samchain/econo-pairs-v1 huggingface dataset:
At the end of last year, the gap was 7¼%, on the latest numbers to end April it’s around 5%, and we expect the gap to be closed by the end of this year. Although that would still represent two years of lost growth, relative to the expected path of activity prior to the pandemic. The good news is that the economy is only around 5% smaller than it was eighteen months ago – and in view of what we have experienced, that is good news – and the gap is closing quite rapidly. But let’s pause for a moment on the good news that the economy is only 5% smaller. In any conventional time, even in the depths of a recession, that would scarcely qualify as good news. Let me add a second leg to this unconventional point. In a typical recession – to the extent there is such a thing – there is a hit to demand relative to the supply capacity of the economy which leads to an output gap, higher unemployment and weaker inflation. For crises such as wars or natural disasters, there can be a large decline in both demand and supply. But the effects on supply capacity are typically more persistent, for instance as a result of the destruction of physical capital. During the Covid crisis, we have seen a simultaneous and substantial fall in both demand and supply. But, all the indications are that for both demand and supply the decline will be temporary.

Taking into account the current stance of monetary policy, I anticipate that inflation will decline to slightly below our 2 percent long-run objective over the next few years. So what does this all imply for monetary policy? I currently anticipate that the Federal Reserve’s federal funds rate target will remain exceptionally low – that is at the current level – at least through late 2014. Given our forecast of stable prices and a still slow path back to full employment, there is an argument for easing further. But, unfortunately, our tools have costs associated with them as well as benefits. Thus, we must weigh these costs against the benefits of further action. As long as the U.S. economy continues to grow sufficiently fast to cut into the nation’s unused economic resources at a meaningful pace, I think the benefits from further action are unlikely to exceed the costs. But if the economy were to slow so that we were no longer making material progress toward full employment, the downside risks to growth were to increase sharply, or if deflation risks were to climb materially, then the benefits of further accommodation would increase in my estimation and this could tilt the balance toward additional easing. Under such circumstances, further balance sheet action might be called for. We could choose between further extension of the duration of the Federal Reserve’s existing Treasury portfolio and another large-scale asset purchase program of Treasuries or agency mortgage-backed securities.
The extraordinary (by historical standards) degree of monetary policy easing by central banks was followed by a fall in volatility in financial markets. Markets appeared to come to take comfort from their own mantra of “low-for-long”  3  High frequency trading is a subset of automated or algorithmic trading where the emphasis is more on the speed of execution than the complexity of the algorithm. Low frequency algorithms tend to be more complex mathematically, with less emphasis on computational time. The goal to reduce execution times to small fractions of a second is the subject of Michael Lewis’ book “Flash Boys” (Lewis (2014)). 4  The finance literature emphasises that the performance of markets in financial assets is driven substantially by changes in the wealth of the marginal investor, which is the market maker or broker-dealer (Nelson et al (2015)). BIS central bankers’ speeches  3  rates which in turn incentivised a “search for yield” (to be clear, “low for long” has not been in the phraseology of central banks). Studies of the US Treasury market have indicated that the Federal Reserve’s programme of Quantitative Easing (QE) caused a reduction in the liquidity premium return for holding those bonds. Part of the effect of QE programmes is to improve market conditions for the targeted asset classes but also to see the trickle down to other asset classes as market conditions change more generally (Christensen et al (2013)).

A regime which inadequately evaluated trading book risks was, therefore, fundamental to RBS’s failure.” (FSA (2011)). I do not doubt that the reversal of this capital treatment of trading books has had an impact on dealer inventory levels by increasing the capital intensity. But I don’t accept that the fairly ephemeral position that emerged shortly before the crisis was fit for purpose or sustainable. What are we therefore doing about the fragility of market liquidity and the risks to both financial stability and the state of the real economy that arise from it? First, we are working hard to understand better these risks and how they could manifest themselves. As the Bank of England’s Financial Policy Committee stated at the end of March, our concern is that investment allocations and the pricing of some securities “may presume that asset sales can be performed in an environment of continuous market liquidity.” (FPC (2015)). We are: gathering better data and thus building a greater understanding of the channels through which market liquidity can affect financial stability and economic activity; establishing a better understanding of how asset managers form their strategies for managing liquidity in their funds in normal and stressed conditions (taking into account any increase that might  6  6  Fender and Lewrick (2015) note that “when market volatility rises, standard risk assessment models will signal a market-maker inventory has become riskier. That may prompt the market-maker to further trim its holdings.
In the long run, even savers would be better off in a world in which aggressive monetary policy generates a strengthening recovery that eventually permits the normalization of interest rates, than they would be compared to a circumstance in which the United States allowed itself to fall into a Japan-style trap of low growth and low rates for decades. So I do not view the effect of low rates on savers as a reason to be less accommodative. Rather, in my view, the potential for the monetary policy impulse to be attenuated over time, is an additional reason to be aggressive in terms of the policy response. A more front-loaded program would avoid greater attenuation compared with a policy that started out less aggressive but added stimulus gradually over time. This has two benefits. First, it would likely be more successful in generating the desired recovery more quickly. Second, relative to a more back-loaded program, less would ultimately need to be done to achieve the desired set of outcomes. The fact that there are asymmetric payoffs from an economy that is weaker than expected versus one that is stronger than expected, given that we are at the zero lower bound reinforces this conclusion. In particular, if the economy were to continue to underperform, and experienced a severe shock, there would be some risk of getting stuck in a deflationary situation in which monetary policy would be even less effective.

Remarks at the C. Peter McColough Series on International Economics, Council on Foreign Relations, New York City, May 24. 4  BIS central bankers’ speeches  Federal Reserve MBS purchases have succeeded in driving down mortgage rates to historically low levels. But these purchases would have had still more effect on the economy if pass-through rates from the secondary market to the primary market had been higher. As can be seen in Exhibit 3, the Federal Reserve’s purchases significantly narrowed the spread between agency MBS and Treasury yields, with the latest round of purchases notably effective in this regard. But, as shown in Exhibit 4 the spread between primary mortgage rates and agency MBS yields3 has widened and this has limited the drop in primary mortgage rates. The incomplete pass-through from agency MBS yields into primary mortgage rates is due to several factors – including a concentration of mortgage origination volumes at a few key financial institutions and mortgage rep and warranty requirements that discourage lending for home purchases and make financial institutions reluctant to refinance mortgages that have been originated elsewhere. On a related note, higher guarantee fees charges by Fannie Mae and Freddie Mac have increased the fixed cost of originating loans and this has also increased the spread between primary and secondary mortgage rates. Factors limiting pass-through warrant ongoing attention from policymakers.
In fact, what is more important than the figures is that central banks were first established mainly as the lender of last resort and banknote issuer, rather than as an institutional body of monetary policy. Today, there are 160 central banks operating around the world. Some of them are also responsible for supervision and regulation of financial system and have been publishing financial stability reports, and some of them are targeting a certain measure of general price level and have been issuing inflation reports. Thus, in a broader perspective, the evolution of central banking has followed a course from maintaining liquidity when it is necessary and issuing banknotes, towards keeping inflation low and stable, and preserving stability in financial markets. In some sense, this evolution process can be characterized as the converging of the objective functions of central banks all around the world. To be more precise, it is generally accepted that in the case of both industrialized nations and emerging economies, the main contribution that a central bank can make to economic welfare in the long run is achieving and maintaining price stability. Moreover, maintaining price stability is not merely an issue of maximization of economic welfare. It gives people the confidence that money will retain its value over time, ensures that price signals function as a guide for markets to function efficiently and establishes trust in the interaction among economic agents, in property rights, in society and in the future in general 1 .

Durmuş Yilmaz: Central banking in emerging economies – the Turkish experience Speech by Mr Durmuş Yilmaz, Governor of the Central Bank of the Republic of Turkey, at the “International Conference on Economics”, Ankara, 12 September 2006. *  *  *  Dear professors, colleagues, and guests, I am very pleased to participate in such a conference covering a broad range of economic issues and attended by many distinguished academicians from different countries. It is also a great pleasure to deliver a speech on the topic of central banking in emerging economies and the Turkish experience. Dear guests, Given the wide range of issues related to central banking in emerging economies and the limited time available, I have decided to limit the extent of my remarks today. I’d like to talk about the challenges we face as today’s central bankers in emerging market countries, mainly in the context of the Turkish experience. However, before embarking on this subject, let me first of all step back and take a look at the evolution of central banking, especially in the recent past. There is no doubt about that throughout the 20th century, central banking has undergone a tremendous transformation both in numerical terms and institutional aspects. At the beginning of the last century, for example, there were just 15 central banks in the world.
All this has made our work harder than in the preceding years. Price tendencies I should like to comment first on the high inflation figures. Fluctuations in inflation are commonplace Recently people have been asking whether the higher inflation outcomes constitute a failure. Some years ago, when inflation month after month, not to say year after year, turned out to be lower than we had predicted and below our 2 per cent target, people asked exactly the same thing. I did not see it on the whole as a failure then and neither do I do so now. The lower inflation at that time was mainly due to downward effects of a transitory nature even though the economy was expanding rapidly and capacity utilisation was rising. Similarly, the higher rates at present primarily stem from transitory factors. Earlier we noted that some upward shift in inflation could be achieved in the short run but only by means of drastic interest rate cuts. The corresponding remedy today would be drastic hikes. Such an approach would make interest rate policy erratic and result in unnecessary fluctuations in economic activity. What we can do - and do - is to aim consistently at our 2 per cent target. There is then a good chance of succeeding in the longer run, particularly if economic agents take us at our word and rely on future inflation being in line with earlier assessments.

But the krona fluctuates sooner than the time it takes to revise our forecast, as is clear from what has happened. In the discussion that followed the publication of the Inflation Report it has been suggested that the Riksbank has lost faith in the krona. I think that’s overdoing it. And regardless of the forecast we presented, I see no strong reasons for altering the appraisal of what is a reasonable fundamental exchange rate in the long run, any more than there were grounds for revising the basic principles for share valuation just because stock markets had shot up to record levels a couple of years ago. That does not mean that some time in the future there could be a case for a different opinion about the exchange rate’s reasonable level in relation to the real economy. But that would stem in turn from an altered view of Sweden’s relative production potential, terms of trade or some other fundamental variable. In this context it should be borne in mind that an unduly weak exchange rate generates effects that should favour an appreciation further ahead: the balance of trade continues to be strong, corporate profits become higher than elsewhere, making Swedish shares more attractive, and so on. Calculations of the krona’s fundamental value will no doubt become topical at the latest if Sweden is to adopt the euro and we require a picture of the exchange rate that will be serviceable in the longer run.
This is consistent with both lower terms of trade for Chile and tighter financial conditions, given the expected monetary policy response in the major economies. In addition, the projections consider a slowdown in the growth of our main trading partners (table 1). In the central scenario, the narrowing of the activity gap that began early this year will last for several quarters. Thus, GDP will see annual change between 1.5% and 2.25% this year, between zero and -1.0% in 2023, and between 2.25% and 3.25% in 2024. Regarding fiscal policy, for this three-year period, the projection envisages a spending path consistent with that reported in the last Public Finances Report (table 2). The Board estimates that, following the hike agreed at the June monetary policy meeting, further smaller adjustments in the MPR will be needed to ensure the convergence of inflation to 3% over the two-year horizon. Still, risks are still high, especially considering the level that inflation has reached and its long-lasting persistence. Risks surrounding the evolution of the macroeconomic scenario remain significant. The upper part of the MPR corridor reflects sensitivity scenarios where inflation could prove more persistent than expected. This could occur if private consumption continues to show no significant adjustment in the coming quarters.

On the one hand, it allows the economy a sufficiently long time span to accommodate significant changes in prices and monetary policy without entailing excessive costs in terms of lost activity or employment. The current environment is a good example of this. In the face of a shock such as the one we are dealing with, a shorter-term target would force a much more significant rise in the rate, thus increasing sharply the costs to the economy. On the other hand, a 24-month time horizon is a sufficient time limit for households and firms to avoid being affected by the uncertainty that could result from being unable to correctly anticipate how inflation will unfold. At a time when our economy is going through complex circumstances, reducing the spaces of uncertainty is greatly appreciated. Certainly, some of these spaces are beyond our ability to act, such as the war in Ukraine or monetary tightening in the world. But there are others where we do have the power to act. On our side, by assuring all those who live in Chile that the Central Bank will continue to do everything necessary to bring inflation down and return it to the defined target within the appropriate time frame. Maintaining and fulfilling this commitment is vital to help mitigate the costs that high inflation has on Chilean families.
As governments are responsible to their respective parliaments, and ultimately to the voters, there is also a strong tendency to favour national solutions. Because of this we have seen a number of uncoordinated crisis resolutions resulting in exceptional levels of public financial support to the banking sector. The handling of the failures of Fortis and the three Icelandic banks are perhaps the most obvious cases. In the case of Fortis, it is interesting to note that the authorities from the Benelux countries initially reached an agreement to save the group as a whole. However, as liquidity pressures continued and the burden-sharing agreement proved politically unviable the agreement eventually fell apart. In the end, the authorities had no other choice but to divide the bank along national borders – an outcome which most likely became more costly than a joint solution for the group as a whole. An important factor affecting the authorities’ abilities to deal with cross-border banks is how banks choose to organise themselves. The most common way of accessing markets outside the home country is to either establish a foreign based branch or a subsidiary and to offer  16  See e.g. Navaretti G., Calzolari G., Pozzolo A. and Levi M. (2009), Agénor (2001), Goldberg (2002, 2004, 2008). BIS Review 82/2010  19  services through this legal entity. At present these two forms of foreign operations end up being dealt with within different regulatory frameworks.

This means that an increase in the Libor target range appears less urgent. Third, the level of uncertainty has risen. The economic outlook in Europe is more difficult to assess than it was in March. Although the price of oil declined in April and May, it rose again significantly in June, and high prices in the oil market could persist for some time to come. In addition, the decline in the level of long-term interest rates is not very consistent with a recovery in the economy. I will now briefly outline our new forecast for inflation. The graph depicts the current and the previous forecasts. The dashed red curve represents the new forecast, which covers the period from the second quarter of 2005 to the first quarter of 2008. The dash-dotted green curve shows the forecast presented in the last monetary policy assessment. Both forecasts are based on the assumption of a three-month Libor rate of 0.75%. The line representing the new inflation forecast begins slightly above the previous forecast, dropping significantly below it from next year onwards. The decline in inflation rates this year is due to a stabilisation in the price of oil. The lower level of inflation next year is attributable to weaker growth in economic activity. In 2007, inflation will rise rapidly because of the high level of utilisation of resources and the high level of liquidity. This means that, should the three-month Libor rate remain unchanged at 0.75%, inflation would reach 2.4% by the end of the forecasting horizon.
Mervyn King: Monetary policy developments Speech by Mr Mervyn King, Governor of the Bank of England, to the Birmingham Chamber of Commerce Annual Banquet, Birmingham, 23 January 2007. *  *  *  Lord Mayor, Lady Mayoress, President, Distinguished Guests, Ladies and Gentlemen, Two weeks ago your Chamber of Commerce called on the Bank of England to take manufacturing more seriously when it sets interest rates. In arguing against an interest rate rise, the Birmingham Chamber said, “we would urge the Bank of England to once again consider the effects this will have on the beleaguered manufacturing sector”. It will not have escaped your attention that Bank Rate did rise in January and has now increased by 75 basis points since the beginning of August. So tonight I want to explain why the Monetary Policy Committee took that action, and why the Bank believes that the control of inflation is essential for the success of Birmingham – and all British – manufacturing. Last week we learnt that inflation, as measured by the Consumer Prices Index, was 3% in December, the highest level since the Monetary Policy Committee was set up almost ten years ago. If it rises by one further decimal point to 3.1%, I shall have to write an open letter to the Chancellor explaining why inflation has risen to more than one percentage point above the target of 2%, and what measures the Committee are taking to bring inflation back to target.

But the continued relative decline of manufacturing – and indeed the strength of sterling – over the past decade or so reflects, not the stance of monetary policy, but the remarkable wind of change that has blown across the world economy with the advent of China, India and much of the former Soviet Union into the world trading system. To their great credit, business people and politicians have not resisted changes to the structure of the British economy, unlike many of their counterparts abroad. As a result, total output and employment here have grown rapidly, and our living standards are higher than could have been sustained with policies aimed to defend the old industrial structure. Those changes, however, have led to the closure of many manufacturing companies. There are over a million fewer people employed in manufacturing now than a decade ago, and 200,000 fewer in the West Midlands. It is just over a hundred years since car production started at Longbridge, just over thirty years since it was nationalised, and no vehicle has been built there for over a year. But there are also many success stories. Since I became Governor, I have made regular monthly visits to the regions and countries of the United Kingdom, and visited around one hundred companies, large and small, new and old.