samchain/econo-pairs-v1 huggingface dataset:
However, a distribution with “fatter tails” would imply a greater likelihood of extreme events and hence potentially larger benefits from higher capital requirements. It seems pretty unlikely to me that the distribution of risks that affects banks follows a normal distribution. A much better way to match the distribution of risks that end up affecting GDP is to assume that most of the time risks – or shocks – follow a normal distribution but that once every few decades a shock comes that is very large. The frequency of such large shocks is very much greater than would be implied by an estimated normal distribution that most of the time matches the GDP data well. This assumption is one made by Robert Barro in a series of important studies of rare events that hit economies 12. A few years ago I calibrated a version of the Barro model so as to match historical experience 13. I used a very large sample of countries and data going back some 200 years. Using data on the annual change in GDP for this sample of countries gave over 4000 observations of historical economic growth. The best fit of the data I could find – and it did fit the data extremely well (Chart 8 see below) – implied that 95% of the time the shock to annual GDP was well behaved and came from a normal distribution with a fairly small volatility (a standard deviation of about 3%).

These range from those requiring banks to hold somewhat higher capital and liquidity ratios to much stricter capital and liquidity requirements; but they also include more fundamental changes to the financial architecture that would preclude banks from undertaking many types of business. It may seem inappropriate to present these alternative proposals on a continuous spectrum. Some are about altering balance sheet structure (capital and liquidity requirements) and others focus on limits on the activities banks can pursue. But in practice I think many of the proposals can be seen to lie on a continuous spectrum. This is because stopping a bank from undertaking an activity and insisting that it be (in the limit) completely equity financed are quite close. One can think of a bank as an entity that finances its acquisition of assets with substantial use of debt finance. By setting capital standards on a type of business high enough one prevents it being financed with much debt; that comes close to making it an activity banks cannot do. Amongst the most radical proposals for creating a less fragile financial structure are those of Laurence Kotlikoff 1. The Kotlikoff proposal is – in essence – to turn the funding of the vast majority of what are now assets on bank balance sheets (largely loans) into equity claims. This could be seen as equivalent to imposing 100% capital ratios. It would mean that banks  1  Kotlikoff, L. (2010) “Jimmy Stuart is Dead: Ending the World’s Ongoing Financial Plague with Limited Purpose Banking”, Wiley Press.
It now has to consolidate its financial position and employment growth in this sector is expected to show a marked slowdown. There are already signs of a turnaround in the labour market. Unemployment is no longer falling and is expected to rise in the period ahead. The labour market is still tight, and Norges Bank projects weak growth in employment in 1999. The labour market will be just as tight during this year’s wage negotiations as it was last year, but the outlook for employment is now less favourable. Employment may fall somewhat from next year. Unemployment was projected to rise to about 41/2 per cent in 2000 in the December Inflation Report. BIS Review 10/1999  –5–  Norges Bank’s projections indicate that the turnaround will not be as pronounced as the situation at the end of the 1980s, partly owing to the fact that households and enterprises are much better equipped to cope with a downturn today than at the end of the 1980s. The financial position of households is much stronger. The enterprise sector is more solid, and the banks’ core capital ratios are substantially higher. Price and wage inflation was much more out of step with the situation in 1986 and 1987, with double-digit inflation. I am not saying this to trivialise the challenges at hand. It is always a challenge to formulate economic policy when faced with such a substantial decline in income alongside imbalances in the labour market.

Conclusion In closing, I would like to take this opportunity to congratulate the Islamic Financial Services Board for commissioning the "Surveys on Legal and Shariah Issues in the Islamic Financial Services Industry". The survey findings represent an important contribution towards augmenting the literature on the  2  BIS Review 35/2007  existing legal and Shariah framework across different jurisdictions. It serves as a useful source of reference for countries that are interested in establishing a legal and Shariah framework for their Islamic financial system. Deliberation on the survey results and the exchange of views and experiences among lawyers, Shariah scholars and Islamic finance practitioners will be important in contributing to increasing the efficiency in Islamic finance and facilitating its robustness as an integral component in the global financial system. Thank you. BIS Review 35/2007  3
2  BIS central bankers’ speeches  Chart 3 Market functioning “heat map” based on issuance and spreads data(a)(b) Corporate bonds P R I M A R Y  S E C O N D A R Y  US UK Euro area Bank bonds, unsecured US UK Euro area RMBS US UK Euro area CMBS US UK Euro area Corporate bonds US UK Euro area Bank bonds, unsecured US UK Euro area RMBS US UK Euro area CMBS (b) US Euro area  N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N N NN NN NN N N N N N N N N N N N N N N N N N N N N N N N N N N NNNNNNN  07  08  09  10  11  12  Funding conditions compared with historical averages Very loose Lack of spreads data  Loose  Normal  Tight  Very tight  No issuance  Sources: Bloomberg, Dealogic, JP Morgan Chase & Co., Bank of America Merrill Lynch and Bank calculations. (a) Shading is based on a score that reflects gross issuance (relative to GDP) and spreads in primary markets, and spreads in secondary markets, expressed as a number of deviations from historical averages, using as much data as available from January 1998.

The FSA has also been able to lower micro prudential liquidity requirements because of the extra liquidity backstop being provided by the Bank of England – in particular the ECTR and the Funding for Lending Scheme. This example may be important in a wider sense. One of the challenges facing macroprudential policy is that the instruments may not be symmetric in their impact. Put crudely, we can make firms hold more capital and liquidity when the going is good. We can’t force them to use those buffers when the going is bad, even if the rules are relaxed. Taking away the stick isn’t the same as offering a carrot. Vegetable metaphors are not always welcomed but I think it’s acceptable to suggest that the FLS may be seen as a carrot! And the FPC recommendations are perhaps a first example of macro prudential policy being used in a co-ordinated way (with central bank actions) to support the resilience of the UK financial system, by being counter-cyclical in approach. This ability to co-ordinate may also demonstrate the benefits of some shared membership across the FPC and MPC. 6  BIS central bankers’ speeches  I want to turn now to the Funding for Lending Scheme in the context of our announcements this morning of the first banks and building societies to have signed up and their stock of sterling lending to UK firms and households at end-June 2012 (Table 1) that will be used as a reference point.
The borrowers would then spend these monies, thereby boosting economic activity. The funds would not disappear, but instead would flow back into the banking system as they were deposited by those who had received the income generated by the increase in spending, thus replenishing the reserves that had been lent out in the first round of lending. This would result in a new stock of excess reserves that would then lead to a second round of credit creation and a further increase in economic activity. This cycling of excess reserves into credit creation, and the corresponding increase in economic activity, would continue until the excess reserves were fully absorbed by an increase in currency outstanding and/or an increase in required reserves associated with the rise in the amount of banking deposits. Inflation would rise as the excessive credit creation generated by the excess reserves led to an overheated economy and a rise in inflation expectations. But that is not the world in which we now live. Because the Federal Reserve now has the ability to pay interest on excess reserves (IOER), it also now has the ability to prevent excess reserves from leading to excessive credit creation. Because the Federal Reserve is the safest of counterparties, the IOER rate effectively becomes the risk-free rate. 3 By raising that rate, the Federal Reserve raises the cost of credit more generally because banks will not lend at rates below the IOER rate when they can instead hold their excess reserves on deposit with the Fed.

Second, the Federal Reserve’s balance-sheet expansion does have a consequence for the balance sheet of the banking system. The increase in the amount of excess reserves has to be held by banks. Excess reserves are a risk-free asset that they may not wish to hold. More important, to the extent that the banks worry about their overall leverage ratios, it is possible that a large increase in excess reserves could conceivably diminish the willingness of banks to lend. At present, these balance-sheet issues do not appear to be having a meaningful effect on bank behavior. In fact, the excess reserves serve as a liquidity buffer that many banks find attractive in the current environment. But that does not mean we can ignore this issue. We need to keep this issue in mind as we contemplate how much balance-sheet expansion might be appropriate. Third, the Federal Reserve is taking on some interest-rate risk in terms of its balance sheet. The excess reserves have an overnight maturity. These liabilities are being used to purchase longer-term assets. In principle, if short-term interest rates were to move up very sharply, the  6  BIS Review 94/2009  cost of funding could eventually exceed the return on the Fed’s assets. The bigger our balance sheet, the greater the amount of interest-rate risk we are assuming. We have examined this issue in detail.
Finally, the baseline scenario uses as a working assumption that, in the short term, the MPR trend will be aligned with market expectations. As I have said time and again, this is a working assumption and in no way must it be taken as a commitment on our part. We at the Board assess the course of monetary policy every month considering every incoming piece of information (figure 6). The baseline scenario reflects those events that are believed to be the most likely with the information at hand at the closing of this Monetary Policy Report. There are risk scenarios, however, which if materialized, may reshape the macroeconomic environment and, therefore, may alter the course of monetary policy. On this opportunity, having evaluated the alternative scenarios, the Board estimates that the risk balance is unbiased for both output and inflation. Internationally, there is the possibility of a sharper slowdown in the emerging world, especially motivated by a deceleration in China. In addition to its effects on our trading partners’ growth, such a scenario is worrisome because of its potential impact on copper prices, our current account and our external financing needs. Scenarios of this type, with significant exchange rate depreciations, may induce inflationary pressures in the short term, especially if combined with a persistently tight labor market and increasing real wages. Complex political and financial conditions persist in the Eurozone, so recurrent episodes of increased volatility are part of the baseline scenario.

For a standard company, this will not matter in the sense that there is an externality in terms of loss of confidence in other like companies. But this is not true for banks. If ordinary depositors get locked into an insolvency process, there can be both hardship and unacceptable loss and the real risk of spillover to other banks. And yet, when a bank fails, decisive action is required to solve the underlying problem. This was the problem with Northern Rock – the only action that could be taken promptly was to use public money, initially in the form of a guarantee by the Government. For the last three years, we have had a special resolution regime for banks in the UK, initially in the form of emergency legislation, and for the last two years in the form of permanent powers given to the Bank of England. The resolution powers give us the right to speed up the insolvency process, subject to a series of legal safeguards which limit what we can do to affect people’s property rights in their money. The central aim of resolution is to enact a solution which ensures that depositors have access to their money and the supply of credit to the economy does not suffer an unacceptable disruption. Resolutions are possibly the most stressful thing you can do as a central banker. Fortunately, we don’t do them very often. The aim is to get the failing bank to a weekend and give ourselves that time to effect the resolution.
An oil price increase triggers a loss in the economy’s terms-of-trade and implies a transfer of wealth from oil-importing countries to oil exporters. This change in the terms-of-trade (in relative prices) requires an adjustment of the real economy and must be absorbed by markets. The policy-makers’ aim should be to facilitate this adjustment by minimising inflationary pressures and aggregate output losses. In reacting to oil price shocks, it is, therefore, important that policy-makers do not repeat the mistakes of the past by attempting to stabilise output growth at unrealistic levels. In the 1970s, such attempts led to a prolonged period of high and costly inflation, rising unemployment and sizeable fiscal deficits. Monetary policy should aim to ensure that inflation expectations are not adversely affected by the unavoidable “first-round” direct and indirect effects of an oil price shock on the price level and that they remain anchored to price stability. By preventing oil price shocks from having “second-round” effects on inflation expectations and on wage and price-setting behaviour, monetary policy can contain the unfavourable consequences of these shocks on both inflation and growth. It can prevent the fuelling of an inflationary spiral and the persistence of inflationary pressures, it can facilitate the real economy’s adjustment to the change in relative prices implied by the oil price shock, and it can thus help to minimise the associated output losses.

In connection with the expansionary cycle of the world economy, and also with the depreciated dollar, prices of copper, oil and derivatives – especially gasoline – are picking up again. The rise in commodities’ prices has now spread to foods. For the year 2008, projections from Consensus Forecast foresee global growth similar to that of 2007 but with a rebound in the U.S. and a slight deceleration in the euro zone and in emerging economies, influenced by the process of monetary normalization implemented to keep inflation under control. Such a favorable global scenario may continue longer, but it can also deteriorate if a number of latent risks materialize. The most important ones facing the world economy are: (1) a deeper deceleration in the U.S. as a result of a stronger adjustment in the housing sector that ends up shocking the rest of the economy and the world; (2) an acceleration of inflation because of supply-side shocks in a global economy with little output gaps, which generates a  2  BIS Review 87/2007  sudden and large increase in the monetary policy rates of industrial economies, especially the U.S. and the euro zone; (3) an unforeseen sharp increase in risk premiums and a liquidity shortage affecting asset prices and world activity as a result of an unexpected increase in inflation in the developed world or a shock in financial markets, at a time when risk premiums are in unusually low levels.
Despite this, one could see that the support measures had had the effects on risk premiums and housing prices I described above; the risk premiums were lower than before the pandemic and housing prices had started to rise clearly, after falling during the start of the pandemic.27 It is not possible to say with certainty how the economy would have developed if we had not decided in November 2020 to extend and prolong the asset purchase programme. As the pandemic still had a significant impact on economic activity and contributed to market uncertainty, continued support measures were justified. However, the financial markets were functioning well and the yield curve was low and flat. The asset purchase programme that we had already decided and which was due to run until mid-2021 seemed, in my view, sufficient to deal even with increasing uncertainty.28  Rapid rise in inflation and a reversal of monetary policy 2022 Inflation has risen rapidly this year and is now far too high. The Riksbank has therefore raised the policy rate, and other interest rates have followed. The higher interest rates mean that the value of the assets we have purchased falls and that the Riksbank will report a large financial loss this year  25  Many central banks supported the markets through asset purchases during the pandemic. Norges Bank is one of the few exceptions.

April 2015  Purchase government bonds for a further SEK 40- 50 billion until end of September 2015. July 2015  Purchase government bonds for a further SEK 45 billion until end of December 2015. October 2015  Purchase government bonds for SEK 65 billion during January-June 2016. April 2016  Purchase government bonds for SEK 45 billion during July-December 2016. December 2016  Purchase government bonds for SEK 30 billion during January-June 2017. No purchases (p 4-8, 23-24). Purchases for SEK 15 billion (p 19-22). April 2017  Purchase government bonds for SEK 15 billion during July-December 2017. No purchases (p 14-16)  December 2017  Purchase government bonds for SEK 65 billion during January 2018-June 2019 to compensate for bonds that mature in March and June 2019. No purchases (p 11-13)  April 2019  Purchase government bonds for SEK 45 billion during July 2019-December 2020. No purchases (p 11-14)  March-June 2020  Several decisions which were then included in the programme below  April 2020  Purchase assets for SEK 300 billion until the end of December 2020, in addition to the asset purchase programme for government bonds already in place. 29 [30]  Purchase government bonds, covered bonds, municipal bonds, commercial paper and corporate bonds. June 2020  Extend the programme by SEK 200 billion and prolong until end of June 2021. November 2020  Extend the programme by SEK 200 billion and prolong until end of December 2021.
Variables are selected according to the number of Bloomberg alert subscriptions, but data on consumer prices, producer prices and wages are excluded. BIS central bankers’ speeches  9  Chart 7: Interest rate reaction to FOMC meeting 18/9/2013(a) UK  Change since 12pm (bps)  US  15  Bernanke's conference ends  10  FOMC  5 0 -5 -10 -15 -20 -25 -30  12:00 15:00 18 Sep 2013  18:00  21:00  08:00 19 Sep  11:00  14:00  -35 17:00  Source: Bloomberg. (a) 1-year OIS rates, 2-years forward. Chart 8: Sensitivity of UK interest rates to economic news(a)  Sensitivity of UK 2y1y government yields to UK economic surprises  Basis points per one standard deviation surprise  Sensitivity of UK 2y1y government yields to US economic surprises  10 8 6 4 2 0 -2 -4 -6 -8  2006 - 08  2009 - Apr 2013  May 2013 - latest  Aug 2013 IR 14 Oct 2013  -10  Sources: Bloomberg and Bank of England calculations. (a) Based on bi-variate regressions of daily yield changes on the daily average surprise in the variables within the Economic Surprise Indicators. The diamond shows the regression coefficient and the bars indicate plus or minus two standard deviations.

Since the start of the crisis, output per hour worked has fallen by around 5%, leaving it more than 15% below where it would have been if it had simply continued growing at its pre-crisis trend rate. As discussed in past Inflation Reports, as well as numerous speeches by MPC members, there are a variety of explanations for this weak productivity performance. These include: specific factors, such as the decline in North Sea oil production and an exaggeration of productivity growth in the financial sector before the crisis; the hoarding of overhead and skilled labour through the downturn; unusually low rates of investment on the back of heightened uncertainty about the outlook; the adoption of more labour-intensive production techniques, encouraged by the high degree of wage moderation; thick-market externalities, which make it easier to find and transact business when demand is strong; and a misallocation of credit as banks repair their balance sheets, with heightened forbearance shown on existing loans to low productivity firms, coupled with caution as regards lending to risky businesses that offer the prospect of higher productivity. Some of these mechanisms depressing productivity can be expected to unwind naturally as demand recovers. But others might take longer and require the restoration of the banking system to full health. And some of the lost productivity growth may prove to be permanent, for instance because of the foregone opportunities for learning by doing.