samchain/econo-pairs-v1 huggingface dataset:
Philip R Lane: Monetary policy, low interest rates and low inflation Dinner remarks by Mr Philip R Lane, Member of the Executive Board of the European Central Bank, at the Centre for European Reform, London, 27 February 2020. * * * It is a pleasure to be invited to speak at the Centre for European Reform. Before turning to the longer-term issues that are the primary focus of this speech, I wish to comment on the coronavirus. As emphasised by President Lagarde earlier today, we are closely monitoring the information about the spread of the coronavirus, which is first and foremost a public health emergency, with the most severe impact on the families of those that have died from the virus. In terms of the macro-financial implications, the more quickly is the virus contained, the smaller will be the impact on the world economy and the faster will be the recovery. Conversely, more widespread contagion and a longer interruption in normal economic activity constitute additional downside risks to near-term projections. Accordingly, it is a priority for the ECB to assess on a continuous basis the implications of the evolving situation for economic and financial conditions. In my remarks this evening, I aim to outline some of the factors that are relevant in understanding the role of monetary policy in the current environment of low interest rates and low inflation.1 First, there has been a trend decline in the underlying equilibrium real interest rate since the 1980s.

A corollary fundamental principle in the design of monetary policy in this environment is that – in order to avoid a long-term de-anchoring of inflation expectations – easing measures must be sufficiently pre-emptive to guard against a further downward drift in inflation dynamics. Furthermore, under conditions in which policy rates are likely to rise only gradually over time, fiscal measures have an especially powerful macroeconomic impact, both by providing stabilisation in the event of adverse shocks and by supporting the return of inflation to our aim. In conclusion, I have briefly described some of the forces shaping the ECB’s current monetary stance. However, there are still many open questions that are raised by the combination of low interest rates and low inflation. Accordingly, this year’s review of our monetary policy strategy provides an excellent opportunity to take stock, reflect on our experiences and listen to a wide range of external voices. 1 For a more detailed discussion, see: Lane, P. R. (2020), “The monetary policy toolbox: evidence from the euro  area”, speech at the US Monetary Policy Forum, New York, 21 February; and Lane, P. R. (2019), “ Determinants of the real interest rate”, remarks at the National Treasury Management Agency, Dublin, 28 November. 2/2  BIS central bankers' speeches
Repo rate forecasts, per cent, quarterly averages 7  7 90% 75% 50% Outcome Forecast  6 5  Greater effects of support measures Confidence strengthened more quickly  6 5  4  4  3  3  2  2  1  1  0  0  -1  -1  Phasing out of support measures Higher productivity  -2  -2 04  05  06  07  08  09  10  11  12  Source: The Riksbank  We are currently expecting to hold the repo rate unchanged at a low level for a further period to come, until autumn 2010. This is necessary to contribute to a stable recovery and to attain the inflation target of 2 per cent. Moreover, we Executive Board members decided at the most recent monetary policy meeting that further measures were necessary to contribute to interest rates on loans to companies and households remaining low. We therefore decided to offer the banks the opportunity to borrow from the Riksbank at a fixed interest rate and a maturity of around 11 months. The loan auction was held on Monday this week and the final amount lent was SEK 95.3 billion. We expect the loans to the banks to complement the repo rate tool in a way that enables monetary policy to have the desired effect. Once economic activity has recovered, we are intending to raise the repo rate to more normal levels.

Central banks' balance sheet totals, percentage of GDP 30  30 The Riksbank  25  25  ECB Federal reserve  20  20  15  15  10  10  5  5  0 Jan-07  0 Jul-07  Jan-08  Jul-08  Jan-09  Jul-09  Sources: Bureau of Economic Analysis, Eurostat, Statistics Sweden and the respective central banks  As we have discussed earlier, the Riksbank has also implemented unconventional measures – measures in addition to the policy we would probably have conducted under more normal circumstances. The effects of these measures are in many cases similar, which means that it is difficult to compartmentalise them. However, even if the boundaries are not razor-sharp, it is possible to divide them up according to their basic purposes. There are measures which are explicit monetary policy measures with the aim of stimulating demand in the economy further – since the repo rate is close to zero, the possibilities to use the “traditional” interest rate tool are limited. There are also measures that have been implemented to safeguard financial stability. …to attain the inflation target... To attain the inflation target, it has been necessary to make use of new tools to get the financial markets functioning better, to increase the access to loans and to try to bring down various interest rates and risk premiums that have counteracted monetary policy.
The current process of deleveraging in the private sector remains incomplete, while pressures on fiscal sustainability in these economies also continue to weigh on confidence and growth. Significant challenges continue to be faced in the implementation of the structural adjustments which in turn is affecting the process of fiscal consolidation. This has further restrained the policy flexibility to support growth. The extraordinary and exceptional monetary measures taken by central banks in these economies have provided support to their economies, but they have also come at a cost to savers with growing risks of market distortions and financial imbalances the longer these measures are held in place. BIS central bankers’ speeches  1  In efforts to build stronger defences against a repeat of the events that precipitated the 2008 global financial crisis, the global regulatory reform agenda has placed significant focus on addressing elements of the regulatory and supervisory systems that allowed the build-up of excessive leverage. These elements include the unfettered innovation by financial institutions and the prevailing incentive system. Financial engineering had led bankers and investors to lose focus on their risk exposures when they failed to understand the increasingly complex products that purported to reduce the risks. The weak regulatory regime and supervision also failed to rein in such unbridled innovation. Misaligned incentives then fuelled excessive risk taking both at the institutional and individual levels.

The various parts of the economy are connected, which often means that a strengthening of the weaker parts is even more important to the economy as a whole than to the effects on a particular branch or sector. It is exactly this – the complementarity of the 4 economy – which makes it particularly important to deal with our weak links and to listen with humility to the proposals of the OECD and IMF, for instance. It is often easier to identify problems if one can see things with a little perspective. I believe that the Swedish economy has considerable unutilised potential for a strong growth if we concentrate on it, if we all work together to make our joint cake grow. 4  The significance of a complementarity in economic policy has been demonstrated by, for instance, Aziz and Wescott 1997 in "Policy Complementarities and the Washington Consensus". 4  BIS Review 78/2001
Now, however, we know that there were hidden vulnerabilities in the banks’ capital positions. There was also a failed attempt to nationalise one of the banks in late September 2008. It was indeed fortunate that it did fail, as nationalising the bank would have turned a bank foreign currency refining problem into a sovereign problem, with the serious risk that the sovereign might have defaulted on such foreign currency payments. In this light, and given the lack of international cooperation, the Icelandic authorities were forced to consider radical solutions. Although they were not necessarily articulated fully at the time, these solutions entailed several goals: preserving a functioning domestic payment system, ring-fencing the sovereign in the case of bank failures, limiting the socialisation of private sector losses, and creating the conditions for rebuilding a domestic banking system. In essence, the adopted solution saved the domestic operations of the banking system by splitting up the banks and allowing the international part to go into a resolution process. Furthermore, in order to stop an incipient run on domestic deposits, all deposits in Iceland were declared safe and all deposits in Icelandic-headquartered banks were given priority over other unsecured claims. As a result of these measures, the domestic payment system functioned more or less seamlessly throughout, and common citizens had continuous access to their deposits. 2  BIS central bankers’ speeches  There are still a number of misconceptions about this process in international discussions.

Of course, I am deeply indebted to His Excellency the President for appointing me as the Governor of the Central Bank of Sri Lanka. I am also indebted to the Hon. Prime Minister and the Hon. Finance Minister for supporting my appointment and I very much hope that I will be able to fulfill the trust they have reposed in me. When I met the President, he just told me one thing, he said “Do your work in a straight way and do not fear anybody in discharging your duties.” Now my intention is to follow his direction. When I met the Honourable Prime Minister, he laid out his vision for where he wants to take this country and there is a big role for the Central Bank. And in many ways, if we are not able to fulfill our functions in the way it should be fulfilled – in-terms of creating a platform for macroeconomic stability with strong macroeconomic fundamentals, having financial sector stability so there is confidence right through the system – nothing else is possible. That is the first step, to get strong macroeconomic fundamentals, to have the financial sector which is the lifeblood of the country stable, and people within the country and outside having confidence in it. So that is our responsibility. And as I said, because I genuinely believe that nothing else will really take off, unless we are able to do our job well, to fulfill our functions well.
[12] As we move forward, we will reassess whether a normalisation strategy is sufficient to bring us back to 2% inflation over the medium term. Ultimately, the terminal rate at which our hiking cycle ends must be compatible with inflation returning durably to our target – and that rate will depend on how the economic environment evolves around us. One key factor will be how the persistence of the shocks we are facing affects inflation expectations and potential output. If there were evidence that high inflation risked de-anchoring inflation expectations, then the policy rate that is compatible with our target would lie in restrictive territory. Similarly, were we to conclude that ongoing supply shocks had durably lowered economic potential, we would have to ensure that demand remains aligned with supply. Another key factor will be how the growth outlook affects inflation. Negative supply shocks will result in a growth slowdown, which will likely have an impact on the prevailing inflation rate. In past euro area recessions going back to the 1970s, headline inflation has fallen by about 1.1 percentage points a year later, while core inflation has fallen by about half that amount. [13] But this is not a hard-and-fast rule: in some recessionary episodes, such as those triggered by a worsening of supply conditions, inflation has stayed the same or even risen.

Boehm, C.E., Flaaen, A. and Pandalai-Nayar, N. (2019), “Input Linkages and the Transmission of Shocks: Firm-Level Evidence from the 2011 Tōhoku Earthquake”, The Review of Economics and Statistics, Vol. 101, No 1, MIT Press, March, pp. 60-75. 5. Lagarde, C. (2022), “A new global map: European resilience in a changing world”, keynote speech at the Peterson Institute for International Economics, Washington, D.C., 22 April. 6. Hamilton, J.D. (2011), “Historical Oil Shocks”, NBER Working Paper Series, No 16790, National Bureau of Economic Research, February. 7. Bachmann, R. et al. (2022), “How it can be done”, ECONtribute Policy Brief, No 34. 8. Kuik, F., Morris, R. and Sun, Y. (2022), “The impact of climate change on activity and prices – insights from a survey of leading firms”, Economic Bulletin, Issue 4, ECB. 9. McKinsey (2021), “How COVID-19 is reshaping supply chains”, 23 November. 10. During US recessions from the 1950s to the 1980s, inventory investment accounted for 1.4 percentage points of the average 2% peak-to-trough decline in real GDP. See Piger, J.M. (2005), “Is the Business Cycle Still an Inventory Cycle?”, Economic Synopses, No 2, Federal Reserve Bank of St. Louis. 11. Lagarde, C. (2022), “Monetary policy normalisation in the euro area”, The ECB Blog, 23 May. 12. The Governing Council has (i) decided to flexibly reinvest maturing securities under the pandemic emergency purchase programme, and (ii) launched a new transmission protection instrument. 13. These are the median figures across recessions. 14.
But given the strong contractionary tendencies in the economy, we decided that further stimulus was needed. So in March, we announced a programme to purchase £ bn of public and private financial assets, financed by issuing extra Bank of England reserves – an action going by the unlovely description of Quantitative Easing. And at our meeting at the beginning of this month, we upped the total amount of purchases to £ bn, about half of which have so far been made. The ultimate aim of these measures is to boost the annual rate of growth of nominal spending in the economy, which has been roughly flat over the past year, to a level consistent with a sustainable level and rate of growth of real activity and inflation meeting our target. Quantitative easing has been described in some quarters as “printing money”, though it is not literally that. It is more akin to us buying the asset with a cheque drawn on the Bank of England, which the seller then deposits with his own bank. As a consequence, the quantity of bank deposits in the economy goes up, while the claims that the banks hold on the Bank of England also increase. The immediate impact of these purchases should be to drive up the price of the assets that we are buying, or equivalently to reduce their yield. That is indeed what we have seen, with gilt yields falling nearly ½ percentage point when the programme was initiated.

Charles Bean: Monetary policy developments Speech by Mr Charles Bean, Deputy Governor (Monetary Policy) of the Bank of England, at Cutlers’ Feast, Cutlers’ Hall, Sheffield, 21 May 2009. *  *  *  Master Cutler, Lord Lieutenant, High Sheriff, Lord Mayor, My Lords, Ladies and Gentlemen. I am very grateful to you, Master Cutler, for inviting me here to Sheffield to speak at this great annual Feast, to meet the leaders of such an important sector of British manufacturing industry, and to enjoy your magnificent hospitality. We are now almost two years into the financial crisis, which broke in August 2007. The preceding decade or so was marked by steady growth and low inflation, not just in the United Kingdom but in many other parts of the world. In 2003, the Bank’s Governor, Mervyn King, even went so far as to christen it the NICE decade – standing for non-inflationary consistently expansionary. He was at pains to point out that one should not expect that unusual stability to be maintained. But although we subsequently fretted about the vulnerabilities building up within the global financial system as a result of the relaxed attitude to risk and the easy availability of credit, we never imagined quite how extreme the unwinding would prove, particularly after the bankruptcy of Lehman's last September triggered a near collapse of the financial system and a world-wide plunge in business and consumer confidence.
In short, a recovery that will be both weak and protracted by historical standards, and characterised by credit constraints and reduced levels of consumption and investment, as both consumers and firms seek to repair balance sheets. In the process, export markets will become more competitive. 1  The IMF’s forecasts, published in the World Economic Outlook (October 2009), cover 2009 and 2010. The forecasts in the European Commission’s Autumn 2009 Economic Forecasts extend to 2011. BIS Review 154/2009  1  … could benefit the Maltese economy Although euro area membership cushioned the domestic impact of the global crisis, the economy’s resilience has come under strain. As expected in an open economy, the shock was transmitted primarily through the trade channel as external demand shrank. Following average annual growth of almost 4 per cent in 2005-2007, the pace slowed to 2.1 per cent last year. The contraction was particularly pronounced in the manufacturing and tourism sectors, though ongoing expansion in the services sector mitigated the overall decline. The government measures targeted to support affected companies, moreover, served to contain job losses, such that the unemployment rate has remained below that of the euro area. Until very recently, inflation, however, has failed to drop as fast as in the euro area, acting as a drag on purchasing power. These trends produced a sharp drop in output in the first half of the year and the Bank expects annual real GDP to shrink by about 2.2 per cent.

The magnitude of the task is compounded by the fact that a high proportion of Malta’s exports go to non-euro area countries whose currencies have tended to depreciate against the euro. In this regard, the example of Germany is significant. Despite the appreciation of the euro, the real effective exchange rate based on unit labour costs actually declined by almost 2 per cent in 2000-2008, primarily because wage growth was moderate and was, in any case, accompanied by productivity gains. The resulting strong competitive position enabled Germany to take full advantage of the global rebound, becoming one of the first, and few, countries to register positive growth in the second quarter of this year. There is a clear message implied here, that wage adjustments not accompanied by more efficient production methods result in a gradual erosion of a country’s competitiveness, especially when inflation is driven by internal cost pressures as in Malta today. A priority task, therefore, should be to change market structures and practices that tend to distort prices. A parallel endeavour should be to foster a culture where wage increases reflect higher productivity. The first challenge then is inflation. We cannot compete successfully in export markets if prices rise faster here than abroad. For instance, despite the downward correction in global food commodity prices since mid-2008, prices in Malta have continued to rise. Last year, a similar movement in restaurant prices reinforced the upward inflation trend. This suggests that some markets do not function efficiently.
Credible, “low-for-long” guidance as a means of easing policy at the lower bound So let’s start with the value of commitment when the policy rate is close to the lower bound. As you know, the last thirty years have seen a marked decline, around the world, in the underlying, “equilibrium” real rate of interest (sometimes called “R*”). This a real phenomenon, not a monetary one, caused by some combination of a greater desire to save – across the world as a whole – and weaker investment demand. But central banks have still had to accommodate the decline and the appropriate nominal rate of interest has therefore fallen alongside this “R*” [7]. However, there’s a limit to how far the nominal rate can fall. As long as people also have access to physical cash, bearing zero interest, it’s not possible to lower the official rate much below that level. And when the “normal” policy rate is already close to that lower bound there’s very little room for conventional policy to respond to negative, disinflationary shocks. This in turn creates the potential for deflationary traps. Because the policy rate can’t fall in response, a decline in inflation expectations pushes up real interest rates, depresses demand and inflation, and this justifies the original (and self-perpetuating) weakness of expectations. These traps are potentially very costly as they can lead to protracted periods of unnecessarily weak economic activity.

And the ECB took pains to say that, although the approach might skew the subsequent distribution of possible inflation outcomes to the upside, this would be “accidental not deliberate”. So I don’t think it really qualifies. Anyhow, these episodes aside, most guidance seems to me to be pretty clearly “Delphic” in nature: it’s about the central bank’s view of economic outlook (a forecast) and about policy conditional on it (a “reaction function”). As a general matter, we know that’s the purpose of numerical forecasts for interest rates, because those central banks that publish them tell us so. The Norwegian central bank, for example, describes the rationale like this: “With the aid of the policy rate paths and related communication, Norges Bank provides forward guidance regarding future policy rate developments and information about the central bank’s response pattern.” [13] As for the UK, the few times the MPC has issued formal guidance about policy, it’s very clearly of this type. If ever it’s said something about future policy, it’s always been in the context of, and dependent on, the outlook for the economy and inflation at the time. In August 2013, the Committee said it would not raise interest rates “at least” until unemployment had fallen to below 7% (so passing this threshold was a necessary but not a sufficient condition for a hike). It added the proviso that low rates would be maintained only “provided this does not entail material risks to either price stability or to financial stability”.