samchain/econo-pairs-v1 huggingface dataset:
Until 1826, the number of partners in a note-issuing bank in England was limited to six. The six-partner rule for English banks was relaxed in 1826. But it was not until 1858 that English banks were allowed to limit their liability, three years after non-financial institutions. This was recognition that the risks posed by banks were on an altogether greater scale. Even after legislation was passed, the initial response by banks was lukewarm. Their directors fretted about the signal that limited liability sent to depositors. That concern was reinforced when Overend and Gurney failed in 1866; it had adopted limited liability just months before its failure. For the eleven British banks with unlimited liability that failed between 1836 and 1878, every depositor had been paid out in full (Turner (2014)). 6  6  Turner (2014) Table 5.6. BIS central bankers’ speeches  3  Shareholders’ willingness to do so was helped by them vetting share transfers to exclude owners without sufficient funds. Indeed, banks’ shareholders remained liable even after they had sold their shares: in Scotland, former shareholders were liable for debts incurred when they had been a shareholder, while in England and Ireland a shareholder remained liable for three years after they had sold their shares (Button et al (2015)). But critics of unlimited liability for banks were becoming increasingly vocal.

This is likely to be a fairly general result, whether the externality is between shareholders and creditors or between shareholders and wider society. The most straightforward way of tackling embedded stakeholder externalities is to have those stakeholders’ interests weighed explicitly in the objectives and decision-making of the company. In practical terms, that would mean modifying the objectives, rights and responsibilities of a firm under Company Law. Such modifications are not, in fact, that radical either from an historical or international perspective. History clearly suggests that shareholder primacy has not always been the centrepiece of company law. Nor has the current practice of endowing only shareholders with explicit control rights. Even today, international experience suggests a range of other corporate models can operate successfully. The UK and US shareholder-centric model sits very much towards one end of the international spectrum (Allen and Gale (2000)). In countries such as Japan, German and France, employees and other firms, especially banks, are assigned a more prominent role on the boards and in the running of companies. In the language of German company law, there is “co-determination” in the decisions of the company. As an illustration of that, Chart 11 is drawn from a survey of senior executives at large companies in the UK, US, Japan, Germany and France. On the question “Whose company is it?”, a strong majority in all countries, bar Japan, view shareholders, rather than broader stakeholders, as the ultimate owners.
A bank may have an ownership share in and/or provide credit lines to both the lender and several other types of special purpose vehicles. If problems arise in one of more of the intermediaries, the responsibility easily falls on the bank. US and European banks have also invested in securities issued by special purpose vehicles. An important part of the process is the packaging of mortgages by special purpose vehicles. The senior tranches have a high rating. The subprime mortgage market has thus gained access to funding from insurance companies and other financial institutions that would not otherwise have invested in this market, and credit risk associated with these mortgages has been spread to international financial markets. 2  BIS Review 115/2007  Rising defaults on subprime mortgages resulted in a sharp rise in the yield spread between securities backed by this type of loan and US government bonds. The turmoil quickly spread to other financial market segments. Uncertainty arose in banks that were directly or indirectly exposed to losses on loans to subprime borrowers. Banks’ oversight of their own potential losses was poor. It was also unclear to what extent special purpose vehicles would draw on credit lines. A number of takeover companies, known as private equity companies, had difficulty obtaining financing in bond markets for their leveraged buy-outs. As a result, banks that had guaranteed temporary funding for these companies were left holding these loans for longer than originally planned.

Norges Bank built up foreign exchange reserves while banks financed household and corporate saving deficits, partly by raising loans abroad. With the decline in oil prices, confidence in the Norwegian economy faltered, capital flowed out of the country and out of banks’ balance sheets. Norges Bank had to step in as lender to the banks. The developments that followed the decline in oil prices in 1986 will not be repeated. In 1986, confidence in the Norwegian economy faltered while inflation was high and rising. Monetary policy measures had to be applied – through a resolute fixed exchange rate regime from summer 1986 – to restore confidence in the national and international value of the Norwegian krone, i.e. to reduce inflation. The Norwegian economy is on a much stronger footing now than it was in 1986. None the less, fluctuations in household saving and corporate saving and investment could pose challenges for both monetary policy and our banks. The outlook ahead The past 15 years have been a golden era for the Norwegian economy. It must also have been a privilege to be in a position to engage in banking activities in Norway in this period. Selling loans has been easy, there have been virtually no losses, and deposits and borrowing have been stable. Banks have in addition been particularly adept at making use of new technologies and being more cost-effective. The combination has led to favourable results. Lending growth will probably have to be reduced and losses may rise.
It is true that, more often than not, we come to the conclusion that the balance of advantage lies in not intervening; and, I must confess, I would be alarmed if we didn’t. Yet, in all cases, the decision is made positively, and not by default, and it is not the non-outcome of a do-nothing approach. But, there are many examples of the Government deciding, usually on the advice of its boards and committees, to intervene, in one way or another, in the free play of market forces.” Indeed there are many examples of intervention. We built the airport because, without government intervention, it would simply not have been economically viable. We built roads and bridges. We provided public housing, medical services, the list is long. But we tend to do less than other jurisdictions and so the size of our public sector in relation to gross domestic product is one of the smallest in the world. Specifically in the monetary and financial systems, there is significant intervention in the form of the regulation of financial markets and the supervision of financial institutions. This is precisely because we feel that, in the words of Sir Philip, ‘the balance of advantage’ lies in so intervening and because ‘imperfections in the operation of the market mechanism [may lead] to economic inefficiency’. In very much the same spirit, we intervened in 1996 and built a real time payment system because the private sector was not able to come up with this highly desirable piece of financial infrastructure.

Coming to the end of my remarks, I would like to repeat how profoundly John Taylor’s thinking has affected central banking. For this, he earns our deepest respect and gratitude. I am certain that his lecture will give us much new food for thought on crucial issues. Ladies and gentlemen, please join me in welcoming John Taylor with a big round of applause. John, the floor is yours. Page 4/4
This mismatch has the potential to create large swings in household net worth which may well exacerbate fluctuations in demand and output. The upside consequence was seen in the consumption boom of the 1980s, and the opposite was evident in the bust of the early 1990s when falls in house prices meant that as many as 1½ million families had negative net equity resulting in higher precautionary saving and lower consumption. The forward-looking information contained in house prices underlines the importance the MPC attaches to measuring them accurately. The recent divergence between the rates of house price BIS Review 53/1998  -3inflation implied by the Halifax and the Nationwide indices is both puzzling and unfortunate. The rates of house price inflation recorded by the two indices began to diverge at the beginning of 1997. The most recently published data suggest that house prices, as measured by the Nationwide index, rose by 12.0% in the year to April 1998, whereas, according to the Halifax index, they rose by only 5.6%. Gross household wealth in the year to April 1998 rose by £ billion more according to the Nationwide than the Halifax index. Such differences matter in our assessment of the economy. The Bank of England, together with representatives from the Halifax and Nationwide and from the Department of Environment, Transport and the Regions (DETR), have spent a great deal of time and effort trying to understand the cause of this divergence and to assess what is really happening to house prices.

The latest retail sales figures provide some comfort with volume growth below that in the middle of last year when consumption was stimulated by windfall gains, predominantly from the conversion of building societies. (Rarely have so many, been so grateful, to so few building societies.) Highs and lows in house prices In the past, domestic demand has been sensitive to developments in the housing market. In the late 1980s house prices increased by 40% in two years, while consumption rose by over 9%. Borrowing using housing as collateral - so called equity withdrawal - amounted to almost 50% of the increase in consumption over that period. The impact of rises in house prices on consumption - which is cause and which is effect - remains hotly contested by economists. A rise in house prices leads not only to an increase in wealth but also to an increase in the cost of housing services. Or, to put it another way, if the price of your home goes up, you will not be able to spend more on other things if you wish to carry on living in your home. So it is not at all clear that changes in house prices will in fact have a significant impact on household spending. Perhaps of greater importance is the role which house prices play in signalling consumer confidence about the future. In common with other assets, such as equities, house prices can respond quickly to news about future economic prospects.
[3] Chart: Regulation on Monetary Policy So there are good reasons that low and stable inflation is a monetary policy objective. The operational target of monetary policy in Norway is consumer price inflation of close to 2 percent over time. We measure consumer prices using the consumer price index (CPI). The CPI seeks to measure the rise in prices facing households. The index is widely used and well known. Virtually all inflationtargeting countries have chosen to stabilise CPI inflation. The CPI is associated with considerable short-term volatility. In practice, we therefore use different underlying inflation indicators, for example the CPI adjusted for tax changes and excluding energy products (CPI-ATE). [4] Chart: Both domestic and imported inflation sources of inflation The extent to which monetary policy should respond to changes in individual prices does not depend on its ability to influence the source of the price change. The response depends on how long the disturbances are expected to last and the extent to which they fuel inflation via spillover effects on other prices and wages. The recent surge in inflation is to a large extent ascribable to factors beyond Norges Bank’s control. There is not much we can do to reduce energy and commodity prices, or to relieve bottlenecks in global markets. But by dampening the level of economic activity, we can help to counter spillover effects of increases in individual prices on other prices and wages. Furthermore, even though Norges Bank cannot influence global prices in foreign currency, we can influence the krone exchange rate.

An increase in the policy rate normally leads to a stronger krone. This pushes down imported goods inflation. The krone exchange rate fluctuates, and the relationship between interest rates and the exchange rate is uncertain. Nevertheless, the exchange rate channel is an important channel for the transmission of monetary policy in a small open economy like Norway. The current high level of inflation is, as you know, not unique to Norway. Policy rates are on the rise in many countries. Had we raised the policy rate substantially less than other central banks, this could have led to a weaker krone and higher imported inflation. Chart: Should the central bank stabilise domestic or total inflation? A question that has been raised is whether the central bank should have disregarded imported inflation when setting its policy rate. [5] It could be argued that domestic inflation covaries more closely with the level of economic activity. [6] If this were the case, and the central bank stabilised domestic inflation, it would also stabilise output and employment. This chart shows underlying inflation, or total CPI-ATE inflation, and the rise in prices for domestically produced goods and services. The output gap is an indicator of the activity level. As shown in the chart, the difference in covariance with activity between the two indices is not very large.
There can be a strong temptation in this case to give in to fiscal dominance. This can take different forms, including two that are frequently cited, and seductive precisely because they are illusory: the cancellation of the public debt held by the central bank, or the similar idea of converting it into perpetual debt. The cancellation of this debt would be tantamount to the monetary financing of public deficits, the prohibition of which is one of the founding pillars of the agreement creating the euro. More importantly, we need to do away with this myth of “magic money”. There is no such thing as a free lunch. If the central bank cancelled the debt it holds, it would book an equivalent loss on its balance sheet and collective wealth would be reduced by the same amount. Moreover, the bank deposits linked to this monetary creation will have to be remunerated by the central bank when interest rates return to positive territory, and will therefore cost as much as a short term debt. And if, as some people are suggesting, the central bank committed to never raising interest rates, that would trigger a potentially uncontrollable inflationary spiral. As for perpetual debt, with no prospect of repayment, investors would demand high risk premiums and therefore interest rates, which would be much more expensive than on the current debt.

François Villeroy de Galhau: Monetary policy in the face of the Covid crisis Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, to the Société d’économie politique, Paris, 25 May 2020. * * *  Ladies and gentlemen, I am very happy to join you today for this discussion, which although virtual, will be very real in terms of the strength of the ideas put forward. And I would like to extend my warm thanks to your Chairman Denis Ferrand for his kind invitation. The crisis we are living through is without precedent, in terms both of its brutality and its scale. In the face of this unparalleled storm and the uncertainty it is creating, central banks have responded and innovated, and they need to remain alert. These actions are sparking debate, and raising profound questions about monetary policy. In these troubled times, I think I should start with a reminder of the two anchors that moor our decision-making. I shall then turn to our current strategy, in order to clarify the order of priority for our objectives, and therefore for our tools. I. Two vital and permanent anchors: the mandate and independence In these turbulent times, the ECB is held fast by two crucial and permanent anchors: its price stability mandate and its independence.
The stable output growth and historically low levels of inflation between the mid-1980’s and the onset of the financial crisis, a period often referred to as the “Great Moderation”, provides an alternative or complementary explanation for the downward trend in real rates. Here, the  1  Real interest rates were calculated using the observed market nominal rate minus CPI inflation. 2  Bernanke (2005). 3  Cf. IMF (2005). 4  Taylor (2009). Cf. also Borio and Disyatat (2011). 2  BIS central bankers’ speeches  basic argument is that, as macroeconomic volatility decreased, investors became increasingly willing to accept lower term and inflation risk premia on their investments, which could translate into a decrease in observed interest rates. Whatever the precise explanation may be, the downward progression of long-term nominal and real interest rates over the last twenty years has been conspicuous. Let us now focus on more recent developments. Recent developments The financial crisis and the global economic decline we have observed subsequently have both added cyclical pressure to this long-run trend. Low or negative output growth and dampened expectations of future growth naturally have a negative impact on long-term rates. In addition, the central banks of most mature economies have, of course, responded to the deteriorating economic situation, first by pushing short-term rates towards appropriately low levels and subsequently by exerting pressure on longer-term rates. As slide 6 illustrates, the first “conventional” monetary policy response was to bring short-term target interest rates to levels as close to zero as possible.

Let me first discuss the roots of some of the longer-term trends, before focusing on post-2007 developments. Long-term trends Central banks’ credible commitment to price stability could well explain the downward trend in nominal interest rates experienced by most mature economies in this period. As we see in slide 3, inflation in G7 countries declined from particularly high levels in the mid-1970’s, and again in the early 1980’s, to relatively low and stable levels since the mid-1990’s. Given the decreasing levels of inflation and inflationary expectations, the inflation premium included in nominal interest rates should have been reduced accordingly. Nevertheless, slide 4 shows that this explanation does not suffice. Real interest rates1 also show a declining trend, as represented here in the average real return on the 10 year bonds of G7 countries. What is behind this evolution? Some attribute the low interest rate environment to a so-called savings glut. The crux of this argument is that there has been an excessive accumulation of global savings relative to the demand for fixed capital formation since the mid-1990’s.
(2019) for studies that find that the impact of monetary policy on financial stability is too small to make it worth the cost on price stability. See Adrian and Liang (2018) and Gourio et al. (2018) for more nuanced discussions of the key assumptions that matter to the desirability of leaning against the wind. xiii Coimbra and Rey (2019). xiv See e.g. Greenwood, Hanson and Stein (2015, 2016) for the role of publicly issued safe assets in preventing the creation of privately issued safe assets, and Stein (2012) for a formal model of the impact of safe assets on the severity of fire sales. See Woodford (2016) for a comparison of the fire-sales risks of balance-sheet policies and interest-rate policies.

Don’t take this debate for disagreement about the broader goal: I am convinced that all FOMC members are committed to taking whatever steps they deem would help advance the dual mandate of price stability and full employment. For my own part, I am deeply unhappy with the current forecast of prolonged high unemployment, and will continue to review whether there is more that we could do that would bring more benefit than cost. Monetary policy must do its part. But there is a strong case for complementary policy actions because such actions can help secure better outcomes than can be achieved through monetary policy alone. If we are to achieve the best possible recovery and build for the future, we will also need ongoing efforts across four broad fronts: financial stability, housing policy, fiscal policy and structural adjustment to foster more sustainable U.S. growth and a more balanced global economy. Ongoing attention to financial stability and the reform and repair of the financial system is essential to support recovery. We need to make sure this proceeds in a manner that is not pro-cyclical, and for this reason we are, for instance, phasing in new capital and liquidity standards, and monitoring how institutions adjust to the new requirements. Nonetheless, the financial system must be healthy to support sustained access to credit. If we want those households and businesses with low levels of debt to reduce precautionary saving, we need to restore their confidence in the financial system.
This is in addition to international migration, which is still high but has decreased from where it was before the crisis. This is what I see for Mexico. Structural reforms – handled judiciously, especially as U.S. economic growth accelerates and Europe recovers – can pay off in spades for the Mexican people, who deserve it many times over. While Mexico has somewhat reduced its dependence on the U.S., 80 percent of exports still go to El Norte. In a strange twist of fate, it may be helpful in the near to medium term to be exporting manufactured goods to a slowly recovering U.S. and Europe rather than maintain the last decade’s shipments of raw materials to China as in the case of Brazil. 6  BIS central bankers’ speeches  Mexico has emerged I began my talk tonight by running through the events, institutional backdrop and the thinking behind the Fed’s quantitative easing efforts. I clearly have not been onboard with all the decisions the FOMC has taken during the economic recovery. I fear that we are feeding imbalances similar to those that played a role in the run-up to the financial crisis. With its massive asset purchases, the Fed is distorting financial markets and creating incentives for managers and market players to take increasing risk, some of which may result in tears. And all this is happening in uncharted territory. We have aided creation of massive excess bank reserves without a clear plan for how to drain them when the time comes.

BIS central bankers’ speeches  3  A second was to pass regulatory reforms to lessen the risk of future financial-market crises and ensure too-big-to-fail entities never again place the U.S. in a position where taxpayer funds must be used to bail out bad private-sector actors. A third was to restructure government debt while long-term rates are at historic lows. Within the next four years, 58 percent of U.S. government debt will mature. And though short-term rates are low now, they won’t be low forever. When the existing debt matures, rates are sure to be higher and servicing the debt will take a bigger share out of the budget, leaving less to spend on everything else. One sobering statistic is that net interest payments on the debt are scheduled to nearly triple by the end of the decade, rising from $ billion in fiscal year 2013 (1.3 percent of GDP) to $ billion in fiscal year 2020 (2.8 percent of GDP). I would say that this era of cheap money is one of missed opportunities on all three of these fronts. To add insult to injury, there are increasing signs quantitative easing has overstayed its welcome: Market distortions and acting on bad incentives are becoming more pervasive. Stock market metrics such as price to projected forward earnings, price-to-sales ratios and market capitalization as a percentage of GDP are at eye-popping levels not seen since the dot-com boom of the late 1990s.