growth in the UK and in Europe – the economics of the situation does suggest that inflation should fall back from its current high point. But there are risks on both sides. BIS Review 91/2010  7  On the one hand we need to be sensitive to the risk of tightening policy prematurely, stifling the nascent recovery. In that case, some of the flexible response to the recession could be swept away, delivering higher unemployment, more company failures and the risk of inflation significantly undershooting the target. The risk of deflation – which prompted the start of the MPC’s asset purchases in 2009 – may have faded, but it hasn’t gone away and would require greater efforts to deal with, if it materialised now.
This can be achieved by requiring bonus payouts to be deferred for a period (“deferral”) and subsequently not paid out if performance is poor (“malus”) or clawed back after payment. If deferral periods broadly match the duration of a typical risk cycle, incentives to risk-shift through time are likely to be significantly reduced. Incentives to act in a shorttermist fashion should also be reduced. These proposals have an element of back to the future about them too. Deferral and clawback in some respects mimic 19th century company practices, when shareholders and managers remained liable for losses that occurred on their watch, even after they had sold their stake. Recently, these ideas have been resurrected in some countries, at least for banking firms. For example, CRD IV in Europe requires that the variable portion of senior bank executives’ pay be deferred for 3–5 years. Last July, the Bank of England consulted on a minimum deferral and clawback period of 7 years for Senior Managers and earlier this year these proposals were finalised. These rules now allow for clawback of up to ten years from award, providing a material incentive to reduce excessive risk taking by executives. 24 In finance, you generally reap the risks you sow over that horizon. This new policy aligns risks and horizons. 22  Bennett, Güntay, and Unal (2012). 23  See Bailey (2014) for further details. 24  The PRA and FCA published their Policy Statement, ‘Strengthening the alignment of risk and reward: new remuneration rules’ in June 2015, available at: http://www.bankofengland.co.uk/pra/Documents/publications/ps/2015/ps1215.pdf.

These issues – low growth and high risk – are the bread and butter of central banking. These costs are not the fault of any party, whether businesses or investors or other stakeholders. Rather they are the result of the incentives embodied within the current structure of companies. These frictions are not just multiple, but potentially interact in important ways. When framing policy choices, that means heeding the “theory of the second best”, in the sense of Lipsey and Lancaster (1956)): with multiple frictions, taking measures to address a friction in one place need not necessarily lead to an improvement in social welfare in aggregate. As one example of that in a corporate governance context, the shift to equity-based compensation practices in the 1980s and 1990s addressed one incentive friction – the principal/agent problem between shareholders and managers. But it may have done so at the expense of amplifying other incentives frictions – for example, it may have amplified riskshifting incentives from shareholders to creditors and to wider society. In some areas, there has been considerable progress in tackling some of these incentive frictions since the crisis, especially among banking firms. One prominent example is regulatory capital reform. Significant increases in banks’ equity and loss-absorbing capital have been put in place or are planned. This is likely to have reduced the incentives of shareholders to engage in risk-shifting, either to creditors or to wider society, thereby lowering the macro-economic costs of these activities.