samchain/econo-pairs-v1 huggingface dataset:
And although inflation also rose during the Second World War, and was much more persistent afterwards – with monetary policy in the hands of the government many argue this does count as a period of “fiscal dominance” over, or at least “fiscal influence” on, that policy – it was at least brought down, and contained to a degree5, by the fixed exchange rate of the Bretton Woods system. Only in the late 1960s and 1970s, once Bretton Woods broke down and by which time government debt ratios were already much lower, did inflation really take off. Finally, to tick off one more relevant episode, we all know that the financial crisis of 2008-09 was  Chart 2: But in British history there is no correlation between public-sector debt and inflation  followed by rapid and material rises in publicsector indebtedness. Yet despite this, and despite large-scale monetary easing as that rise was occurring, inflation remained close to target. Indeed, for much of the post-crisis period many developed country central banks have found themselves battling rates of inflation that are too low, not too high. All in all, taking the past three centuries as a whole, the correlation between public-sector indebtedness and inflation – whether that’s  Sources: Thomas and Dimsdale (2017), Mitchell (1988), Feinstein (1991), Crafts and Mills (1994), Feinstein (1998), O'Donoghue et al (2004), ONS and Bank calculations. measured contemporaneously or after the event – is zero (Chart 2). I think we can draw a few lessons from this.

But if the overall story of recovery in underlying growth still looks broadly intact, there has been bad news on the inflation front. The recent inflation data, particularly for goods prices, has come in a little stronger than expected. Sterling oil prices and wholesale gas prices have risen by more than 5% since February. Together with duty changes announced in the March Budget, that seems likely to leave the short-term outlook for inflation on a path a little higher than incorporated into the central projection described in the MPC’s February Inflation Report. I think inflation might remain above 3% throughout the second quarter of this year, and possibly into the second half of the year. Already in February, there was a risk that inflation might fall back towards target less quickly than incorporated into our “most likely” central outlook. Not only was there a prospect of supply disruptions to oil production, there was also a possibility that firms might seek to rebuild margins faster than assumed as and when economic recovery becomes more secure. So one possibility is that companies have begun to rebuild or protect their profit margins more quickly than expected. According to the latest ONS data, by the end of last year the profits of mainstream businesses (excluding oil and finance) had fallen to their lowest share of GDP for a couple of decades. Companies’ willingness to tolerate a further squeeze, in the  BIS central bankers’ speeches  5  face of rising import prices, might be limited.
The final benefit in terms of lower lending rates is uncertain: I can envisage strategies in which the degree of pass through ends up being less than 100% or greater than 100%. The key point is that if the cost of funds is reduced, the supply of credit expands and hence the quantity of lending should rise. So will the banks make more money as a result of the FLS? Well they should try to! The scheme depends on banks exploiting the opportunity to make more loans and more profitable loans because that is in everyone’s interest. If they don’t respond by lending more than they otherwise would have done, competition will probably mean that they make fewer profits because other firms will take their business. Shareholders should be urging management to take advantage of the opportunity. The fact that, by signing up, banks and building societies agree to the Bank of England publishing details of their usage of the scheme, means that pressure will be more intense. What of the question on the state of demand? I have personally talked to businesses in many different parts of the country. Those SMEs who have got the finance they wanted – and many have, despite the unfavourable public commentary – complain about the length of time it has taken, the bureaucratic processes and the onerous terms and conditions. Few have actually complained to me about the price of their new loans – but many have come under pressure to renegotiate existing cheaper arrangements.

3  The Bank published an explanatory note on the FLS, available here: http://www.bankofengland.co.uk/ markets/Documents/explanatory_notefls120713.pdf  4  Drawn sterling loans to UK private non-financial corporations (PNFCs) and households, by the FLS Group, which includes all UK resident monetary financial institutions and related specialist mortgage lenders within a group. 5  If their lending expands by 7% for example, then they can draw down an amount of treasury bills equal to (7+5=) 12% of their initial stock. BIS central bankers’ speeches  9  The first point I want to make in reply is that banking in the UK is far from a perfectly competitive market. The six biggest lenders account for the vast majority of lending to UK businesses and households – and the seventh largest accounts for less than a third as much as number six. In large part the quantitative success of the scheme will depend on what these larger lenders do. But each bank is in a different strategic position to start with. They will all have some portfolios they wish to shrink, and others to expand. But some were planning to reduce their overall stock of lending, given market conditions and their own capital and liquidity positions. And some had been ordered to reduce parts of their lending because they had received state aid. The FLS is not intended to undermine competitive and financial stability objectives by forcing banks to change such strategic decisions. What we do want to encourage is an expansion of their core portfolios.
For example, research has shown that anticompetitive regulations in upstream sectors such as utilities can curb TFP growth in downstream sectors.4 Second, specific financial factors also contributed to capital misallocation. In certain sectors in catching-up economies both the marginal product of capital and profitability were relatively low – for example, construction and retail – yet capital formation remained elevated. The explanation for this apparent contradiction seems to have been very loose credit conditions. This meant that, despite low gross remuneration for enterprises in these sectors, net remuneration was kept high by low real borrowing costs. In Ireland, for example, from 2003 to 2008 the average real borrowing costs for households (mortgages) was 1.1%, while for non-financial corporations it was 2.1%. In both cases this averaged 2.8 percentage points below the nominal cost. As a consequence, and facilitated by insufficiently intrusive banking supervision, credit volumes also increased steeply, with loans to households growing on average by 23% per year in the four years before the crisis, and by almost 28% for nonfinancial corporations. The fact that this credit growth was associated with labour-intensive sectors such as construction, and hence diverted labour towards these sectors, itself contributed to the weak performance of productivity. Another financial factor that may have influenced capital allocation was the type of crossborder capital flows, which reflected an incomplete single market in capital.

Moreover, in real terms, according to third quarter’s data, net exports deficit narrowed and contributed positively to aggregate demand. Annualised contraction of net exports deficit is assessed to be resulting from imports of goods and services decline by about 4.2% in real terms and exports upsurge by about 8.6%. Monetary indicators were in line with developments in the economy’s real sector. Our analysis and assessments suggest that higher monetary supply is in accordance with economic agents’ demand for real money, while monetary inflationary pressures in the economy are contained. Growth of M3 aggregate was slower in the second half of 2011, influenced by lower money creation in foreign currencies. During July–October, annual average growth of monetary assets in the economy was 10.4%. Contribution of private sector’s demand for loans remained unchanged. At the end of November, its annualised growth was 10.9%. Crediting remains under the influence of low demand for loans and more prudent lending policies by banks. Economic agents’ behaviour continues to be conditioned by uncertainty for the future, which, in turn, conditions spending and investments in the economy. On the other hand, credit supply is tight, as lending standards performance shows. Financial markets during the second half of 2011 were calm and reflected relatively downward premiums on liquidity risk and inflation. Successive key rate cuts were swiftly reflected in the interbank market. In the primary market, government security yields dropped, reflecting the key interest rate cut as well as the low demand of the public sector for loans.
In doing so, first, let me start with the current financial crisis and its relation with global financial imbalances and economic integration. Then I will briefly discuss the stage of Asian economic integration and highlight the benefits it rendered in cushioning a number of regional economies from the adverse effects from the crisis. After that, I will draw the lessons from the current crisis that should further help gear our integration towards the path that reaps the most benefits and minimizes potential risks along the way. Ladies and Gentlemen, During 2004-2006, one of the main potential threats to the world economy centred around the global financial imbalances arising from the chronic and rising US current account and fiscal deficits. Although most economists believed that the situation was not sustainable, no one could predict the timing and extent of the unwinding process, nor whether the US would face a hard on soft landing. The current crisis, unfortunately, manifests an abrupt unwinding of the imbalances. The trigger point of the crisis is clearly the subprime lending problem in the US, a new phenomenon. However, most economists would agree that the root cause of the crisis lies beneath excessively accommodative monetary policy that led to excessive credits, and in turn, to asset price bubbles, a repeating cause of past crises. Other important driving factors behind rising credit expansion and bubbles included rising financial innovation and its complexity and lax supervision. The global financial imbalances could not have heightened rapidly since the early 2000s without fast rising global economic integration.

Empirically, the behaviour of the economy matters more for interest rates than prior forecasts. In addition, the MPC isn’t solely concerned with inflation anyway, still less its most likely rate at a fixed point in the future. That means that the target horizon for inflation is generally longer than the earliest point at which policy can affect it – there is therefore no single, unique path of interest rates that will do the job. It also means that the horizon itself can vary. I will therefore conclude with something of an apology. For those in the audience wanting me to give a direct and unequivocal promise as to when Bank Rate will change, you will, I’m afraid, be disappointed. I can’t. But you should look on the bright side. If there is any value in listening to people like me, it is to help you with what is the best way to try and predict future interest rates - to forecast the economy yourselves (which is probably more interesting). After all, if the future were perfectly predictable we wouldn’t have to bother trying. References Broadbent Ben, 2014, “Unemployment and the conduct of monetary policy in the UK”, Speech given at the Federal Reserve Bank of Kansas City 38th Economic Symposium, Jackson Hole, Wyoming. Campbell John, 1995, “Some lessons from the yield curve”, Journal of Economic Perspective, Vol. 9, No. 3. Eguren-Martin F. and N. McLaren, 2015, “How much do UK market interest rates respond to macroeconomic data news?”, Bank of England Quarterly Bulletin.
As Asian economies gradually opened their markets to international trade and competition, with Hong Kong setting a good example of how free markets work, the existence of stable exchange rates, largely linked to the US dollar, formed the anchor of Asian growth. The need for monetary co-operation amongst Asian economies, therefore, did not matter much as long as each traded mainly with Europe or America using the US dollar as the main currency of trade. 16. This was the reason why the work of the principal forum for central bank discussions in the late 1950s called SEANZA (South East Asia, New Zealand and Australia) focused mainly at providing training for central bankers. The 18 members of this group cover a geographical area that spans the whole of Asia-Pacific from India to New Zealand. Training and research was also the primary focus of another central bank forum founded in 1966. This is SEACEN (Southeast Asian Central Banks), comprising ten central bank members with a research and training centre in Kuala Lumpur. 17. In the 1990s, the number of Asia Pacific groupings increased, partly as a result of accelerating intra-regional trade. The establishment of APEC (Asia Pacific Economic Co-operation) in 1989 promoted trade and investment amongst the 18 member economies, but there were only ancillary discussions on monetary co-operation. In February 1991, nevertheless, Asian monetary co-operation took a quiet but significant step forward with the creation of EMEAP (Executives’ Meeting of East Asia Pacific Central Banks).

But there certainly is a problem with the effectiveness of financial intermediation in this region which is inhibiting the flow of long-term savings into long-term investments. I believe an important factor behind this is the perceived or actual risks inherent in dealing with the products, the intermediaries and the market that are part of the process of financial intermediation. I also believe that monetary authorities have a responsibility, through concerted efforts in prudential regulation and supervision, and the development of the financial infrastructure, to contain these risks to levels more acceptable to those concerned, including themselves as managers of official foreign reserves. The Case for Asian Monetary Co-operation 36. These Asian monetary problems which I have described can seriously undermine the ability of Asian monetary authorities to deal with shocks, and so when shocks do come they will cause much agony in terms of economic disruptions and painful adjustments. The problems are also highly contagious, transmitted through sudden shifts in the same direction in the perception of risks by international investors, as they looked for worrisome similarities amongst Asian economies, as the recent turmoil in Asian currency markets has shown. The fall in one market may also lead them to look for liquidity in other markets, thus contributing further to the contagion. BIS Review 91/1997  -8-  37. We are living in an ever more interdependent region. Increasing trade and investment flows, made possible by trade and financial market liberalization, have bound our fates together.
The alternative business model for banking is to retreat from the street, but to seek new ways to nurture generalised, or anonymous, trust on the part of the public. Technology may be a great enabler here, allowing a customised and personalised service even if it is not a person actually delivering it. Indeed, it is striking that it is often technology companies that are towards the top of the industry trust league table. I am a long-standing supporter of alternative business models for banking, ones which connect end-savers and end-borrowers directly, peer-to-peer. Their offering to consumers is often a different one, challenging both the product and the pricing of incumbents. It is disruptive innovation. Many of these challengers are growing fast and have high levels of customer satisfaction. Innovation never occurs in a straight line, nor without bumps, but these new entrants bring welcome diversity to the banking market. Whatever business model is adopted, success will hinge on whether the public have faith in banks pursuing a purpose aligned with their needs, that they are fulfilling their fiduciary function. There is a mountain to climb on this front, not just for banking but for business generally. If not at an all-time low, public trust in big business is plumbing the depths. And the chorus of criticism of business is not confined to the general public. It is shared by politicians, academics, investors and indeed sometimes by companies themselves.

11 This goes to show just how competitive Swiss industry really is in these markets. This positive outcome is due in part to Switzerland’s exceptional trade performance with China, with the result that Switzerland is one of the few industrialised countries that have not generated a deficit in its goods trade with China in recent years. 12 This confirms just how important the Asian market is as an export destination for the Swiss economy. And judging by Asia’s strong growth prospects, it is likely that it will become even more important in the future. The regional diversification of Swiss goods exports towards Asia turned out to be a considerable advantage in the recent crisis. Given that the global economic recovery first took hold in Asia – thanks in part to the many fiscal and monetary policy stimulus packages – Switzerland was able to reap the benefits of the fast-paced recovery. During the upturn, which began in mid-2009, more than one-third of the growth of Switzerland’s goods exports was attributable to the increasing demand in Asia – even though, as mentioned above, exports to this region still account for only around 15% of the country’s total goods exports. 2.2  The changing composition of goods exports  It isn’t just the regional focus of Swiss exports that has changed but also the product composition. This brings me to the second factor which promoted the development of Swiss goods exports in the recent crisis.
The challenges facing central banks can be grouped in three areas:   first, what is being labelled as the “new normal” in the macroeconomy and its implications for monetary policy;    second, the challenge for financial regulation policies;    and third, the new challenges posed by financial innovation and the new technologies. The impact of the crisis on monetary policy But before addressing these challenges, I think it might be useful to take a short step back to remember where we have come from. We can only understand today’s challenges if we bear in mind the changes, often far-reaching, that have come about in central banks in response to the crisis. The global financial crisis came about following a build-up of bubbles in the advanced economies, mainly in the financial and real estate sectors, a process to which easy financing conditions proved conducive in a setting in which risks were not appropriately priced. In any event, what was surprising was the intensity and global nature of the crisis that broke in 2008. Given highly integrated financial markets and complex interconnections, instability spread rapidly, leading to the most serious financial crisis since the Second World War. In the European Union the crisis was, moreover, exacerbated by a double-dip recession, which has prolonged the recovery period and has also revealed the weakness of the euro area’s institutional framework. The crisis also left the monetary and regulatory policy “manual” that central banks had been applying in tatters.

Since Norges Bank will be providing the Ministry of Finance with concrete advice regarding a countercyclical capital buffer, I would like to devote some time to stating the reasons why such a buffer is necessary, and why, more generally, regulation of the banking sector is necessary. Then I shall touch upon the interaction with monetary policy and will also add some brief comments about some of the challenges facing monetary policy in the wake of the financial crisis. Why capital regulation? A well functioning financial market is essential for virtually all other economic activity in a market economy. Banks are a key component of the financial system. Banks channel money from savers to investors. Banks determine who should be given credit and closely monitor borrowers and their projects. This is a task that would be difficult for small savers to undertake. Resilient banks and prudent banking are important for a solid and stable economy. If banks end up with insufficient equity capital following substantial losses in bad times, they will have to tighten lending. This may serve to amplify the downturn, as is currently the case in a number of European countries. Compared with other enterprises, banks have limited equity capital. It is often more costly for banks to fund lending with equity capital than with deposits and borrowing from the market. As deposits are readily available to depositors and many deposits are covered by a deposit guarantee, depositors accept a relatively low interest rate.