samchain/econo-pairs-v1 huggingface dataset:
William C Dudley: US monetary policy and its global implications Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Central Bank of the United Arab Emirates, Abu Dhabi, 13 November 2014. *  *  *  It is a pleasure to have the opportunity to speak with you here today. In my remarks, I will assess the outlook for the U.S. economy and the progress that the Federal Reserve has made toward its dual mandate objectives of maximum employment in the context of price stability. I will argue that we are now closer to achieving these objectives. That is the reason why the Federal Open Market Committee (FOMC) ended its latest Treasury and agency MBS asset purchase program last month. But we still have further to go. Although the U.S. labor market has shown substantial improvement, there still is a meaningful gap between where we are and full employment. Also, inflation continues to undershoot the FOMC’s 2 percent objective. This argues for patience with respect to the timing of lift-off of the federal funds rate and the beginning of the normalization of monetary policy. Although patience is appropriate, if all goes well, I anticipate that we will begin to raise short-term rates sometime next year. That would be a welcome development, because it would indicate that the U.S. economy has largely recovered from the damage caused by the housing boom and bust, and the financial crisis.

So what does this assessment of the outlook imply for monetary policy? Since September 2012, when the last program of asset purchases was announced, there has been substantial improvement in the labor market outlook. Because the asset purchase program had fulfilled the FOMC’s stated objectives, the FOMC decided to end the program last month. At the same time, it still is premature to begin to raise interest rates – there remains slack in the labor market and the inflation rate is still too low. Hence, the last FOMC statement states: “The Committee anticipates, based on its current assessment, that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program this month.” But this sentence should not be viewed as an iron-clad commitment. As the statement goes on to say: “However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.” In other words, what the FOMC does going forward will depend on how the economy evolves, and how this affects the labor market and the inflation outlook. In considering the appropriate timing of lift-off, there are three important reasons to be patient.
I would caution against over-interpreting the detail of this chart, as there are several ways to represent aggregate supply and demand, and thus the output gap. But, detail notwithstanding, it is clear that while a gap has opened up between demand and supply during the Covid pandemic, the overwhelming feature is the coincident hit to both demand and supply. That stands in marked contrast to the more pronounced impact on demand following the global financial crisis, and persistent period of spare capacity thereafter. As well as the Covid shock, the behaviour of supply and demand also reflects the nature of the policy response, and in particular the so-called furlough scheme (the Coronavirus Job Retention Scheme). By temporarily supporting jobs, this scheme has avoided a much larger spike in unemployment, which would other things equal have resulted in a smaller fall in supply and a much wider margin of spare capacity. For a monetary policy maker interested in the output gap and how it will evolve in the recovery from Covid, it is clear we need to focus on the recovery of both supply and demand. More so than usual, the recovery from Covid requires a recovery of the supply side. Some of the effects on supply directly related to restrictions on activity and voluntary social distancing are likely to be temporary, and should start to reverse as the health outlook improves and along with the vaccination programmes enable restrictions to be eased.

BIS Review 25/1997  - 10 -  Since then the Czech crown has been pegged firstly to a basket of the currencies of five major trading partners and since 1993, with a view to the development of the currency breakdown of foreign payments, to a two-currency basket (65 per cent Deutsche Mark and 35 per cent US dollar). The improvement in macroeconomic stability and relatively high foreign exchange reserves created good starting conditions for the gradual extension of the Czech crown’s convertibility. Some additional measures were taken in 1994 by means of an amendment in August 1994 to the Foreign Exchange Act. This amendment made it possible to export securities denominated in Czech currency; foreign exchange permits for direct investment outside the Czech Republic were provided to virtually all applicants and permit procedures for obtaining foreign exchange credits from abroad and for equity participation abroad were simplified. Effective October 1, 1995 the Czech currency became convertible in accordance with Article VIII of the IMF Articles of Agreement, and the country became a member of the OECD. Under the new Foreign Exchange Act the current account of the balance of payments was liberalised and the regulation of the capital account was substantially reduced. Only the establishment of accounts abroad by residents, the outright purchase of securities by residents, the provision of financial credits to non-residents and real estate purchases by non-residents continue to be subject to regulation.
Petroleum revenues are gradually phased into the economy, approximately in pace with the expected real return on the Government Petroleum Fund.” The first sentence can be seen as a justification for a gradual phasing in of petroleum revenues. A phasing in of revenues based on using the expected real return on the Petroleum Fund must be said to be reasonably controlled and gradual. Another aspect is that the plans do not call for using the actual wealth. However, the expansionary impetus to the economy in any one year will depend on the time profile for the accumulation of capital in the Petroleum Fund. 8  BIS Review 7/2002  There was broad support in the Storting for the guidelines. Both the previous and current Government have placed considerable emphasis on adhering to these guidelines in the government budget for 2002. The use of petroleum revenues is calculated on the basis of the structural, non-oil deficit. This means that, in general, changes in activity levels in the economy do not influence the use of petroleum revenues. This also implies that fiscal policy will contribute to curbing fluctuations through automatic stabilisers. In years with a high level of activity, the actual budget deficit will be smaller than the structural deficit. In years with a low level of activity, the actual deficit will be higher. It is the level, and not changes in economic activity, that influences the structural deficit.

We can expect other events to occur with a greater or lesser degree of probability. Historically, the deviation between actual underlying price inflation and our projections has been within an interval of +/-1 percentage point. When we later report on the implementation of monetary policy, we will place special emphasis on analysing the causes when deviations from the target are more than +/- 1 percentage point. 1  “Box: Effects of a change in interest rates” in Inflation Report 4/2000, Norges Bank. 2  Economic models of the Bank of England, Bank of England (1999). 2  BIS Review 7/2002  Normally, we make projections with a time horizon of about two years. During this period, a number of events will necessitate a revision of the projections. A number of uncertainties will be clarified along the way. New information about how the economy functions may be revealed. As we approach the period for which the projections apply, the uncertainty surrounding the projections will diminish. The chart shows how the projections for the rise in the CPI from 2000 to 2001 have changed from December 1999 to the end of 2001. Through 2000, the estimate was revised upwards by more than 1 percentage point. The most important factor influencing this adjustment was an upward revision of the projections for oil and electricity prices in 2001. We see that from the end of 2000, the deviation of estimated price inflation from actual price inflation, which was 3 per cent, was modest.
In reality, however, we all know that the nature of the problem of achieving such an ideal solution is as much political as it is economic. And nowhere is this tension more palpable than it is in the realm of exchange rate  2  BIS Review 107/2007  and capital account regimes. There are strong and vocal constituencies that are averse to currency appreciation and part of them averse to variability in the exchange rate itself. Not unlike today’s political economy in advanced countries, emerging market politics also risks being less favorable to openness, but more partial to protection of selected industries or protectionism in general. In emerging markets, the political economy and policy tension are even more complex because our markets and institutions are still developing. Hence, the struggle between financial integration and financial stability requires from us a deft balancing act. As such, I hope you appreciate that, when it comes to policy, there is risk in change as well as in inertia. I hope that you also appreciate that if advanced countries pursue more protectionist stance, emerging markets would likely follow suit. One might ask: How then has the Bank of Thailand handled this tension and what is our strategy going forward? My answer to you is that we make every effort to get the economic fundamentals right and strengthening them. But as our financial and capital markets are small, thin, and still developing, we have adopted a balanced approach to managing capital flows under flexible exchange rate.

On trade and financial integration, we all have to wait for the resolution of WTO negotiations. In the meantime, Thailand and ASEAN have made progress on a number of free trade arrangements with Japan, China, Korea, Australia, and New Zealand. Within ASEAN, more progress on the ASEAN blueprint, which lays out the strategic plan to achieve further trade and financial integration within 2015, is in the pipeline. On this topic, I also like to share with you an observation that Asian emerging markets, in general, rely increasingly more on trade integration because it is judged to be a safer mode of risk-sharing with the world. While benefits from trade integration are universally appreciated, net benefits to overall economic development from the international financial integration have not been so apparent in Asia. As a result, while the pace of financial integration has far outstripped trade integration in advanced economies, it has only managed to keep pace with trade integration in emerging markets. Turning to the financial sector side, nowhere are the international rules of the game closer to my heart than the international standards for banking supervision. Early this year, the Bank of Thailand’s capacity and performance in supervising financial institutions  BIS Review 107/2007  3  has been assessed against international best practices in the context of the joint IMF/World Bank Financial Sector Assessment Program or FSAP. This FSAP assessment confirmed the strength and capacity of our supervisory process, which have been significantly strengthened over the past decade.
There is a great deal of slack in the economy. Around three-quarters of a million jobs (net) have been lost. And most surveys have firms working well within capacity (Chart 8). The MPC believes that that will tend to bear down on wages and consumer price inflation over the next few years, warranting our substantial monetary stimulus. But the recession will obviously impair the economy’s productive potential. Investment plans have been shelved and some discouraged people are likely to leave the workforce. Those effects are likely to accumulate over time. But there are important temporary factors too. Typically when monetary policymakers talk about the potential supply of the economy, we have in mind the slow-moving accretion in productive capacity determined by growth in underlying productivity, the workforce and firms’ net investment in the capital stock. Right now, that mindset would not quite capture what is going on. There are a number of reasons for thinking that the “effective supply” capacity of the economy has been depleted temporarily due to the shock to credit supply and confidence (Chart 9). How much, and how temporary, are major uncertainties. In the months immediately after the Lehman crisis, the cutbacks in lending and in trade credit insurance were so severe that some firms were probably unable to maintain production at previous levels. Working capital is, after all, an intermediate input. 2 Those constraints have probably reduced over the months.

Sustained employment gains, which are also benefiting from past structural reforms, and still relatively low oil prices provide additional support for households’ real disposable income and thus for private consumption. In addition, the fiscal stance in the euro area is expected to be mildly expansionary in 2016 and to turn broadly neutral in 2017 and 2018. At the same time, headwinds to the economic recovery in the euro area include the outcome of the UK referendum and other geopolitical uncertainties, subdued growth prospects in emerging markets, the necessary balance sheet adjustments in a number of sectors and a  BIS central bankers’ speeches  1  sluggish pace of implementation of structural reforms. Against this background, the risks to the euro area growth outlook remain tilted to the downside. According to Eurostat, euro area annual HICP inflation in June 2016 was 0.1%, up from 0.1% in May, mainly reflecting higher energy and services price inflation. Looking ahead, on the basis of current futures prices for oil, inflation rates are likely to remain very low in the next few months before starting to pick up later in 2016, in large part owing to base effects in the annual rate of change of energy prices. Supported by our monetary policy measures and the expected economic recovery, inflation rates should increase further in 2017 and 2018. Turning to the monetary analysis, broad money (M3) continued to increase at a robust pace in May 2016, with its annual rate of growth standing at 4.9%, after 4.6% in April.
While the PRA has not yet consulted on a reform package, it has recently published a Discussion Paper[5] seeking views on a range of areas that are likely to be key in forming such a package. Our intent lies in finding a set of reforms that protects policyholders and enables even greater investment flexibility than we have seen already, whilst reducing any misaligned investment incentives. To achieve this intent, the Solvency II reform package we develop must address the two significant deficiencies in the current regime: a risk margin calibration that is overly sensitive to interest rates; and an allowance for retained risk – the FS - that varies very little, if at all, as credit risk premia vary across assets and over time. The risk margin is currently pulling more than its weight in the current Solvency II construct – the resulting incentive being for insurers to reduce the insurance risk they are taking. However, the MA as currently formulated rewards taking certain non-insurance risks, potentially in significant quantum, and with a set of incentives that may be misaligned. We therefore see quantitative reform of both the risk margin and Matching Adjustment, as integral to any package. The PRA seeks a calibration package that is better able to capture how liability transfer values are likely to be impacted by the assets held to back the business. Such a package should also take account of different financial and economic conditions that might pertain at the point that a transfer became necessary, including times of stress.

These properties would provide supporting evidence of the economic reasonableness of the calibration. And it would provide assurance that the package is serving its policyholder protection purpose. In particular, as MA portfolios become more diverse then a question arises as to whether the assets currently backing a book of business are assets that another party would be able and willing to take as funding. To achieve a material reduction in the level and sensitivity of the current risk margin, the PRA considers it necessary for the design of the MA to appropriately reflect uncertainty around future credit risk experience that would likely be reflected in any transfer price. The FS is the key determinant as to the amount of any expected future investment profit firms can recognise upfront. A calibration of the FS that is too low exposes firms to risk that this future investment profit does not emerge in practice and the associated implications this would have on their ability to meet their liabilities as they fall due. A successful outcome of the Solvency II review will be DB scheme members, trustees and insurance policyholders having long-term confidence in the resilience of the insurance sector, and in the security of their benefits. Page 9  Conclusions and next steps Solvency II has only been in force for around six years, but we have already learnt a lot. Particularly in respect of the relationship between the regulatory framework and firms’ business models.
As policy instruments are targeted to address systemic risk, assessing macroprudential measures in a consistent manner requires accounting for spillovers, including to the real economy, also taking account of their impact on various sectors as well as layers of interaction between those sectors. Conclusion Let me conclude. The ECB has been working hard on developing analytical tools for the effective implementation of macroprudential policy. The ECB’s new legal competences in macroprudential policy relate primarily to the power to top-up measures adopted by national authorities and the assessment of possible spillovers to other countries in connection with the reciprocity principle laid down in the legislation. In this vein, the ECB has been analysing the numerous macroprudential measures adopted by member states that, so far, we have decided not to aggravate. Concerning the governance framework, we have created an internal Macroprudential Coordination Group and established the Macroprudential Forum – integrating the Governing Council and the Supervisory Board – to discuss all matters related to financial stability and macroprudential policy. We are taking our new responsibilities very seriously. The robustness of our assessments is key and, for this reason, analytical and research work in the macroprudential policy area has been stimulated and has been fruitful, as evident in my  16  Gross, M. and J. Poblacion, (2015), “Assessing the efficacy of borrower-based macroprudential policy using an integrated micro-macro model for European households”, ECB Working Paper No. 1881.

8 builds and extends on work done at the BIS. 9 It shows how credit and asset prices share cyclical similarities, captured in a synthetic financial cycle index that outperforms credit-to-GDP gap measures in predicting systemic banking crises, on a horizon of up to three years. They also demonstrate how the financial cycle is different from the business cycle. Based on this research, we conclude that financial variables (credit volumes and asset prices) in EU countries have historically exhibited higher average volatility than economic variables (volume of activity in goods and labour markets, as well as consumer prices). Financial cycles have also exhibited a higher duration than business cycles on average. Lastly, asymmetries appear to exist, whereby financial cycles tend to build up slowly and correct more abruptly. Taken together, these findings have at least two policy implications. First, they establish a rationale for differentiated financial and macroeconomic policies, and are thereby fundamental to the newly established macroprudential policy area. Policies targeting financial cycles, such as countercyclical macroprudential policies, can act as a powerful complement to policies targeting the business cycle, such as monetary policy. Policy trade-offs may emerge in the short-run, as the propensity for such cyclical divergence seems to be greatest at short frequencies. Second, the results present a strong case for a differentiated national application of macroprudential policies, amid a far from complete convergence of country financial cycles.
However – with the spirit of regional financial cooperation for development of Asia as a whole in mine – countries with more advanced financial systems may decide to offer these guarantees for a limited period of time. Proposals for development and integration: enhancing market infrastructure Currency arrangements Issuing bonds under a basket of Asian currencies may achieve a slightly lower cost of funding, given that the currency risk of a basket is lower than the sum of the risk of the underlying currencies. This lower risk should be reflected in a lower cost off capital for borrowers. With regards to liquidity, if bonds in the region were to be issued in a basket of currencies that could be traded in many Asian bond markets, liquidity of such a bond should be better than that of any individual bond. In this regard, deep and liquid bond markets should also reduce transaction costs, making the regional market more attractive than issuing locally. Such a basket of currencies may enhance the natural hedging ability of market participants in each country in the region. Given the importance of intra-regional trade, exporters cold better match the currency exposures of their assets with their liabilities. Cooperative actions needed to facilitate growth of regional bond markets The use of these mechanisms to promote development of bond products must not detract countries from taking serious steps to developing their bond markets.

Work on the supply sides revolves around issues of tax, legal and regulatory as well as accounting and should receive endorsement from the highest levels of government following the adoption of the Chiang Mai Declaration on the Asian Bond Market Development. Demand side development: establishment of the Asian Bond Fund On the demand side, central banks in the region have been working closely under the Executives Meeting of East Asia-Pacific Central Banks – or EMEAP – to establish an Asian Bond Fund. Under this initiative, central banks will set aside a fraction of their reserves into a pool that will be invested in bonds issued by Asian governments and government enterprises, with an ultimate aim to provide a catalyst for private investors to consider investment in Asian issues EMEAP has worked out the details and modalities of the operation of such a Fund and will announce details to the public shortly. Approaches to regional cooperation: work on developing the supply side ASEAN+3 and APEC are both working on the development side of bond markets, including the removal of barriers impeding the issuance of bonds both in the regional and domestic contexts respectively. In addition, there has been cooperation in setting up the necessary infrastructure for such a regional bond market, including a regional credit rating agency, as well as credit enhancement facilities.