samchain/econo-pairs-v1 huggingface dataset:
Cycles in real activity sometimes reflect behaviour outside the influence of monetary policy. As Lawson (1994) put it, “I find it wholly unconvincing to believe that the credit cycle is caused simply by mistakes in monetary policy. Of course, such mistakes can exacerbate the cycle; but the cycle would be there without them. There is no way in which the monetary authorities can finetune bank lending, any more than they can fine-tune expectations”. That is why the framework introduced in 1997 explicitly recognises that the MPC would not attempt to bring inflation back to the target immediately following a large shock. As a result inflation might deviate from the 2.5% target by more than one percentage point. That would require the Governor to write an  16  BIS Review 68/2002  open letter to the Chancellor. Ed Balls explained in his Oxford lecture in 2001, “Some have assumed it [the requirement to write an open letter] exists for the Chancellor to discipline the MPC if inflation goes outside the target range. In fact the opposite is true. In the face of a supply-shock, such as a big jump in the oil price, which pushed inflation way off target, the MPC could only get inflation back to 2.5 per cent quickly through a draconian interest rate response - at the expense of stability, growth and jobs. Any sensible monetary policymaker would want a more measured and stability-oriented strategy to get inflation back to target.

Examples of how the option value to waiting can lead to significant increases in required rates of return are given in Dixit and Pindyck (1994). BIS Review 68/2002  9  Chart 6 Consumption and deflation in Japan, 1985-2002  Note: Inflation is measured using the consumer price index excluding foodstuffs. The overnight interest rate is the nominal overnight uncollateralised call rate. Source: Thomson Financial Datastream. (iii)  Aversion to long-term contracts and excessive resources devoted to hedging inflation risks. As we have seen, high inflation goes hand in hand with greater uncertainty about future inflation. Inflation is, therefore, associated with a positive risk premium to compensate investors for that uncertainty. The longer the time horizon, the greater the risk premium is likely to be. That discourages long-term contracts and interest rates in such contracts will often depend upon future spot interest rates. Floating-rate mortgages are a good example. With a floating-rate mortgage the borrower is exposed to the risk of sharp fluctuations in the proportion of income that is devoted to debt service, as many households in Britain still remember from the late 1980s when interest rates doubled to 15%. Fixed-rate mortgages eliminate that risk, but at the cost of introducing a new risk: the real value of the outstanding debt may change relative to the value of the house. John Campbell and João Cocco (2002) have suggested that a superior contract would be a fixed-rate mortgage where the principal was index-linked. That would reduce both income and capital risk.
Whereas monetary policy requires a highly trained but small cadre of economists in the head office of the central bank, large numbers of supervisors are needed, often spread across the country, to deal with a multitude of new banks with poor quality accounts. And the skills of assessing risk and the quality of management have not always come easily to staff from a bookkeeping background whose instincts are to tick boxes rather than make judgements. Staff who have acquired the skills needed are frequently enticed away to work for commercial banks at higher salaries. (iii) Managing government debt Another field in which central and eastern European central banks are generally more heavily involved than their western counterparts is in the management of government debt. (Hungary, where there is a separate debt office under the Ministry of Finance, broadly on the Irish model, is again an exception.) Under the old regimes governments relied on their state banks for finance, but the new statutes of the central banks - usually following an IMF model limit the provision of finance to government. Ceilings are mostly around 5% of government revenues, though in Estonia and Lithuania they are zero. With monetary financing restricted, new methods of financing governments have had to be developed and nearly all the central banks have taken a leading part in this process. Even where the government’s own financing needs have been small, as in the Czech Republic, central banks have been keen to establish markets in short-term paper in which they can conduct monetary operations.

Several of them have issued their own bills for this purpose, particularly where in the early years the finance ministry was reluctant to issue government paper. Whether the market being developed is in government, central bank or private paper, the central banks have had to strike a difficult balance in deciding how frequently to intervene in the markets. In the absence of intervention, a market can remain illiquid and unused. But if the central bank intervenes too much and holds prices too steady, then private market-makers will not develop. This dilemma is not unique to transition countries. Similar dilemmas arise elsewhere, and some western central banks still sometimes play a role, if only a marginal one, in balancing supply and demand in the domestic securities and foreign exchange markets. (iv) Payment and settlement systems One area of activity in which the new central banks do mirror the diversity of their western counterparts is in responsibility for payment and settlement systems. Of the nine central banks in central and eastern Europe, five operate the main clearing system themselves. In the other four countries the position is roughly as it is here, with the central bank participating BIS Review 33/1997  -8-  in, and providing final settlement for, a privately owned clearing system. In Russia the central bank has been slow to develop its own payment system, and commercial banks have been putting parallel mechanisms in place.
The mainland of China continues to see impressive growth under an economic system that is to a great extent insulated from the turmoil, while Hong Kong, the world’s most open economy, is passing through a sharp but hopefully also a short recession. While they vary from place to place, the effects of the current crisis are clear enough. What we see throughout the region, in differing degrees, is a sharp wealth loss, manifested in sudden capital flight, asset price collapses, and threats to currency and banking stability. These in turn have had macroeconomic consequences, such as declining or negative growth, growing unemployment, and deflation. They have, in economies as different as Thailand and Japan, brought to the surface severe structural weaknesses in financial systems. Quite why this should all have come together within the few months that followed the sudden collapse of the Thai Baht almost exactly eighteen months ago is something of a conundrum. There was no dramatic change in underlying economic fundamentals, which were, by conventional measures, healthy. Indeed, the financial turmoil in Asia erupted so quickly and unexpectedly that economists found it necessary to put forward special explanations. The explanations fall into two main schools of thought: their differences derive more from the emphasis they place on different factors than from any fundamental contradiction, but the logic of their conclusions points to different solutions.

This is not surprising, for even though the euros (and dollars for that matter) are happily accepted in Swiss shops, cafés, and hotels, the exchange rate is usually unattractive and the change is given in Swiss francs. Shopkeepers and restaurant owners are not in the business of providing financial services, and foreign tourists are still better off changing their euros at banks or using their credit cards. True, Swiss firms use the euro extensively, some do much of their billing in the European currency, and some have even switched their accounting to euros. Some natural hedging takes place as well, although it is not clear how efficient this is. It is noteworthy, however, that some of the largest firms do much of their billing and  2  BIS Review 35/2004  their accounting in dollars, while others quite happily continue to use the Swiss franc. The fact that “euroization” has not taken place should not really surprise us. There have been other examples of small independent currencies surviving in the neighbourhood of much larger monetary zones. The example of the Canadian dollar comes to mind. The loonie has been floating for the past several decades, and it has served Canada rather well. More generally, there is nothing to be gained in having more than one currency for transaction purposes. Much of the double coincidence of wants gets lost if several currencies circulate simultaneously. “Dollarization” only occurs in those countries where hyperinflation threatens.
As a Welshman now working in Threadneedle Street, I appreciate that the Bank of England can appear a remote institution, apparently focused on the City of London and far away from the day-to-day concerns of people living elsewhere in the UK. The work of the Agencies provides a bridge between the Bank and the households, businesses and communities it serves. Through my discussions over the past couple of days, I have learnt about how Brexit has affected trading relationships on the island of Ireland and across the Irish Sea. And our Citizens Panel on the cost-of-living emphasised the distinctiveness of the retail energy market in Northern Ireland, which has been in focus of late given the sharp rises in utility bills. I am not going to discuss those issues this evening – although I realise that they are important, as well as politically and economically sensitive. I have been in listening mode, and can now take some of the lessons learnt back to our deliberations at the Bank. I originally hoped to spend the bulk of my time exploring the macroeconomic motivations underlying MPC decisions in the past few months. I hope to return to those issues in a moment. But given recent events and actions, it would be remiss of me not to address market developments. Over the course of the past week, there has be a significant repricing of financial assets. Part of  Page 3  that re-pricing reflects broader global developments.

In pursuit of the inflation target, the MPC employs monetary policy – changes in Bank Rate – to steer aggregate demand in the UK economy around the trends in aggregate supply, so as to relieve current inflationary pressures. The relevance of recent market developments to our monetary policy decisions stems from how those developments influence our efforts to come to an appropriate balance between demand and supply. But crucially, the impact of market developments has to be seen in the context of all the other important macroeconomic influences on demand and supply, including the impact of fiscal measures announced by the Government in the past few weeks, as well as developments in energy prices and labour markets that my colleagues and I have discussed in the past. The vehicle for making that necessarily comprehensive assessment is our MPC forecast. The process of producing that forecast ahead of the MPC’s next scheduled meeting in early November is already well underway. That assessment will need to embody recent evidence of weakness in economic activity, as well as the impact of the Government’s Energy Price Guarantee on headline inflation and wage and price setting behaviour. It will have to factor in the evolution of international commodity prices, not least developments in wholesale natural gas markets. And it will need to assess the impact of the Government’s Growth Plan and other fiscal announcements in detail. I don’t have time to discuss all that this evening.
Thomas Jordan: Monetary policy in the financial crisis – measures, effects, risks Speech by Mr Thomas Jordan, Chairman of the Governing Board of the Swiss National Bank, at the Swiss Banking Global Symposium, Zurich, 16 November 2012. *  *  *  The speaker thanks Mathias Zurlinden for his support in preparing this speech. He would also like to thank Katrin Assenmacher, Rita Kobel and Peter Kuster for their helpful comments, and also extends his thanks to the English Language Services. When the Swiss Bankers Association was founded 100 years ago as Vertreter des schweizerischen Bankgewerbes, or Representatives of the Swiss Banking Trade, this step was warmly welcomed by the Swiss National Bank (SNB). Surprisingly, perhaps, the senior representatives of the SNB were even members of the Association between 1916 and 1937. Since that time, of course, the role and the tasks of central banks have changed significantly. It would be unthinkable for the SNB nowadays to belong to a private sector interest group. Nevertheless, I am happy to observe today that the relationship between the SNB and the Swiss Bankers Association has remained good and reliable over the years. The Swiss Bankers Association has been a key dialogue partner for the Governing Board on all matters relating to the financial centre, and continues to be so. My topic today is the monetary policy which central banks have pursued during the past few years to manage the financial and economic crisis.

The objective is to prevent severe damage to the Swiss economy from a very substantial and possibly longlasting overvaluation of the Swiss franc. Accordingly, the SNB has set the minimum exchange rate at a level where the value of the Swiss franc remains high. Impact and risks When evaluating the accommodative monetary policy and unconventional measures, we need to take account of effects as well as risks. What can we say about the effects? The way I read the available data, conventional and unconventional measures taken by central banks have made a decisive contribution to preventing the global economy from drifting into deflation and depression. However, the slow recovery reminds us that monetary policy is not omnipotent and is not in a position to solve all problems. Fiscal consolidation and the structural reforms required for the improvement of growth potential in many countries cannot be replaced by monetary policy measures. An evaluation of the impact of the individual unconventional measures is more difficult. The simplest to assess is the minimum exchange rate. This instrument has made a decisive contribution to stabilising the Swiss economy. The export industry is gaining ground again, and the deflationary expectations that were threatening to take hold were checked. It is more difficult to assess the impact of forward guidance and quantitative easing. Certainly, longterm interest rates have fallen to record lows this year in some areas. However, it is likely that the deterioration in the economic outlook and the flight to safe investments also played a role in this development.
But this is not the same thing as needing to put those plans into action. Concluding thoughts I would like to carefully emphasise that what I have taken up regarding economic activity and monetary policy should not be interpreted to mean that in a sudden outburst of uncontrolled optimism I have a much brighter view of the coming period than most others. And my message today does not contain anything new in relation to what I said at the most recent monetary policy meeting. I can assure you that I am aware of the seriousness of the ongoing downturn. And it is not a question of my being hawkishly “trigger-happy” and wanting to raise the interest rate again as soon as we see the slightest sign of a recovery. I believe, like my colleagues, that we need to maintain a low interest rate for a relatively long period of time. What I want to say is rather this: I believe it is easy to become a hostage to the situation when all of the figures are falling and to put a large emphasis – possibly too large – on the downside risks. And, of course, one cannot rule out the possibility that the crisis and the economic downturn will be more protracted and more profound than we are now assuming.

But consumer spending appears to be weak, nominal wage growth remains relatively muted and once we strip out the impact of rising commodity prices, output price inflation has been steady. To paraphrase Sherlock Holmes, if expectations have become detached, it is curious that those dogs haven’t barked. So in my view the news on that front has been encouraging. The impact of the credit crunch And of course, we have been balancing that upside risk to inflation from the commodity price shock against a downside risk that the credit crisis would drive down activity too far and push inflation below target in the medium term. And the news on that front remains worrying. The headlines are about the drama on Wall Street but the failure or rescue of even big and well known financial firms matters mainly because of their knock on impact on the wider economy. The last year has brought home once again why central banks have to be concerned with financial stability as well as monetary stability and inflation. For the biggest risk to the financial sector is also the biggest downside risk to the economy: namely that damage to bank balance sheets would lead to tighter credit conditions, lower asset prices, lower consumption and investment and to a severe feedback loop into more losses for banks and so on down a spiral. That feedback is already working to some degree not just in the US but in the UK too.
The writer recalls him saying “…if you have only price stability, then you would fall into the trap of attempting to stabilize a price index which is not what is meant by price stability, in the context of a central bank. The attainment of price stability for a central bank means elimination of both excess demand and excess supply in the market so that the market is free of potential inflationary or deflationary pressures” At that time, many in the Central Bank, including the present writer, did not fully understand the wisdom enshrined in that statement. It even led to confusion by many that the Bank had been mandated to stabilize the growth rate as well, in addition to the stabilization of prices. Accordingly, some even charged that the Bank had failed in its tasks, when there was a negative growth in the economy in 2001. In hindsight, it can now be discerned that Mr. Jayawardena’s wisdom was to present the price stability in its totality rather than as a sub part of the issue. We could illustrate this point as follows: An economy produces goods and services, numbering millions, for use by its members. The total of these goods and services, when they are offered in the market, is called the aggregate supply. This aggregate supply consists of real goods and services which the users can consume or use as inputs for further production. Hence, it is known as a real quantity, quite distinct from an imagined or assumed quantity.

In the short and medium term, the crisis will have desinflationary effects that are already noticeable, with inflation temporarily falling in August by 0.2% in the euro area, and by 0.1% in Germany. For a year as a whole, we are expecting a slightly positive inflation of 0.3% in 2020 and 1.0% in 2021. As you know, we unfortunately remain well below our inflation target of "less than, but close to 2%". The other aspect of the response to the health crisis are fiscal measures, primarily at the national level. Germany clearly made greater use of the financial leeway it had built up since the 2009 crisis. Its fiscal stimulus package (as a percentage of GDP) is at this stage greater than France’s. The effectiveness of its stimulus package is still difficult to anticipate: in particular, the 2/4  BIS central bankers' speeches  temporary reduction in VAT appears costly. The French government also announced a EUR 100 billion stimulus package last week. I wish to mention three positive features. It focuses on business supply and investment, and not household demand. This is fully justified, since households, protected by short-time working measures, except for the most vulnerable ones, will have saved nearly EUR 100 billion this year. This plan also has a strong focus on transformation, including ecological reconstruction - a third of the funds are allocated to this area.
11  All speeches are available online at www.bankofengland.co.uk/news/speeches  11  There are three ways to measure the scale of the UK investment underperformance. -  First, by using evidence from the Bank’s Decision Maker Panel survey of companies. 8 Since the referendum, Brexit has ranked as one of the three most important sources of uncertainty for over one third of respondents to this survey – and for one half since autumn last year.9 Investment growth has been persistently weaker among these companies (Chart 10), reducing total business investment by an estimated 6 to 14%. -  Second, by comparing the performance of business investment in the UK with the rest of the G7. Prior to Brexit, UK business investment was growing in line with the average across the rest of the G7. Since then, it has risen by just 1% in the UK, while it is up by 12% on average elsewhere, and by 16% in the US. -  And third, by comparing to pre-crisis trends. The current level of business investment is some 20% below the MPC’s projection from May 2016, conditioned on a vote to remain. These three approaches average to a 12% hit to UK business investment caused by Brexit uncertainty. To compare that to what markets may be pricing in for global trade effects, consider that expected policy rates in the US have fallen by around 150 basis points since the first trade measures took effect in July last year.

I can only add that combining these ingredients - the vision, the will and the power of knowledge - form the leader, regardless whether we talk about politics, managements, or science. Having in mind education and network you have gained  1/2  during the EMBA course you have the best assumptions to succeed. I wish you all the very best in your further professional carriers. 2/2