samchain/econo-pairs-v1 huggingface dataset:
Mr Bäckström asks the question “Is there a new economy?”  Speech given by Mr Urban Bäckström, Governor of Sveriges Riksbank and Chairman of the Board of Directors and President of the Bank for International Settlements, at a conference arranged by the Stockholm Chamber of Commerce and Veckans Affärer, held in Stockholm on 25 January 2000. *  *  *  First a word of thanks for the invitation to attend this conference and discuss matters to do with the question “Is there a new economy?”. Besides considering that issue, I shall be looking at other factors that may affect economic developments in Sweden, together with their implications for the future construction of monetary policy. Monetary policy aims at promoting economic stability The Riksbank’s primary concern is, as we all know, the future path of inflation. But our deliberations about how to keep inflation at a low and stable level can equally well be described as the Riksbank’s endeavour, with the aid of the repo rate, to ensure that the economic trend in Sweden continues to be favourable. This is because in most situations the task assigned us by the Riksdag (Sweden’s parliament) - “to maintain price stability” - amounts to acting so that the development of production and employment in Sweden is as stable as possible. There have certainly been times when a tightening of Swedish monetary and fiscal policy has led to an economic downturn and increased unemployment.

The problem we face is that unemployment’s critical level cannot be identified for certain and we do not know when shortages and rapid wage increases will actually arise. Estimating these matters is difficult and the results cannot be taken for granted. It is therefore hard to tell how much scope there is for a temporary phase of economic growth above the long-term trend. The ability to look ahead and formulate monetary policy cautiously is particularly important when an economy is moving further and further along an upward phase. Otherwise there is a risk of price and wage increases accelerating so that the brakes have to be applied more abruptly later on, leading to a situation that is worse than would otherwise have been the case. Thus it is in this phase of rising activity that we can be said to influence the depth of the next slowdown. It was the overheating in the late-1960s, the mid-1970s and the end of the 1980s that set the stage for the subsequent deep troughs. And each recession was worse than its predecessor. Looking back, it is easy to see that economic policy ought to have been tightened much earlier than was the case on those occasions. At the same time, it has tended to be difficult, not least in fiscal policy, to take such measures sufficiently early, particularly as that needs to be done before the problems are clear to everyone.
The euro area is currently witnessing a process of rapid disinflation, mainly driven by the marked decline in global commodity prices since last July and associated base effects. This is likely to cause a U-shaped profile for headline annual inflation in the course of 2009. We expect headline annual inflation to fall further in the coming months, temporarily reaching negative levels in some months around mid-year. Thereafter, annual inflation rates are expected to increase again in the latter part of 2009. Against the background of these price developments, is there a reason to be concerned about deflation? In my opinion, the risk of deflation in the euro area remains very limited. What we are experiencing in the euro area is a disinflation process reflecting reduced inflationary pressure in the supply chain due to lower input costs, a moderation of wage increases and stronger competition in a context of falling demand and excess capacity. This temporary disinflation does not constitute a persistent, broad-based and self-sustaining  12  See European Commission (2009)  13  General government debt of euro area governments was 77.4% of GDP in 1997, and had reached 69.1% in 2007. BIS Review 65/2009  7  decline in the overall price level, which may be reinforced by the anticipation that prices will decline further in the future. On the contrary, expectations of inflation over the medium to long-term are solidly anchored at levels consistent with price stability.

This outcome reflects the extremely low level (0.25%) of the ECB’s deposit rate and the Bank’s management of liquidity in the interbank money market. The very low level of interest rates in the euro money market and the generous provision of funding by the ECB to the banking system have gradually resulted in a marked decline in bank lending rates, especially on short-term credit to the private sector. 8 More generally, the real average cost of financing for euro area non-financial corporations has declined by 43 basis points over the past five months to 4.47%, from its peak level reached last October. However, the cost of financing for speculative-grade-rated firms (i.e. the high-yield segment of the corporate bond market), although it has also declined somewhat, remains at unusually high levels (at about 19% in nominal terms), reflecting the continuing high degree of risk aversion of investors that has prevailed since the intensification of the crisis last fall. Despite the improved conditions in the euro money market and in the average cost of bank lending to the private sector, bank credit standards have remained tight and the annual rate of credit growth to the private sector has decelerated steadily. Indeed, in recent months the flow of credit to both firms and households became negative. These developments partly reflect the reduced demand for banks loans by both households and firms. But they are also partly a consequence of the deleveraging of banks’ balance sheets and persisting stresses in the bank wholesale bank funding markets.
And we can see this clearly when we study developments adjusted for absence due to sickness (Figure 8). Here we can see that the average working hours have shown a declining tendency even when adjusted for people who have not worked due to illness. Compared with the period 1994-1995, average working hours have declined by around 3 percentage points and the negative tendency is particularly strong after 1999. Moreover, the other curve in my diagram - for the number of employed shows that the growth in working hours last year was curbed by a lower increase in employment. This was in turn a result of the economic slowdown no longer affecting just manufacturing, but also the services sector. The decline in working hours appears to depend on three main factors, apart from increased absence due to illness. The first factor is an increase in other types of absence than illness, e.g. holidays or looking after sick children. The second is a decline in the amount of overtime worked and a reduction in the working hours agreed between employers and employees. The third factor is a shift where more people choose to move over from full-time to part-time work. The relative significance of structural and economic factors in this context is again difficult to assess. There are many indications that variations in overtime are particularly affected by economic activity. Although it is more difficult to determine how this relates to the other factors.

The assessment made by the Riksbank so far is that average working hours will show a tentative rise when economic activity improves. To summarise, there is reason for considerable concern regarding the future labour supply. If there is reason to be slightly more optimistic over productivity growth, the opposite applies to the labour supply. A number of factors, such as demographic developments, absence due to illness and the proposal for shorter working hours all indicate a decline in the labour supply over the coming decade, unless there is a change in policy. 4  BIS Review 16/2003  Future potential growth What does all this mean for the assessment of the economy's potential growth capacity right now and in the coming years? If we uncritically assume the simple model I outlined earlier, we could calculate an estimate of potential growth by simply adding together the trend values I showed in the diagram on productivity growth and the number of hours worked. I have done this in my next diagram (Figure 9). Measured in this way, potential growth was just over 1.5 per cent up to around 1992. Since then it has risen gradually to approximately 3 per cent in 2001. However, my discussion of the causes of the decline in actual growth in recent years showed that there are good reasons to believe that 3 per cent is an overestimate of the growth potential in the Swedish economy today.
I wonder whether the ECB’s behavior has been limited much more by its status than by the country in which it is headquartered. I suspect even more that Germany’s insistence on strict observance of ECB rules stems from a fear that any lenient interpretation will lead sooner rather than later to the total subordination of minority interests in the eurozone, i.e., the interests of savers, i.e., German interests. i. Anyway, I am afraid that the ability of economic-based reasoning to influence events is gradually declining. Future events will be influenced more and more by decisionmakers’ communications and gestures or by accidents unplanned by anybody. As an example of the latter, consider how Greece’s tourism income might develop this year and the next if its major electricity supplier occasionally switches off supplies due to payment problems, thereby shutting down air conditioning in hotels. j. But now I am straying away from the topic of imbalances, so I’d better pause to venture one final observation. Germany is currently under financial stress and is full of middle-class savers who are angered by the perceived failure of their state. This situation, I believe, has never been in the interests of my country or in the interests of Europe. Some of us may like to contemplate this a bit. Possible questions for the panelists (as I have already spoken enough I will reserve myself for the second round of Q+As): a. How has the financial crisis modified the world-wide pattern of creditor-debtor countries? b.

It is generally a country of small savers. The median household has more financial assets than liabilities. c.  There is no significant stress in its financial sector at the moment, and none is expected by my central bank in its role of both macroprudential authority and financial market supervisor. d.  We have an extremely open economy. Exports and imports are roughly equal to 80% of GDP, mostly with the EU. e.  Our major trading partners are the EU and Germany, where there are still quite a few opportunities. 3. Consequently, like all of us I have no desire to see the crisis deepen. However, before I stress a few different issues than the intended speaker, let me borrow some introductory sentences for these topics from Philip Coggan’s Paper Promises: Debt, Money, and the New World Order, 2011: “Economic history is a battle between creditors and debtors, with the nature of money the territory over which they fight. Money has two core functions; as a means of exchange (paying for your daily Starbucks) and as a store of value (making sure you can still afford a Starbucks in old age).
18 Ghosh, AR, Ostry, JD, and Qureshi, M (2016), ‘When do capital inflows surges end in tears?’, American Economic Review. Surges are defined as a net capital flow observation that lie in the top thirtieth percentile of both the country-specific and the full sample’s distribution of net capital flows, expressed in percent of GDP. 12  7  All speeches are available online at www.bankofengland.co.uk/news/speeches  7  percentage points faster, all else equal, the typical EME with higher capital flow volatility will grow 0.7 percentage points slower.19 Following their experience of successive crises, EMEs have responded to these pressures by following the conventional wisdom to “keep their houses in order.” Over the past two decades, inflation targeting has been widely adopted, fiscal policy is generally improved, and macroprudential policy is increasingly active. Bank analysis finds that, for EMEs as a whole, reforms to these domestic institutional “pull” factors have substantially increased the sustainability of capital flows, all else equal (Chart 5).20 But unfortunately for EMEs, all else is not equal. Their efforts have not been sufficient because of the consequences of the growing asymmetry between the importance of the US dollar in the global financial system and the increasingly multi-polar nature of global economic activity. Monetary policy and financial stability shocks in advanced economies have become more prevalent and more potent, increasing the importance of “push” factors in driving capital flows.

The purple bars build on the contribution of pull factors to the conditional 5th percentile of capital flows in the current quarter and two quarters ahead. Pull factors are proxied by domestic financial condition indices (DFCIs), which are mean-orthogonalised by a global financial conditions index (GFCI). The coefficient on the DFCIs is estimated by panel quantile regressions. Push factors are proxied by the Bank of England’s global financial conditions index. The chart shows PPP-weighted averages across the 13 EMEs in our panel. Chart 7: For EMEs, market-based finance accounted for all the increase in foreign lending since the crisis Structure of external liabilities for emerging market economies  Sources: IMF, EPFR and Bank of England calculations  20  All speeches are available online at www.bankofengland.co.uk/news/speeches  20  Chart 8: Market-based finance flows are particularly sensitive to push shocks The sensitivity of Capital Flow-at-Risk to push factors, by source of capital flow FDI  Banking  Market-based finance  of which: investment funds 0 -1 -2 -3 -4  Median  5th percentile  -5 Capital Flows-at-Risk as a % of GDP  Sources: IMF, EPFR, Bank calculations. Notes: Chart shows the sensitivity of different capital flows to a negative "push" shock. Coefficients are standardised by each component’s share of total flows e.g. the red MBF bar shows how total Capital Flows-at-Risk would respond to a one standard deviation tightening in global financial conditions if all capital flows were accounted for by MBF.
They like to ask the question: “Does the Investment Banker know the difference between right and wrong?” To which the answer is: “Of course he does, provided he’s allowed two guesses!” Having arrived at the Bank over three years ago, I am often asked what I actually do there. And the answer is that I have three main roles. First, I am one of the nine members of the MPC; secondly, I have responsibility for the Bank’s work in financial stability; and thirdly, I have day-to-day responsibility for the management of the Bank. One way or another, wearing these three hats involves me in most of what the new Bank of England does - new in the sense that the 1997 changes, incorporated in the Bank of England 1998 Act, were fundamental to the Bank’s activities. Without providing a personalised “this is how I spend my day” account we occasionally read in the newspapers, perhaps I could say a little about each of these roles. Monetary Policy Committee Being a member of the Monetary Policy Committee is a hugely rewarding experience. The process we go through has been quite well documented elsewhere so let me be brief in my description. We are required by the 1998 Bank of England Act to meet at least monthly, although we have the right to meet as often as we wish.

Perhaps I could close at this point by thanking you for coming. I have got a few points “off my chest” - and I hope for your part I have made a few points which have been of interest. 7  BIS Review 102/2000
•  The statement entitled Summary of the Monetary Policy Committee Discussions will be published within 8 working days following the meeting with the title Summary of the Monetary Policy Committee Meeting, alongside its English translation. •  As of July 2006 the “Price Developments” report started to be published to provide an accurate understanding of inflation data. This report will be published within 2 working days following the announcement of inflation data. BIS Review 1/2007  5  •  Besides all these statements, presentations and speeches made by the Governor and the Committee members will be shared with the public from time to time. •  Moreover, the research papers, booklets, and technical notes published by the Central Bank and organized conferences will continue to be a part of the communication policy. The publication calendar for the Inflation Report and the Financial Stability Report along with the Monetary Policy Committee Meeting dates are presented in the Appendix. Meeting dates have been determined by taking into account such factors as official holidays, national and religious festivals, and the data flow calendar. Exchange rate policy and foreign exchange buying auctions Along with inflation targeting, the Central Bank will continue to implement a floating exchange rate regime in the upcoming period. In the floating exchange rate regime the FX rate is neither a target, nor a policy tool. The only variable that the Central Bank sets as target is inflation and the main policy tool to achieve this target is short-term interest rates.

1  16  All speeches are available online at www.bankofengland.co.uk/speeches  16
Together, these economic forces have contributed to significant job losses in certain sectors, most notably manufacturing. The resulting decline in demand for middle- and lower-skilled workers has resulted in fewer jobs and has depressed wages for many in those industries. Other, less important factors behind the rise in inequality include the decline in private sector labor unions and the falling real value of the minimum wage. At the same time, technological change and globalization have created jobs in areas such as engineering and software development. Demand has been particularly high for knowledge workers, resulting in strong wage growth in certain sectors. All told, the forces of technological change and globalization have contributed to wage inequality by pushing up wages for those toward the top, and stifling wage growth for workers toward the middle and bottom of the wage distribution. As I have said in previous remarks, we need to do a better job of helping those hurt by globalization.2 Monetary policy can help support economic growth, but it is much less powerful in addressing the structural factors that underpin inequality in the labor market. That said, understanding the causes and consequences of economic inequality is important to the Fed. We are working hard at producing research, information, data, and analysis so that we can better understand inequality and participate in an informed debate on how to best address it. One significant initiative within the Federal Reserve System is the creation of the Opportunity and Inclusive Growth Institute at the Minneapolis Fed.

While the “rags to riches” story has been a popular theme in U.S. history, income mobility in the United States is now notably lower than in many other advanced economies. Unfortunately, substantial differences in economic mobility exist within the United States. Important research by Raj Chetty and his co-authors suggests that upward mobility strongly depends on where one grew up.4 That is, places themselves seem to have a measureable effect on economic outcomes for children as they reach adulthood. In particular, this research indicates that higher upward mobility is associated with areas that are less residentially segregated by race or income, and that have higher-quality schools, stronger social networks, greater community involvement, and stable family structures. Significantly, they find that places with greater upward economic mobility tend to have lower income inequality. This evidence suggests that there is a fundamental inequality of opportunity for advancement that is tied to where people live. Reducing inequality of opportunity is something we should all work toward. Directions for Policy So, what are some specific ways policy can address inequality and improve economic mobility? While this is a difficult and complex set of issues with no easy answers, I do have a few thoughts. First and foremost, we can improve the quality of education for our most vulnerable citizens. Children who attend better schools and attain higher levels of education have more favorable long-term outcomes, including better job prospects and higher earnings.
2  This certainly requires a strong commitment from us, placing a special emphasis on drawing conclusions based on sound research and analysis. In addition, and also importantly, it calls for our proactive engagement in a practical experimentation phase that can shed light on the nature and scale of the pain points, problems and underlying threats, and also on potential solutions. That is why while the issuance of a digital euro is not foreseen in the immediate future, the Eurosystem has a keen interest to tackle the challenges arising from possible future scenarios. As you may know, many other central banks2 are already analysing this possibility. Along these lines, you may have already heard about the tests that the People’s Bank of China is currently carrying out in a number of provinces, or the extensive work that preceded the well-publicised e-krona pilot in Sweden. You may also be aware of the Fed’s recent announcement of its intention to remain on the frontier of research and policy development regarding CBDCs.3. As ECB President Lagarde mentioned a few weeks ago,4 earlier this year the Eurosystem decided to set up a taskforce to explore the benefits, risks and operational challenges of introducing a digital euro. The results of this work will soon be shared publicly. However, this is only the first step in a more profound reflection that still has to take place.

The crisis severely eroded people’s trust in the industry, both here and abroad. Governments and regulators quickly got to work fixing the main deficiencies in the existing regulatory framework. These included requiring much stronger loss-absorbing capital to weather severe economic downturns, demanding greater liquidity cushions to withstand market and funding disruptions, and creating a robust resolution framework to protect both the economy and the taxpayer in the event of a failure of a systemically important firm. These changes were appropriate and necessary. We must not lose sight of their importance in safeguarding the soundness of the financial system and in ensuring that future generations do not have to suffer the economic trauma that we lived through this past decade. Bringing us to the present day, we are in a much, much better place, in terms of both the financial sector and the overall economy. We have a more robust regulatory regime in place, and banks are well positioned to survive future storms. Furthermore, our economy’s in great shape; we’re in the second-longest expansion in history, and economic data from both the United States and countries around the world continue to trend upwards. As a policymaker, solid growth, a strong labor market, and inflation near our target are all exactly what I want to see. Paradoxically, it’s precisely this sense that things have gotten so much better that worries me most.