samchain/econo-pairs-v1 huggingface dataset:
According to money market expectations, the interest rate will eventually stabilise around 5½ per cent. This is consistent with an inflation target of 2½ per cent and a long-term real interest rate in line with the level abroad. This interest rate, with a mark-up for banks’ margins, provides a more realistic expression of the interest rate level that will apply over the loan’s life than the floating interest rate prevailing today. When the interest rate is abnormally low, it can be particularly challenging for borrowers to assess their debt-servicing capacity over time. Such a low interest rate also places particular demands on banks in assessing the creditworthiness of borrowers. But experience has shown that the underlying cause of loan defaults can be overly optimistic assessments on the part of both the lender and borrower. House prices and developments in household credit influence consumption and housing investment. We seek to take account of these indirect effects in our interest-rate setting. Household debt has increased sharply over the past decade. Developments in debt in the 1990s may partly be interpreted as a delayed adaptation to the deregulation of the housing and credit markets in the 1980s after many households experienced financial difficulties following the relaxation. We have limited scope for restraining structural changes that occur when households increase their debt over several years to invest in housing and other property and assets. An interest rate that would effectively restrain these structural adjustments would also have an adverse impact on output and employment.

The additional liquidity infused into these economies occurs at a time when it is necessary to withdraw economic stimulus and normalize or even tighten monetary policy. This is an example of the inconsistency between global liquidity and regional economic cycles. 3. The second issue is the current international monetary system which is not aligning with the changing structure of the global economy. As we all know, one outcome from the current crisis is the growing role of emerging market economies, particularly in Asia. This multi-polar economic landscape is something for policymakers to consider whether there is a need to move to a multi-polar currency system. The end goal should be to retain the efficiency of the current system while enhancing its stability going forward. 4. The third issue is, despite the shortcomings of the current international monetary system, the international community has not been able to make a transition to an alternative system. In practice, it is difficult to identify a currency to compete with the US dollar as there are certain criteria to qualify as reserve currency. First, a reserve-issuing country has to illustrate a good track record of prudent macroeconomic policy. Second, such country must have an open capital account regime supported by deep and liquid financial markets. Should these two criteria are satisfied, such currency has a potential to be widely accepted and used in private international transactions. Today, it is difficult to find an alternative currency which satisfies these conditions.
Thankfully, the issue of climate change, after languishing on margins for years, has finally caught policy makers’ attention. As Victor Hugo once said, ‘nothing is as powerful as an idea whose time has come’. It seems that time has finally come for the climate change to receive the attention it deserves. Climate risks stem both from climate shocks like floods, hurricanes and other severe weather events as well as from trends such as warming temperatures, melting glaciers and rising sea levels. Broadly speaking, these weather developments pose two types of risks to the financial sector; physical and transition. Increasing severity and frequency of extreme weather events could pose serious physical risks by damaging the assets that constitute banks’ exposures. Additionally, natural disasters can damage public infrastructure and destroy livelihood, hurting economic activity in general. On the other hand, transition risk stems from the economic impact of a shift to a lowcarbon economy. Factors like development of environment-friendly technologies, changing public sentiments, and new laws to govern carbon emission can cause a shift in economic activity towards greener projects. As a result, the value of carbon-intensive assets might drop as investors’ risk perception and preferences change. Sectors like oil, gas, coal and utilities are particularly vulnerable in the long run as transition risk might devalue their assets and displace their workforce.

Graph 1 shows the progress that has been made so far with fiscal consolidation and the plans embedded in the fiscal budget for 2011. Provided the plans are carried out, the consolidation involved will be impressive in both historical and international comparison, with a roughly 9 percentage point improvement in the non-cyclically adjusted fiscal balance from 2009 to 2012, even though there will be a significant slack in the economy for most of the period. Although it has been delayed and has faced obstacles on the way, the reconstruction of the domestic financial sector is far advanced. The three major commercial banks have been recapitalised, with foreign creditors taking a majority stake in two of them and the State  BIS Review 139/2010  3  holding a majority in the third. At the end of June, all three had capital ratios above 16%, most of it common equity. As a result, Iceland’s banks meet Basel III requirements more than two times over. The recapitalisation of the savings banks is in its final stages. In June of this year, however, question marks were raised about the capital position of the banking system when the Supreme Court of Iceland ruled that linking ISK loans to exchange rates was illegal. The banking system had a large number of such contracts on its books. The precise scope of the problem was uncertain, but more importantly, it was not clear what interest rates these loans should carry when they were no longer exchange rate-linked.
4  All speeches are available online at www.bankofengland.co.uk/speeches  4  Chart 1: Close correlation pre-crisis between output growth and policy  60  3 month moving average, bps 50 Combined CIPS output survey (LHS) 25  55  0  50  -25  45  -50  40  -75  3 month moving average, balance 65  Average MPC vote, including QE (RHS)  35 30 1998  -100 -125  2000  2002  2004  2006  2008  2010  2012  2014  2016  2018  Sources: IHS Markit, ONS and Bank calculations. Notes: Combined CIPS output survey is a weighted average of the Markit/CIPS PMIs for services, manufacturing and construction. Average MPC vote includes both decisions on Bank Rate and QE, with every extra £ of asset purchases (gilts and corporate bonds) treated as equivalent to a 25bp cut in Bank Rate (see Joyce, Tong and Woods, 2011). Five years ago, the MPC recognised that past should not be prologue. The MPC was pretty certain there was a large amount of slack, although it had questions over how much productive capacity had been destroyed following the crisis; how quickly productivity growth would recover; and whether labour supply would change in the wake of reforms and a heavy burden of household debt. Such uncertainties about supply meant that knowing what was happening to demand was no longer sufficient for gauging the appropriate policy response.

This generally wasn’t necessary during the Great Moderation, when the economy was largely subject to a series of demand shocks. The inflation target could be achieved without causing undesirable volatility in 2  output and employment (so-called “divine coincidence” ). Despite the crisis, divine coincidence has continued to reign in the euro area and the US (see charts in the Appendix). Large output gaps and below-target inflation have pointed monetary policy in the same direction. That, unfortunately, has not been the case in the UK economy, which has been subject to a series of major supply shocks over the past five years, creating tensions between short-term output and inflation stabilisation. Brexit is the latest and potentially largest example. Brexit is a regime shift that has markedly increased the range of possible outcomes for the UK economy and therefore the potential paths of monetary policy. 1  Another dimension to uncertainty is ‘model’ uncertainty around the structure of the economy. That is distinct from uncertainty about possible future events, or ‘shocks’, affecting economy. Model uncertainty captures uncertainty around how the economy responds to those events, including to changes in monetary policy itself. 2 See Blanchard, O., and J. Galí (2007). "Real Wage Rigidities and the New Keynesian Model". Journal of Money, Credit, and Banking, 39(1), pp. 35-65.
As regards economic developments abroad there are three obvious uncertainty factors that we have considered in conjunction with the most recent monetary policy decisions. The first concerns the effects of the United Kingdom’s withdrawal from the EU – Brexit. As you know, people in the UK voted to leave the EU in a referendum back in June 2016, so this risk has indeed been with us for some time now. And the recent course of events has increased the uncertainty still further. The second risk these past twelve months concerns the trade conflict between the United States and China. Developments seem to have subdued export orders abroad. And recently, growth looks to have slowed in China, which has otherwise provided traction for global growth over a long period. The third risk concerns Italian fiscal policy. The discussion between the EU and the Italian Government about the Italian budget has periodically created unease on the financial markets, even though the most recent course of events is providing some breathing space. As regards the domestic economy, the Riksbank has long since warned about developments on the Swedish housing market, which is the most important domestic factor that could trigger poorer economic development than in our forecast. After having risen sharply over a long period of time, housing prices started to fall quite rapidly last autumn. During the course of 2018, prices have recovered slightly, and our forecast is for them to continue to rise at a modest rate in the coming years.

Beyond the large number of subsidiaries established in or relocated to Paris since then – at least thirty banks, twenty asset managers, several market platforms for instance –, we should also consider the activities performed through branches in Paris, especially trading rooms and desks, which are sometimes far more significant than the subsidiaries to which they are legally bound. Contrary to other cities, which have attracted one or two kinds of financial services, Paris is the only one to have benefited from relocations on all segments of the financial industry. More importantly still, these moves were not one-off events: the momentum has lastingly shifted from London to continental Europe. We observe a steady shift, which shows no sign of losing steam. Combine this with the strength of some key sectors of our economy; the result is that Paris now stands as the first stock market capitalisation in Europe, ahead of London.3 Whatever your field of activity, you will find in Paris a convenient and safe harbour, with all facilities and fast speed train connections to other major cities, in Europe and  2/3  BIS - Central bankers' speeches  beyond. It has also attracted regulatory bodies, which can only be viewed as comforting neighbours after recent turmoil elsewhere. The EBA (European Banking Authority) moved to Paris in the wake of Brexit, thereby joining ESMA (European Securities and Markets Authority). Having a "regulatory hub" will facilitate cooperation between European agencies, in a world that requires such enhanced cooperation between authorities.
In the UK civil service, there is the Northcote-Trevelyan principle which ensures that recruits are selected on merit and not through political patronage and the well-established practice that “civil servants advise and Ministers decide.” At both the World Bank and the IMF, the job of the “expert” staff was to provide the best technical advice and if there were political trade-offs to be made, they were done at the level of the Board, which represented the 189 member country governments. If experts cross that line, they undermine the credibility of their expertise and  36  Evaluating Information: the Cornerstone of Civic Online Reasoning, Stanford History Education Group, pp 4-5. Haidt, J (2013) The Righteous Mind: Why Good People are Divided by Politics and Religion, London: Penguin Books A good example is the recent debate on whether or not migration was the cause of the fall of the Roman Empire between Mary Beard, a well-known historian, and Aaron Banks, a UKIP supporter (see here for more details). 37 38  11  All speeches are available online at www.bankofengland.co.uk/speeches  11  their accountability to their professional standards. And if politicians cross that line, they risk misleading the public who elected them to look out for their interests. Independent institutions such as the civil service, central banks, and universities have a special role in mediating expertise in the public interests, but technocracy can only ever derive its authority from democracy.

They work themselves up into a righteous frenzy culminating in their leader, Reg, yelling “what have they [the Romans] ever given us?” Although the question is intended to be rhetorical, after a short pause one of the rank and file gingerly points out that the local aqueduct has been useful. Several others then feel obliged to chip in with other helpful innovations from the Romans, until finally Reg has to restate his question as “Apart from the sanitation, the medicine, education, wine, public order, irrigation, roads, a fresh water system and public health, what have the Romans ever done for us? !”  2  All speeches are available online at www.bankofengland.co.uk/speeches  2  And what have the experts ever done for us? We have gained about 20 years of life expectancy since 1950  1  as a result of advances in water, sanitation and healthcare. Millions used to die of easily treatable illnesses like diarrhea or influenza. Polio used to paralyze 350,000 people annually as recently as 1988; today it has 2  been virtually eradicated . Average world incomes have risen over twentyfold - from $ to $ in 3  current $ - as a result of improved economic policies, particularly in developing countries. The proportion 4  of the world living in poverty fell from 44% in 1980 to 11% in 2013 .
Matters to do with world economic development and what should be done - not just to mitigate the short-run effects but also to construct systems and institutions so that similar events can be avoided in the future - have been high on the agenda for economic policy discussions in various fora this autumn. The latest instance is the 1998 Annual Meeting of the International Monetary Fund in Washington D.C. earlier this week. In connection with that meeting, finance ministers and central bank governors from all over the world assembled in various groups to discuss the situation. Background to the global economic problems Just a year or so ago, many observers foresaw a golden future for the world economy. There was talk in some places of a new economic era, with strong growth and permanently low inflation, at least in the United States. Today, the discussion has shifted in general to deliberations about the risks of a world economic slowdown. The challenges the global economy is facing at present are a combined result of several factors. One of these factors is, of course, the situation in Japan, where the economic problems, as I just said, have been at work throughout this decade. The inability to take sufficiently resolute action has led the Japanese economy into a serious decline. Japan has the world’s second largest economy and is of primary importance for the outlook in Asia as a whole. A crisis in other Asian countries then materialised almost a year ago.

I should recognise at this point the debt I owe to my colleagues Jack Meaning and, in particular, Alberto Polo, who helped me with the simulations of this model. The past couple of weeks have been a busy time for me with the MPC: I would not have been able to complete this work without their considerable help. Charts 1 and 2 illustrate the advantages of difference rules over level rules in this set-up. When restricted to simple forms and optimised, a difference rule performs better than a level rule in stabilising inflation and lowering social losses. This is true however much weight is placed on output gap stabilisation relative to inflation stabilisation – in other words, for all values of ‘lambda’ in standard policy evaluation exercises.24 And – at least in our setup – it is true even as the importance of the persistent shock to the starred variables relative to the temporary shock diminishes. The intuition behind the result is as I have discussed. If monetary policy decisions are based on a mis-interpretation of the shock driving R-star, then the difference rule is more ‘forgiving’ of those mis-perceptions than the level rule, and less noise is introduced into the system as a result. This is illustrated by the impulse responses shown in Chart 3. These show the evolution of model variables following a risk premium shock that lowers R-star persistently, but is believed by policymakers, firms and households to be temporary.
But, in fact, the mean path for inflation was above target at around two years. That underlines the hefty upside risk to inflation that featured in the Committee’s August projections. Indeed, we cannot be remotely complacent about the risks in either direction. This is a delicate balance, and one that is developing from month to month. It is a convenient but in some ways misleading shorthand to characterise the Committee as currently balancing a growth risk against an inflation risk. Given our mandate – and, indeed, given how the economy works – that is better thought of as our having to balance the downside risks to inflation over the medium-term against the upside risks to inflation over the medium-term. So, perhaps contrary to some recent commentary, the MPC remains as focused on medium-term inflation as ever. No shift in the underlying reaction function. No shift in the aversion to inflation (or to deflation). But, of course, the current environment is highly unusual and our reaction function cannot be written down as a fully specified state-contingent rule; and so everyone is discovering that we truly are committed to low inflation in the medium term. The mandate is expressed in terms of stable low inflation because that is what central banks can deliver over the medium term, and because nominal stability is a precondition for sustainable growth. There is not a comfortable medium-term trade off between growth and inflation. Inflation is just the opposite of a free lunch.

As oil is a key input to production, this acts like a negative supply shock for the Western economies: it costs firms more to produce the same level of output than before the run up in oil prices. And, like a tax, it acts to redistribute spending power from energy consumers to energy producers. In those circumstances, real-take home pay has to grow more slowly for a while in order to avoid the capital stock shrinking as firms sought to maintain the internationally-determined required rate of return. The role of monetary policy is to facilitate that process, recognising the potential redundancy of some capital resources given higher energy prices, and the upward pressure on real interest rates as households seek to borrow to tide them over the tough times. In other words, in the now standard set up, taking the cost shock on its own, the equilibrating short-term real rate (r star) has risen and the economy’s potential supply (y star) has probably fallen. So, ignoring other developments, policy would have to be tighter than otherwise, even if the direct effects of the cost rise on the price level were accommodated. But, of course, other things have been going on, and it is the net effect for our policy rate that matters. And that involves making a judgment about the tightness of credit conditions. The credit shock and monetary conditions In conducting policy, commentators usually take the short-run nominal interest rate, Bank Rate, as a summary measure of monetary conditions.
As the staff of the Riksbank has knowledge and experience of significance in this field we have agreed to contribute factual information. We have also agreed that any senior managers wishing to express their views on various issues relating to the EMU discussion may do so, as long as this is done in a factual manner. Our ambition here is of course to ensure that the general public retains confidence in the Riksbank regardless of the outcome of the referendum. Today I intend to briefly discuss three issues that have arisen in the discussions and of which the Riksbank has knowledge and experience. The first concerns whether the differences between the ECB and the Riksbank are as large as is sometimes claimed. The second issue is the need for a national stabilisation policy. Finally, I shall discuss, on the basis of our own experiences, the conditions for influence in economic policy forums if we choose to remain outside the Eurosystem. Are there major differences between the Riksbank and the ECB? In Sweden we lived for a long time - rather longer than the core EMU countries - under the impression that better economic growth and lower unemployment could be achieved merely by allowing inflation to be slightly higher. This led to repeated devaluations and to much poorer economic growth. Sweden fell behind the other EU countries in terms of GDP per capita and purchasing power. There was a break in this policy at the beginning of the 1990s, in connection with the crisis during that period.

Importing the stability-oriented policy that had long been conducted in the EMU's core countries helped to create better conditions for future growth. The policy model we now follow comes originally from Germany. During the entire post-war period they have endeavoured, to a great extent successfully, to maintain price stability. The task of achieving this has fallen to the German central bank - the Bundesbank - which has operated independently, at arm's length from party politics. The Bundesbank model is now copied by a number of industrial nations, which have given their central banks a large degree of independence and the task of aiming for price stability. This policy is also reflected in the Maastricht Treaty and in the Riksbank legislation. My colleagues in the major industrial nations also try - as long as they are sure that inflation is not about to deviate from the desired level to take account of economic activity and unemployment. There are thus considerable similarities and this applies not only in Europe, but also in a comparison with, for instance, the US, although the stipulated targets vary, sometimes for historical reasons. In this sense we are all the children of the Bundesbank! Within the central bank world the methods of working have also become more similar in recent years. Although not all industrial nations with a floating exchange rate say that they use inflation targeting, they actually do so in some form.