samchain/econo-pairs-v1 huggingface dataset:
Øystein Olsen: The conduct of monetary policy Introductory statement by Mr Øystein Olsen, Governor of Norges Bank (Central Bank of Norway), at the hearing before the Standing Committee on Finance and Economic Affairs of the Storting (Norwegian parliament), Oslo, 20 May 2011. Please note that the text below may differ from the actual presentation. The statement is based on Norges Bank’s Annual Report for 2010, Monetary Policy Report 1/11 and the Executive Board’s assessments in the period to the monetary policy meeting on 12 May. *  *  *  I would like to thank the Chairman of the Committee and also thank the Committee for this opportunity to report on the conduct of monetary policy in connection with the Storting’s deliberations on the Government’s Financial Market Report. My statement here today is based on the Bank’s Annual Report, but also on the Executive Board’s assessments for the period to the most recent monetary policy meeting and new information. I also refer to this year’s report from Norges Bank Watch, a group of experts that evaluates Norges Bank’s conduct of monetary policy. 1. Activity in the Norwegian economy has gained a firm footing  The global financial crisis that unfolded in 2008 gave rise to the most severe economic downturn of our time. There was a dramatic decline in international trade, and in the following year world GDP decreased for the first time in generations. Although global economic growth has recovered, the outlook remains uncertain.

I do believe that the roadmap that we paved will lift financial skills of the citizens and the level of their inclusion, making them cognizant of all the possibilities, but of the potential threats as well. The importance of financial literacy does have enduring origins, yet it gained prominence after the global financial crisis. Unfortunately, it was a bitter way of learning how low level of financial literacy and risk awareness can contribute to a large-scale financial crisis. Of course, there is no single cause or a single player in conceiving a crisis. So was the case with this one as well. But in this crisis episode, the illiteracy played an important role. In the United States, “the development of a speculative bubble and its burst was also due to the reckless financial behaviours of households, including the most vulnerable ones who contracted mortgages they should not have subscribed considering their financial situation. Actually, individuals were often not aware of the risks they were exposed to”. It collapsed the U.S. financial system, and given the tight financial linkages, it led to a worldwide financial and economic crisis. Another example was the widespread practice in CESSE of borrowing in foreign currency, while repaying in domestic, with adverse implications for households when currencies appreciated. In some countries, individuals undertook investment risk as well, by investing in high-risk, structured products, that they did not understand. Financial illiteracy was even a trigger for irrational exuberance, with deposit withdrawal occurring on the backdrop of ungrounded causes in some countries.
Mark Carney: Opening remarks to the “Empowering productivity: harnessing the talents of women in financial services” report launch Opening remarks by Mr Mark Carney, Governor of the Bank of England and Chairman of the Financial Stability Board, at the Gadhia Review launch, Bank of England, London, 22 March 2016. *  *  *  Good morning and welcome to the Bank of England. It’s a pleasure for us to host the launch of the “Empowering productivity: harnessing the talents of women in financial services” report. A series of transformations are sweeping financial services. First, since the crisis, a comprehensive series of reforms have strengthened the resilience of banks. Capital requirements are now seven times the old standards for most banks. For global systemically important banks (G-SIBs), they are more than ten times higher. For UK banks, liquid asset holdings have tripled. Trading assets are down by a third and inter-bank exposures have shrunk by two thirds. Second, the aftermath of the crisis exposed serious deficiencies in the conduct of many market participants. Now, the tide of ethical drift is being reversed and trust in our institutions is beginning to be rebuilt as a result of the conclusion of the Fair and Effective Markets Review, the launch of the Banking Standards Board and the FICC Markets Standards Board, as well as the start of the Senior Managers Regime, and the embedding of new compensation regimes that better align rewards with risks taken.

Since inception, the annual excess return from asset management has amounted to 24 basis points, or 0.24 percent. Given the fund’s current size, the annual excess return after costs is around NOK 20 billion. This is money worth having. The Bank’s investment strategies 1/5  BIS central bankers' speeches  The excess return is a result of hundreds of active decisions made by asset managers. We make such active choices every single day. To be able to safeguard society’s wealth in the best possible way, these choices must be based on a well founded strategy that seeks to benefit from the fund’s defining characteristics. The fund is among the world’s largest and is a global investor. It also has a very long investment horizon and a limited need for liquidity. These are the characteristics that we must try to make the most of to achieve excess returns. The Bank’s investment management organisation has built up unique experience in this work after having managed the fund for over 20 years. The risk in the active part of asset management is diversified across sub-strategies. These substrategies complement one another. This means that the different sub-strategies cannot automatically be assessed in isolation, precisely because they are part of an integrated diversification strategy. Chart: Contribution to relative return by strategy This table shows relative return by main strategies in the period between 2013 and 2019. It illustrates how the different strategies have influenced excess return from our management of the fund.
Figure 9 Ownership of Swedish covered bonds by type of investor Shares in per cent 50  50  45  45  40  40  35  35  30  30  25  25  20  20  15  15  10  10  5  5  0  0 02  04  06  08  10  12  14  16  Swedish banks Swedish funds Svenska insurance companies Public sector including national pension funds Foreign investors  Source: Statistics Sweden. Indirect risks for financial stability and the macro economy An indirect risk, going from the macro economy to financial stability, is that reduced demand from over-indebted households will push the general level of demand in the economy down. This will weaken economic activity, in turn increasing the risks that the banks will incur loan losses in the corporate sector. 11 Earlier, I mentioned that the banks may have problems obtaining funding in the event of a fall in prices on the housing market in Sweden. In such a scenario, it is also conceivable that the banks’ funding problems will lead to higher lending rates to households – and thereby to lower consumer demand. In practice, it is likely that all of these direct and indirect factors will interact so that the consequences of a decline on the housing market may be serious and also difficult to gain an overview of in advance. 11  See Financial Stability Report 2015:1, pp. 13.

Interest rates abroad are an important condition for Swedish monetary policy. As I have pointed out on previous occasions, there is a very high correlation between Sweden and the rest of the world regarding inflation, GDP and interest rates. 3 When the euro area conducts a highly expansionary monetary policy, this affects us. I am thinking not just of the level of the policy rate but also of the ECB’s comprehensive asset purchases, which are also intended to push down the interest rate level in the euro area (see Figures 2 and 3). Everything else being equal, lower interest rates abroad lead to a stronger krona and lower inflation in Sweden via lower import prices. 3  2  See my speech to the Swedish Economics Association, 2015. BIS central bankers’ speeches  Figure 2 Policy rates in Sweden and the euro area Per cent  Sources: ECB and the Riksbank. Figure 3 Central banks’ balance sheet totals Per cent of GDP  Sources: ECB, Eurostat, Statistics Sweden and the Riksbank. Several other small, open economies, such as Switzerland, the Czech Republic and Denmark, have also been affected by the ECB’s expansionary monetary policy, even though their conditions are slightly different from those in Sweden, not least as regards their monetary policy regimes. However, the problem is fundamentally the same, namely that the expansionary monetary policy in the euro area is creating pressure on these countries’ own currencies to appreciate.
I should add that there are other initiatives being developed, with the aim of positioning the banking system of Hong Kong to take advantage of further financial liberalisation in the Mainland. I hope they can be agreed, announced and introduced soon. Short-term risks However, the generally good news in recent months should not blind us to the problems that remain in our economy or to the risks that face us. While the economy has been recovering strongly, it has not been creating as many jobs as we all would like to see. It is also uncertain to what extent the budget deficit will be reduced, as government revenues recover along with the economy. To be sure, the difficult investment environment is not helping us in our attempt to meet the budgeted investment income for the fiscal reserves. Disappointments on these fronts may affect market sentiment in the short term, although the determination and ability on the part HKSAR government in tackling the remaining, structural components of these problems should not be in doubt. Furthermore, there is a risk that our financial markets could over-react to external developments, notably stronger than expected monetary tightening in the US, macro-economic adjustments in the Mainland and sharp increases in oil prices. Although it is unlikely that these external factors would derail our economy, and so this risk seems small, under extreme market conditions, short-term volatility in financial markets could have a bearing on monetary and financial stability in Hong Kong.

Time is limited, and this is, after all, a luncheon speech, so I shall not go into detail about these standards. The point to make here is that, as an international financial centre, we have no alternative but to implement these standards as fully as we possibly can and as soon as international agreements have been reached on them. Many of these standards will be, to put it mildly, quite onerous. In this connection, I wish to ensure you all that the HKMA has been adopting a proactive approach in participating in the relevant international standard setting forums and in influencing the standard setting processes in the best interests of Hong Kong. We have also consulted widely in Hong Kong. Insofar as the banks are concerned, there is a clear need for bank management to allocate adequate resources to the process of implementation, which will involve substantial changes to IT systems and compliance arrangements. For Basle II, for example, banks should not be acting under the misapprehension that they can simply sub-contract the implementation processes to third party service vendors, such as their external auditors. Active involvement of bank management is crucial in ensuring that most, if not all of these international standards are properly incorporated into the daily operations of banks, especially since each bank may face different focuses and challenges in the process.
15 Keynesian policies to smooth the path of adjustment by supporting aggregate demand can help in the short run, but their effectiveness is limited by the fact that a significant adjustment to spending – from consumption to investment – is required. If policymakers can, first, identify misperceptions, and, second, correct them by changes in monetary policy – both highly uncertain empirically – then there is indeed a trade-off between hitting the inflation target and reducing the chance of a financial crisis down the road. But are central banks less prone to misperceptions than others? My second example concerns what Masaaki Shirakawa, Governor of the Bank of Japan calls the “cycle of confidence”. He argues that success breeds confidence, and eventually over-confidence and complacency, leading to collapse. Such ideas are closely associated with the work of Hyman Minsky and others. Minsky set out a “financial instability hypothesis” in which a period of stability encourages exuberance in credit markets and subsequent instability. 16 Perhaps the experience of unprecedented stability in the UK and world economies before the crisis dulled the senses and bred complacency about future risks. I talked about this when I christened the period leading up to 2003 the nice (non-inflationary consistently expansionary) decade. 17 The point of that speech was that the following decade was unlikely to be as nice. And, of course, it wasn’t. But the point didn’t get home, and the financial system became more and more fragile as the leverage of our banking system rose to unprecedented levels.

The Riksbank has emphasized that one should see the price stability objective in an annual perspective—nothing more precise than that. As to the width of the band, we have started from an interval of +1 per cent, which is fairly normal among countries with an inflation target. Summary The policy with an inflation target has functioned well in Sweden and in other countries that have chosen to work with an inflation target. Inflation has become low. In addition an increased understanding of a policy directed at price stability has been created in Sweden as well as in other countries with an inflation target. This is especially notew orthy because many of the countries which now work with an inflation target are the very same countries that earlier had problems with inflation. When monetary policy is conducted with an inflation target, production and employment are normally stabilised too. For example, increased demand usually implies an increased rate of inflation. When inflation forecasts indicate that a risk for inflation will exceed the target, raising the instrumental rate is warranted, thereby also slowing down demand growth. In practice the room for an active stabilisation policy is circumscribed by the uncertainty about future inflation. Another important complication relates to how credible the policy is. Increased credibility of monetary policy creates more room for both rapidly shifting BIS Review 56/1997  - 10 -  policy in a more expansionary direction in situations of weakening demand and deferring interest rate hikes.
By 2014, what do we find? Due to the magic of compound interest, China is now almost eight times the size of Italy. Indeed, China creates a new economy the size of Italy every 18 months; an economy the size of Portugal every quarter; an economy the size of Greece every month; and an economy the size of Cyprus every week. Those things that can be counted sometimes really do count. Today’s policy debates bear testimony to that. Since the financial crisis, global growth has under-performed. In the decade prior to it, advanced economy growth averaged 3% per year. In the period since, it has averaged just 1%. The world has grown fast, then slow. That has led some to fear “secular stagnation” – a lengthy period of sub-par growth. 3 The self-same concerns were voiced at the time of the Great Depression in the 1930s. 4 The economic jury is still out on whether recent rates of growth are a temporary post-crisis dip or a longer-lasting valley in our economic fortunes. Pessimists point to high levels of debt and inequality, worsening demographics and stagnating levels of educational attainment. 5 Optimists appeal to a new industrial revolution in digital technology. 6 Given its importance to living standards, this debate is one of the key issues of our time. Some insight into that debate can be provided by looking at patterns of growth through a long lens. Over long runs of history, it is possible to detect distinct phase shifts in growth.

The inflation forecast for the coming quarters is slightly higher than in March. This is because the departure point for the forecast has moved upwards, as inflation was somewhat higher in May than expected. However, from mid-2015 onwards, inflation will be lower than forecast in the previous quarter. The reason for this is that the global economic outlook has deteriorated slightly. Another factor is the unexpectedly weak inflation in the euro area. At 0.1%, the inflation forecast for the current year is 0.1 percentage points higher than in March. For 2015 and 2016, the new forecast – of 0.3% for 2015 and 0.9% for 2016 – is 0.1 percentage points lower, in each case, than at the previous monetary policy assessment. It is important to bear in mind that our forecast is conditional. It is based on the assumption that the three-month Libor remains at 0.0% over the next three years and the Swiss franc weakens over the forecast horizon. In our forecast, therefore, we assume that the SNB will pursue a very expansionary monetary policy. Even under such assumptions, there are still no signs of any inflation risks for Switzerland in the foreseeable future. Global economic outlook The SNB’s inflation forecast is embedded in a global economic scenario. I would therefore now like to give you our assessment of the global economy. The global recovery remains hesitant overall. Last quarter registered weaker growth than we had anticipated at our March monetary policy assessment.
Less extreme is the euro zone, where, after a period of slow growth in the area as a whole, recovery is now well established. The internal imbalances in each country - differences between growth of domestic demand and the supply of output - are the mirror image of the external imbalances - current account surpluses and deficits. Widening imbalances are unlikely to be sustainable for long. But the extent to which they will be self-correcting, or will require policy adjustment, depends in large part on why they have arisen. This is my second question - why have the imbalances arisen? Sustained current account deficits can reflect profitable investment opportunities that exceed the supply of domestic savings so that it is necessary to borrow from abroad. And the most popular explanation of the recent rapid growth in domestic demand, especially in the US, is as the consequence of a rise in productivity growth, and investment opportunities, reflecting the so-called “new economy”. It has been pointed out by several economists, including Alan Greenspan and my colleague John Vickers, that an increase in trend productivity growth might increase demand by more than it raised supply initially, as firms invest in new technology and consumers anticipate higher future incomes and spend today out of this revised estimate of their “permanent” income. Hence new information technologies, because they raise  BIS Review 34/2000  2  potential future output in the economy, would add to demand today.

In February the Riksbank introduced a new system which means that we publish a forecast for the repo rate together with a probability distribution. Previously the interest rate path has only been published in connection with the Monetary Policy Reports issued three times a year. But in September the Executive Board took the decision that the interest rate path and forecasts for certain key variables should also be published at the monetary policy meetings where no report was published. There are several advantages to the Riksbank publishing its own interest rate forecast. We can then explain more clearly to the general public and market agents how we view future interest rate developments, which makes it easier to evaluate monetary policy. Clearer communication should also mean that monetary policy becomes more efficient. Through the influence on interest rate expectations the Riksbank can to a greater degree influence interest rate setting in the economy. Another advantage of having our own interest rate forecast is that it becomes simpler to explain how we view the driving forces behind economic developments and also the objective and effects of monetary policy. At the same time, it should contribute to giving greater depth to the analyses and discussions of monetary policy conducted both within and outside of the Riksbank. Up to February this year, when I myself still worked as an analyst, I like many others tried to interpret the Riksbank’s communication and what it might mean for future interest rates.
The situation one would like to avoid is one in which the upturn is characterised by exaggerated optimism and excessive risk propensity. In such a situation, the fall can be dramatic when something causes this sentiment to turn. Prices fall, participants become more pessimistic and risk propensity decreases among both lenders and borrowers. This may result in an extended period during which participants consolidate their balance sheets, consumption and investment develop weakly, and lending becomes exaggeratedly restrictive. Fluctuations in property prices and credit volumes can thus amplify the fluctuations of the real economy. A fall in prices or expectations of such a fall may also lead to financial instability with possible consequences in the form of increased uncertainty, a credit crunch and stresses on central government finances. This is because a credit-driven imbalance can create a significant credit risk if the banks have filled the asset side of their balance sheets with loans based on inflated prices and with high loan-to-value ratios. The credit risk also depends on the manner in which borrowers’ obligations in the event of a default will be regulated, that is to say whether the bank will be able to claim only the actual collateral or whether it will also have a claim on the remaining loan. An individual bank has no reason to take consideration of anything other than the risk to its own balance sheet and can, in general, ignore the effects on the real economy and financial stability: these are external effects.

It showed that there existed areas in which we needed to think further or maybe even revitalise old knowledge. Not least, it  6  BIS Review 68/2010  made it apparent that, while central banks had become more adept at handling normal shocks to demand and supply, there remained a great deal to be learned regarding the manner in which imbalances on the financial markets ought to be handled. So what consequences can we expect the crisis to have for central banks’ method of working in the future? Is there reason to supplement current monetary policy reasoning – and, if so, how? A large part of what I will address here today consists of matters that are currently the subject of intensive international discussion. The final result of these discussions remains to be seen. Nonetheless, let me think aloud on the manner in which central banks’ work may be affected and on the challenges we will face. Effects on potential output and growth? One challenge concerns attempting to assess the manner in which the crisis will affect the economy’s long-term production capacity or potential output. This is significant for several reasons. Firstly, the deviation between actual and potential output, the output gap, is a measure of the stability of the real economy. Secondly, the output gap can affect the manner in which inflation develops. If the production of an economy exceeds its long-term production capacity (that is to say, if the output gap is positive), this tends to exert upwards pressure on inflation.