samchain/econo-pairs-v1 huggingface dataset:
Temporarily high inflation is needed to reduce unemployment One consequence of high unemployment over a long period of time and of unemployment tending to become entrenched at higher rates, is that inflation will be higher for a given rate of unemployment. This means that a sufficiently large demand for labour to bring down the high unemployment towards a long-run sustainable rate will lead to higher inflation than normal for a period of time. It is therefore important to allow inflation to overshoot the target for a number of years. This would be a necessary cost that should be weighed against the gain of bringing down unemployment. As inflation on average has fallen below the target, an inflation rate above the target would at present also have the advantage that average inflation over a long period would come closer to the target, something that would contribute to avoiding the unnecessarily high average unemployment that earlier policies have caused. According to Prospera’s surveys, inflation expectations have stabilised at 2 per cent from 1997, despite average inflation being lower. Inflation expectations would thus probably be stable even if inflation were to overshoot the target for a period of time. Summary: Monetary policy too tight My conclusion is that monetary policy in Sweden is and has been too tight.

References Andersson, Björn, Stefan Palmqvist and Pär Österholm (2012), “The Riksbank’s attainment of its inflation target over a longer period of time,” Economic Commentary no. 4, 2012. Assenmacher-Wesche, Katrin, and Stefan Gerlach (2010), “Monetary policy and financial imbalances: Facts and fiction”, Economic Policy 25, pp. 437–482. Blanchard, Olivier, and Jordi Gali (2010), “Labor markets and monetary policy: A New Keynesian model with unemployment”, American Economic Journal: Macroeconomics, April 2010, pp. 1–30. Claussen, Carl Andreas, Magnus Jonsson and Björn Lagerwall (2011), “A macroeconomic analysis of housing prices in Sweden”, in Sveriges Riksbank (2011), pp. 67–95. Englund, Peter (2011), “Swedish house prices in an international perspective”, in Sveriges Riksbank (2011), pp. 23–6, www.riksbank.se. Federal Reserve Board (2012), “Federal Reserve issues FOMC statement of longer-run goals and policy strategy,” press release 25 January 2012, www.federalreserve.gov. Fiscal Policy Council (2012), “Swedish fiscal policy 2012”, www.finanspolitiskaradet.se. Ingves, Stefan (2012), “Monetary policy entails a balancing act”, speech in Luleå on 4 December 2012. National Institute of Economic Research, (2012), Wage formation report 2012, www,konj.se. Kuttner, Kenneth N. (2012), “Low interest rates and housing bubbles: Still no smoking gun”, presented at the conference “The role of central banks in financial stability: How has it changed?” Federal Reserve Bank of Chicago, November, 2011, econ.williams.edu/ people/knk1. Qvigstad, Jan F. (2005), “When does an interest rate path ‘look good’? Criteria for an appropriate future interest rate path – A practician’s approach”, Staff Memo No. 2005/6, Norges Bank. Rogerson, Richard (1997), “Theory ahead of language in the economics of unemployment”, Journal of Economic Perspectives Vol.
Following a long period of unusually good economic performance, characterised by relatively steady growth and low and stable inflation in the advanced economies and rapid growth and development in key emerging market economies, we have seen the eruption of a systemic financial crisis of quite unusual intensity and international reach. The nearest precedent is probably the widespread closing of international capital markets on the eve of the First World War. And associated with that, we have seen the sharpest internationally synchronised slowdown in growth in the post-war period, together with an unprecedented contraction in world trade. To the public at large our present troubles are the fault of: whiz-kid financiers, who created financial instruments that even they didn’t properly understand; greedy bankers, who pursued profit and personal reward without regard to risk or common sense; somnolent supervisors, who failed to adequately regulate and restrain those bankers; and negligent central bankers, who allowed an explosion in liquidity, credit and asset prices that supported the whole rotten edifice. And all the while, the culprits were cheered on by an economics profession that was over-enamoured of theoretical models, blind to the lessons of history and subject to a severe case of “group think”. Wasn’t it blindingly obvious that the whole house of cards would come crashing down at some point? As one of those involved in responding to the crisis – and some might charge also a bit part in creating the conditions for it – I want to look this evening at how we got here.

One Norwegian krone was worth 0.40323 grams of fine gold. In the latter part of the 1800s, Norway benefited from free trade and free capital movements and became a relatively prosperous country. The standard of living in Norway did not lag behind that of Sweden. The currency union was maintained after the political union with Sweden was dissolved. The agreement lost its practical significance after the gold standard was suspended in 1914. The agreement was not formally terminated until 1972. From an economic viewpoint, the dissolution of the union in 1905 was a painless process. Economic developments were favourable up to World War I. International real interest rates have fallen The interest rate level is lower today than in 1905. In fact, Norges Bank has not allowed the key rate to be this low since the Bank was established in 1816. This partly reflects international conditions. In many countries interest rates were reduced considerably when the economic situation took a turn for the worse early in 2000. Interest rates adjusted for inflation, i.e. real interest rates, are now also low. Low real interest rates may be ascribed to several factors: Inflation has been low for such a long period that savers require a low premium as a hedge against unexpected inflation in the future. In order to prevent an appreciation against the dollar, many Asian central banks have been buying US government bonds, thereby pushing down yields.
When we consider the interest rates that are most important for households and businesses – i.e., longer-term real interest rates rather than the rates decided directly by the Bank – it is also important to realise to what extent monetary policy can affect those rates. The answer to this is that monetary policy only has a short-term impact on long-run real rates that are ultimately determined by underlying economic fundamentals, not least the interactions between the propensity to save and the impetus to invest. Let us now examine a few facts of importance in this context. First, it should be noted that international long-term real rates have been falling over the past three decades, as can be seen in Chart 1. 2  Chart 1: Real long-term Treasury rates on price indexed bonds 1985-2016 %  1985  1990 2015  1995  2000  2005  — International interest  2010  —Iceland  Rates on indexed long-term Treasury bonds (5-10 years). International interest rates are the simple average of rates for the US (from 1999), the UK, and Germany. The Icelandic data are compiled from data on initial offerings of Treasury savings bonds and yields on Housing Financing Fund bonds and indexed Treasury bonds. The figure from 2016 is the average through mid-November. Sources: Bank of England, US Federal Reserve Bank, Central Bank of Iceland. This development began long before the financial crisis.

As a result, we can even talk now about discouraged employers, as opposed to the periods that follow a crisis, when the employees are the discouraged ones. Thus, we have ourselves another dilemma: ensuring that wage levels are compatible with attracting investors, but acknowledging that, at least in certain areas, wages need to come up at present, in order to mitigate the labour force drain, which affects the private and public sector alike. The key is, in my opinion, to increase wages at an adequate, sustainable pace, so as to ultimately benefit from an improved living climate reflected in a higher purchasing power, but also from preserved macroeconomic equilibria, as well as higher-quality public goods – roads in particular –, because, after all, wages are not the only part of the emigration story. Speaking about roads, I would like to point out that infrastructure is essential for connecting different regions of Romania and promoting cohesion. This is all the more important that, even though EU membership has acted as a catalyst for country-level real convergence, the development gaps across the regions of the New Member States, including in Romania, have not diminished significantly. Let me conclude by recalling the words that Otmar Issing said during a dinner speech on his leaving the ECB, back in 2006, when things seemed to move into the right direction all by themselves: “We were all privileged to participate in a historically unique experiment: the creation of a new currency for Europe.
In the end, the most risky behaviour is one characterised by over-optimism, and lack of consideration of all the relevant risks. This means that when shocks occur, entities are unprepared and tend to react abruptly, causing problems for their institution and, sometimes, for the whole system. On the contrary, adopting a forward-looking approach, which takes account of the possible impact of broader changes in the cycle, should help institutions to avoid mistakes and bad decisions, and to detect and respond to problems in a smoother fashion and at an earlier stage. Conclusion In closing, I would like to thank you as risk professionals for your inputs to the various Basel Committee initiatives during my Chairmanship, especially Basel II. A unique element of Basel II is that rather than imposing a purely regulatory approach, it incorporates what the Basel Committee views as leading practices in bank risk management. In developing the revised Framework, the Committee sought to incorporate rigorous and comprehensive risk management approaches into the regulatory structure. We could not have come as far as we have without the advances in risk management that you in the industry have developed. Moreover, as industry practices continue to evolve, I believe the Framework is flexible enough that these advances can be incorporated on an ongoing basis. These past several years have been among the most interesting and challenging in my career, and I will always look back on the accomplishments of the Basel Committee over this period with a mixture of pride and humility.

We are also looking into how to better capture risks associated with banks’ trading book positions in credit derivatives and highly structured and complex products. The AIG has established a working group that is following up on the Committee’s July 2005 trading book guidance. This working group, in consultation with the industry, is in the process of identifying possible principles for the implementation of so-called incremental default risk charge for trading book capital, and will be exploring other issues related to the measurement and modelling of risk in the trading book. And work is also going on outside the auspices of the Basel Committee. Many of you are probably aware that the Federal Reserve Bank of New York and the UK Financial Services Authority, in conjunction with other supervisors of major credit derivative dealers, have encouraged the industry to focus greater attention on sound risk management practices and the infrastructure of the credit derivatives markets by improving controls around assignments, reducing confirmation backlogs and increasing the use of electronic matching platforms. Other supervisors are reviewing bank stress testing practices and potential risks arising from banks’ private equity activities and exposures to hedge funds. The Basel Committee supports these efforts, and members will continue to keep each other informed on the results of their reviews. Private sector initiatives The public good of financial stability is not just of interest to supervisors and public authorities, but also to the financial sector.
This conference is at the heart of the present phase of the evolving debate and I would like to thank the Bank of Greece and the Hellenic Observatory at the London School of Economics and Political Science for inviting me to contribute to this discussion. The general theme of this conference highlights the cost of the financial crisis, the policies being implemented to manage and resolve it, and the plans for an exit strategy. The financial, economic and social costs are indeed staggering, and they are likely to rise. A few figures will underscore the magnitude of the costs incurred so far. With regard to financial costs, the total writedowns on the assets of global banks over the period 2007-2010 have been estimated by the IMF at USD 2.8 trillion of which about one-third, just under USD 1 trillion, have already occurred. 1 In the euro area, the writedowns of banks reported so far, until early May, had reached USD 179 billion, roughly 18% of the total losses incurred by banks globally to date. The value of net wealth has also declined substantially since the turmoil erupted. For example, the market value of equity in Europe had fallen by EUR 3.65 trillion, or 45%, from its previous peak in July 2007 until late May 2009. 2 Finally, with regard to the economic cost of the crisis, one simple but encompassing measure is the aggregate output lost due to the recession that was triggered by the financial turmoil.

It is not easy, however, to disentangle the relative contribution to bank credit developments of demand and supply-side factors on the basis of the available evidence. Having said that, it is evident that the effects of the financial crisis on banks’ profitability and capital position have been sizeable. Banks’ efforts to deleverage their balance sheets and build capital and liquidity buffers are constraining, other things being equal, their lending to the private sector. So far, by early May 2009, write-downs on the securities and loans of large euro area banks amounted to USD 179 billion, which corresponds to just over 18% of the total write-downs of major banks globally (USD 986 billion). 9 Euro area banks have successfully raised capital from both private and public sources, amounting to USD 192 billion, which exceeds the recorded write-downs. 10 Of course, a key issue is the amount of potential further write-downs that could be faced by global and euro area financial institutions and the additional capital that should be raised by them to safeguard their solvency. Recently the IMF has estimated that the total amount of potential future write-downs of euro area banks could be around USD 750 billion, largely on their loan exposures. 11 This estimate, however, is based on assumptions and methodology that can be challenged and it is subject to a high margin of error. Estimates based on alternative methodologies and assumptions yield a much lower, yet sizeable, figure.
Similarly, if the aggregate supply is higher than the aggregate demand, the resultant excess supply will put pressure for the prices to fall. Then, it follows that, if someone desires to have price stability, he should try to equate the nominal aggregate demand with the given real aggregate supply. The price stability, in the context of a central bank, means the maintenance of a zero excess demand or excess supply in the total economy, commonly known as the macro economy. In that situation, all incentives for prices to rise or fall are non-existent. What is meant by economic stability in the broad objective of the Central Bank is the attainment and maintenance of this state. A central bank cannot be complacent until it has attained this level of stability. The way to attain that level of stability is to control the nominal aggregate demand by controlling the main force affecting that aggregate demand:  2  BIS Review 48/2007  the quantity of money in the hands of people. This is because in the long run, the general price level moves exactly in accordance with the movement of money supply. It led the Noble Laureate Milton Friedman to remark in his Noble Laureate Oration that “inflation is always and everywhere a monetary phenomenon”. What are the manifestations of the absence of that level of stability? There are two manifestations. First, people on average may not expect the general price level to remain stable in the future.

W A Wijewardena: Central Bank – why “economic and price stability”? Speech by Mr W A Wijewardena, Deputy Governor of the Central Bank of Sri Lanka, at the Association of Professional Bankers, Colombo, 23 March 2007. *  *  *  An amendment effected to the Monetary Law Act in 2002 requires the Central Bank of Sri Lanka to pursue “economic and price stability” as one of the two core objectives of the Bank. This is somewhat a departure from the central banks in the rest of the world which have been mandated to attain only “price stability”. Hence, it may be puzzling to many whether the Central Bank of Sri Lanka has been given an additional objective to attain. It is, therefore, timely to identify the precise meaning of this phrase “economic and price stability” in the context of a central bank. The amendment to the Monetary Law came as a part of the modernization program which the Bank commenced in 2000. One of the essential ingredients of that program was to update the Monetary Law to be on par with the emerging global best practices. Up to that time, the Central Bank had been entrusted with a multitude of objectives: attaining price stability, participating in economic development, preserving the external value of Rupee, protecting banks from collapse and maintaining the financial system stability etc. These objectives were not very clear and were often in conflict with each other. They also posed difficulties in monitoring the progress or assessing the success.
Over the next three years, this pool is expected to grow to $ trillion. BIS Review 91/2010  1  7. With such vast investment capacity, SWFs will play increasingly important roles in the international financial system. John Lipsky of the IMF noted that in the recent crisis, SWFs have been a positive and stabilizing force in providing capital to economies. Closing 8. The opening of NBIM’s Singapore office represents the start of a new chapter to the strong friendship and good relations between Singapore and Norway and to even closer cooperation between our investment agencies. 9. The Singapore office will certainly place NBIM in the heart of Asia; bringing NBIM closer to developments within the Asian markets and in the assessment of investment opportunities in the region. 10. 2  Congratulations on your office opening! Have an enjoyable evening ahead! BIS Review 91/2010

In mid-2007, serious problems with structured products backed by sub-prime mortgages put an abrupt stop to the boom in securitisation. False incentives, inadequate control mechanisms, shortcomings in the rating system and insufficient personal responsibility on the part of investors were the main criticisms aimed at securitisation practices. What is important now, is to correct these deficiencies, so that the trust of market participants in these products can be restored. It would be wrong to ban the securitisation of mortgages, since these refinancing instruments generate substantial economic benefit and are an indispensable part of our modern financial system. The mortgage securitisation weaknesses revealed in the financial market crisis do not apply in the case of the Swiss mortgage bond. Consequently, it should definitely have the potential to play an even greater role in maturity-matched refinancing of mortgages in Switzerland in the future. In addition, banks can improve their liquidity by holding portfolios of Swiss mortgage bonds themselves. Mortgage bonds could be converted into liquidity quickly and simply, as required, by means of repo transactions – either in the Swiss franc interbank market or at the SNB. BIS Review 60/2008  1
In addition, cross-country debt holdings and linkages between financial institutions led to contagion and the spread of systemic risk. Moving on to the macroeconomic dimension, it can be observed that in various countries, governments with large fiscal imbalances have now resorted to the narrowing of such imbalances, through the application of inevitable fiscal consolidation measures. These corrections have often met strong social dissatisfaction and political resistance. And yet, the budgetary restraint has not always been viewed as adequate from the point of view of the financial markets that seem to have limited patience for the measures to have a discernible impact on fiscal imbalances. For many governments, bond spreads remain wide. This fiscal restraint has also slowed down economic growth and this in turn has aggravated the budgetary deficit. Chart 5 shows the deficit as per cent of GDP for the euro area as a whole, along with the corresponding cyclically adjusted ratio. The light blue line in the chart shows where the deficit would have been without the economic 2  BIS central bankers’ speeches  slowdown that was caused in part by fiscal consolidation. The gap between the two lines illustrates the inevitable contribution of the economic slowdown to the deficit ratio. Still, the relatively small size of this gap post 2009 indicates that there is a strong structural element in the fiscal deficit. This explains why structural adjustments are so necessary. In response, the ECB has taken policy rates lower than any time during its history (as can be seen in Chart 6).

A subject that often comes up for discussion is the cost of living allowance or COLA. It has to be recognized that in Malta the allowance is determined on the basis of a basic or social wage, and COLA is a flat euro amount, granted regardless of the level of pay. This limits its impact on competitiveness. Nevertheless, the award of COLA is disconnected from productivity gains and hence may constrain firms’ ability to respond to changing market conditions. It also raises the risk of secondary cost increases after an initial price shock, which may come for example from an increase in imported prices. It may not be possible to neutralise such increases in imported prices and simply compensate for them in wages without significantly losing competitiveness of the enterprises concerned, especially if our competitors are absorbing these external shocks through an internal devaluation. It is relevant to note that the world economy is going through unusual times where some countries are undergoing internal devaluations. Malta cannot afford to be oblivious of the impact that these realities exert on its competitiveness. The list of euro area countries passing through significant corrections is impressive, namely: Ireland, Portugal, Spain, Italy, Slovenia, Cyprus and Greece. This apart from other non-euro area member states that are also going through difficult and corrective changes in their economies.