samchain/econo-pairs-v1 huggingface dataset:
In practice, however, the expectations hypothesis hardly holds water and this is due to the risk premiums that reflect all the other factors also affecting interest rates. There is a notion that average risk premiums should be positive and increase as the period of maturity increases as investors want to be compensated for the price risk associated with holding long-term bonds. 2 In addition, risk premiums are affected by supply and demand on the bond market, which can have either positive or negative effects on risk premiums. In actual fact it is probable that risk premiums can be positive as well as negative and that they fluctuate a great deal over time in a rather irregular way. This makes it difficult to adjust market rates in a way that excludes the effects of risk premiums and reveals expectations concerning future interest rates. Normally, it may be possible to come reasonably close using standard adjustments, but when, as in recent years, the markets are highly uneasy and uncertain at the same time as the central banks are actively influencing price formation using various unconventional measures, it is very difficult to reliably estimate expectations. But is it important for us to be able to distinguish monetary policy expectations from the other factors that affect the interest rate? The answer is that it matters when evaluating the alternative courses of action for monetary policy.

6  For a more detailed analysis of forward rates and surveys as measures of monetary policy expectations see Alsterlind, J. and Dillen, H, “Monetary policy expectations and forward premia”, Sveriges Riksbank Economic Review 2005:2. 4  BIS central bankers’ speeches  Figure 2 SEK/EUR exchange rate and 5-year interest rate differential in relation to Germany Per cent  Source: Reuters EcoWin. So, what form does the link between the krona exchange rate and the interest rate differential take in the data? Figure 2 shows the value of the krona relative to the euro and the difference between Swedish and German five-year government bond rates since 1995. If we only look at the past few years, the theory seems to apply rather well as the krona has strengthened against the krona at the same time as the difference between Swedish and German long-term rates has grown. On the other hand, the figure shows that there have been several episodes with both increasing and decreasing interest rate differentials in which the krona has not at all reacted in accordance with this simple view. If we now concentrate solely on the most recent period, one may wonder why interest rate differentials appear to capture shifts in relative market expectations, while during the same period of time it was difficult, as previously pointed out, to directly interpret interest rate fluctuations in terms of market expectations?
Josef Bonnici: Lessons from the recent past and the road ahead Address by Professor Josef Bonnici, Governor of the Central Bank of Malta, at KPMG’s biennial Financial Services Conference “Maintaining the vision – driving value from change”, St. Julian’s, 1 November 2011. *  *  *  The euro area is currently addressing the challenge of a number of interacting problems: the economic slowdown, the sovereign debt crisis and financial sector instability. The sovereign debt crisis has been aggravated by the impact on fiscal balances of slower economic growth and, in many countries, government support for distressed banks. In turn, sovereign debt problems have damaged the balance sheets of euro area banks and impaired the supply of credit to the economy. The fact that this monetary union is made up of sovereign and autonomous Member States shows up at various levels. Looking at national fiscal and structural policies in the recent past, one notices sharp differences in the extent to which different countries have exercised budgetary caution and preserved their international competitiveness. Other national differences can also be observed. In the case of Greece, for example, the country’s problems were compounded by the statistical understatement of the budget deficit and debt. In the case of Ireland, as another example, it was imprudent bank lending policies, particularly to the real estate sector, which led to a massive rise in the debt burden of the state.

And how far, in any case, would we be able to avoid importing US monetary policy even in the absence of the Link? The experience elsewhere in the region does not give ground for much optimism. The third question is how far the Link is fuelling deflation, and how far this is detrimental to our economy. Internal price deflation is indeed a part - and a necessary part - of the process of adjustment imposed on the economy under the Link when there is a fall off in external demand. It is also, incidentally, a feature of our longer-term economic integration with the Mainland of China. It is the counterpart of currency depreciation under a floating regime, except that the adjustments that it forces to take place tend to involve less overshooting, less instability, and more lasting restructuring. Price deflation brings pain to those who see the value of their assets shrink dramatically, and, as we know, there are many in Hong Kong who are, sadly, in this position. But there are many more who have seen their purchasing power increase, as prices for the whole range of goods and services steadily decline. And the effect, equivalent to that of devaluation, on adding to the attraction of Hong Kong as a regional centre, and as a destination for tourists, can only be positive. The concern comes when price deflation, as part of the adjustment process under the Link, turns into the kind of spiralling deflation that inhibits investment and fuels recession.
Money market fund reform is now in place, and while the leverage ratio and many other Basel III rules are not fully in force, in practice most banks are complying with them. As a result, what we have observed in money markets might simply have reflected a oneoff realignment of asset prices to the new enhanced regulatory structure. 9 / 13  BIS central bankers' speeches  Conclusion To conclude: I continue to be greatly encouraged by the performance of our framework for policy implementation, which has provided the FOMC with excellent control over the federal funds rate and predictable pass-through of the monetary policy stance into broader money market conditions. Transaction-level dispersion measures demonstrate markets that are competitive, and suggest that the effects of policy tightening are realized as expected and intended. These markets, and our framework, have proved resilient to major shocks to the structure of money markets, including the reshaping of the money market fund industry. I remain highly confident that our framework will continue to perform very well. Nevertheless, we should continue to monitor the possibility of a growth in dispersion in broader money market rates. Gathering more and better data about money markets is a useful step in this direction, and one at which my colleagues and I are actively engaged. Learning more about policy transmission through theoretical and empirical modeling is another useful endeavor.

Peter Pang: Diverging monetary policies, global capital flows and financial stability Opening remarks by Mr Peter Pang, Deputy Chief Executive of the Hong Kong Monetary Authority, at the conference on “Diverging Monetary Policies, Global Capital Flows and Financial Stability”, jointly organised by the Federal Reserve Bank of New York/European Central Bank/Federal Reserve Bank of Dallas/Hong Kong Monetary Authority, hosted by the Hong Kong Monetary Authority, Hong Kong, 15 October 2015. *  *  *  1. It is my great pleasure to welcome all of you to this Conference jointly organised by the Board of Governors of the Federal Reserve System, the European Central Bank (ECB), the Federal Reserve Bank of Dallas and the Hong Kong Institute for Monetary Research. 2. Today’s Conference is very timely. With the US Fed contemplating an imminent liftoff in policy rates, while the ECB and the Bank of Japan (BoJ) are still preoccupied with quantitative easing (QE), central banks around the world are carefully weighing the potential impact of the expected divergence in monetary policies on global capital flows and financial stability. Financial markets often move ahead of the real economy. We have seen global financial markets tumbled and emerging market economies (EMEs) experienced quite intense capital outflow pressures during this summer. Many would be interested to know whether such gyrations of capital flows and asset prices have already captured a good part of the adjustment process or are just a curtain raiser for even stronger threats to financial stability of the EMEs. 3.
The fixings, provided across many different currency pairs, were used in many different ways – including for multicurrency portfolio valuation and for the valuation of key financial market indexes. In regard to the WMR 4 p.m. London fixings, the group identified important changes to strengthen the construction methodology and reduce the scope of potential manipulation. Specifically, it recommended that the length of time over  8  See the U.K.’s Fair and Effective Markets Review Final Report for related insightful discussion on fixed income, currency and commodities (FICC) markets. Available at: http://www.bankofengland.co.uk/markets/Documents/femrjun15.pdf. 9  In the United States, the CFTC has regulatory responsibility for most FX products. 10  The WMR London fixing is now subject to regulatory oversight by the Financial Conduct Authority (FCA) in the U.K., in addition to the FSB initiatives. See the FCA’s report Bringing additional benchmarks into the regulatory and supervisory regime, https://www.fca.org.uk/news/ps15–06-additional-benchmarks. BIS central bankers’ speeches  5  which the fixing was calculated be extended. In addition, it recommended that this fixing incorporate price feeds and transaction data from a broader range of sources. These recommendations resulted in changes to the WMR calculation methodology, which were implemented in mid-February of this year. The FXBG also identified a series of recommendations to strengthen market conduct and reduce the scope for manipulation and mistreatment of customer flow and information. For example, the recommendations encouraged greater clarity around fixing transactions through transparent pricing for such transactions and by establishing a clearer separation of fixing transactions from other types of activity.

These effects are of similar magnitude than results obtained for the programmes conducted in the United States and the United Kingdom.6 According to these studies, what matters is the extent to which and for how long central banks’ holdings reduce the availability of assets by removing them from the market. This implies that we can continue to exert downward pressure on the yield curve by keeping our stock of asset holdings at a high level for a prolonged period. Let me first state the obvious: even if we reduce the monthly flow of net purchases, we will continue to increase the size of our balance sheet. And let me add as a second consideration for 2/4  BIS central bankers' speeches  later: in any case, the Eurosystem will remain in the coming years a major buyer of eurodenominated bonds thanks to our reinvestment commitment, which we took in December 2015 and which was perhaps not widely enough noticed: the repayments that we will obtain when bonds reach their maturity date will be fully reinvested, thus keeping the size of our asset holdings unchanged. Most importantly, our monetary policy is based on a set of instruments [slide]: it is not a solo, but a quartet. On top of QE, we play with our policy interest rates, our forward guidance and the provision of liquidity to financial institutions. 2/ Perhaps the most unconventional policy is the use of negative interest rates.
Therefore, it is not surprising that the systemic problems that emerged in the US sub-prime housing loans in the second half of 2007 and gradually spilled over to other credit markets have given enormous anxiety to policy makers. In this context, central banks have engaged in closer cooperation and information sharing with each other to address these challenges. The recent crisis in financial markets is likely to have significant repercussions over the real economy and the most obvious victim is the economic growth. A marked slowdown in  BIS Review 82/2008  1  developed countries is expected. Part of the current debate is whether developing countries could escape from a sharp slowdown in the industrialized world. Some argue that they can, thanks to progress in macroeconomic stability and structural reforms in recent years. We still do not know whether they are right. Another aspect of globalization is the huge volume of international trade, which has led to considerable convergence in business cycles across countries. Integration of previouslyclosed economies, like China, India and Eastern European, to international markets has led to an economic boom in the world economy, which was mostly anti-inflationary – until most recently. Needless to say, record increases in commodity prices in the last two years have created doubts in our minds about the sustainability of this anti-inflationist growth process in the near future. Dear Guests, We are currently facing significant inflationary pressures on a global scale due to record high increases in commodity prices.

BIS Review 82/2008  3  Advocators of a “wait-and-see” approach in the face of supply shocks are not clear on the question of when the supply shock ends and when demand-driven price increases take its place, in an environment where inflation keeps rising. If this issue is not clarified, any abovetarget inflation figure or any upward revision in inflation forecasts can easily be attributed to supply-side factors. Clear lines should be drawn as to which economic data would refute this discourse and what would constitute a limit to supply shocks from a central banker’s point of view. Dear Guests, In this part of my speech, I would like to discuss recent developments in the Turkish economy and the monetary policy implemented in this period. I believe that starting this evaluation with the developments in 2006 will be more useful in providing a better understanding of the current monetary policy stance. As you may know, in May 2006 risk perceptions for developing countries changed significantly owing to the deterioration in global liquidity conditions. In the period where the supply-side shocks started to take their toll on inflation, the rapid depreciation of Turkish lira led to a significant deterioration in medium and long-term inflation expectations – giving rise to the risk of potential second-round impacts. The Central Bank of Turkey responded to these developments with a rapid and strong monetary tightening. This strong monetary tightening was a necessary policy stance for keeping inflation expectations in check and making inflation converge to the target in the medium term.
Contributing to this lesser momentum, on one hand, has been the change to a more moderate growth model in China; owing to lower Chinese demand for commodities and the interrelated effect on global production chains, this has been instrumental in the lower growth in the other emerging economies. Further, the expectations that global financial conditions will normalise have led to fewer capital flows towards certain emerging economies, exposing their vulnerabilities linked to their dependence on external funding. In any event, exchange rate flexibility or sizeable volumes of reserves have enabled them to withstand, in better conditions than in past periods, this episode of reversed capital flows. In sum, this new outlook reveals greater certainty about the recovery of the global economy and a shift in the central points of uncertainty from the developed economies – and in particular from the euro area countries – to the emerging economies. As regards price developments, the current phase of recovery is marked by the absence of inflationary pressures in the main advanced economies, with the exception of Japan, with inflation rates significantly below the targets set by central banks being recorded. Contributing factors here were the persisting slack in labour markets, the low levels of capacity utilisation and the moderation of commodities prices, in particular of oil. The absence of inflationary pressures has been conducive to an accommodative monetary policy stance being maintained globally, with official interest rates anchored at levels very close to zero and extraordinary liquidity provision measures still in force.

Prudential rules, by linking the development of banking loans to the level of banks’ capital and by weighting the loans according to their risks, create a capital constraint that is especially harsh in times of crisis when the weighting increases with the risks and when due to accounting rules, which impose marking to market for certain assets, the capital base is eroded. The second constraint is a liquidity constraint. It is linked to the ability of financial players to access markets to refinance themselves. When banks cannot refinance  BIS Review 57/2010  1  their portfolios, they are forced to shed assets and cut back on new credit. The recent crisis has featured the combination of these two constraints. Let me now turn to the main points I would like to discuss. How can we make our financial systems more resilient on a long term basis? It is clear that the level and quality of pre crisis capital in the banking system has not been adequate relative to the types of losses that have been experienced and that may be expected to materialize in a broader economic downturn. Larger capital and liquidity buffers are necessary, especially for trading activities. The recent reform package of the Basel Committee will lead to a much more robust and resilient banking system in the future, with both a stronger capital and liquidity base.
Of importance is to ensure that the implementation of the new accord is consistent with the overall agenda and objectives for the financial sector to facilitate growth and economic expansion. Implementation principles for Malaysia In Malaysia the appropriateness of the new accord is being assessed in the context of our own objective to develop a more effective and resilient banking system that is best able to serve the nation. In view of the significant and special role of the banking sector in the economy, a well-capitalised banking system has always been a priority in the regulatory framework. In this context, the principles advocated by the new accord are consistent with our regulatory philosophy that encourages capacity building and enhancing risk management. Effective Basel II implementation strategies would be premised on the industry having the correct understanding of the new framework. To implement the required changes, it is therefore vital that the management of banking institutions understands the principles of the new accord. One common misperception is that the recognition of financial collateral under the new framework will encourage more collateral-based lending within the banking sector. This is a simplistic conclusion given the stringent minimum standards for the recognition of such financial collaterals before banks can qualify for the capital savings. Moreover, the potential capital savings under the new framework is not from the recognition of financial collateral, but rather from the much lower risk weights attached to higher rated loans.

The assessment of capital adequacy needs to look beyond the computed capital ratio. The new Basel Accord therefore comprises three pillars. The first pillar provides a minimum capital measurement framework for credit and operational risks. In essence, the regulatory capital requirement is aligned more closely with the actual degree of underlying risk that the banking institution faces. It provides the capital measurement that has three options with different levels of complexities for both credit and operational risks to better reflect actual risk. The second pillar focuses on strengthening the supervisory process, particularly in assessing the quality of risk management in the banking institutions. The supervisory process aims to provide the mechanism to ensure that other risks such as concentration risks and market risks in the banking books being managed. Under such an environment, prudent lending such as that characterized by a high degree of portfolio diversification, could justify lower capital requirements. The third pillar specifies minimum disclosure requirements on capital adequacy to enhance market discipline. Despite its relatively more complex architecture, the implementation of the new framework provides a number of options and flexibility to banking institutions. This is to ensure that the approach adopted reflects and is commensurate with the nature of risk-taking activities and the level of sophistication of individual institutions. In adopting the standardized approach for credit risks, the credit exposures are weighted based on recognized external credit ratings.
Norges Bank  Economic perspectives 2023  6  Real wage flexibility lessens the risk of wage price spirals. This also reduces the need to tighten monetary policy in response to a cost shock than would otherwise be the case. We can bring down inflation while avoiding a substantial increase in unemployment. But wage determination alone will not ensure low and stable inflation. That is the job of monetary policy, in Norway too. If the foreign exchange market is not confident that monetary policy will be tightened when inflation rises, the krone may depreciate.6 A weaker krone pushes up imported inflation. A weaker krone may also drive up wage growth, because the manufacturing sector’s wage capacity improves.7 Price and wage inflation can become self-reinforcing. Over the past three decades, low and stable inflation has been the rule, and in Norway we have avoided prolonged periods of high unemployment. The reform of the economic policy framework deserves a large part of the credit, but we have also benefited from global developments. Globalisation, especially China’s expanded role in world trade in the early 2000s, ushered in a period of low prices for globally traded goods. In many countries, the concern was that inflation was too low, not too high. And some were perhaps misled into believing that inflation was a thing of the past. The return of inflation But it turns out that inflation was not dead (Chart 5). Two events reawaken inflation. Chart 5 The return of inflation Consumer prices. Four-quarter change.

The reason we are taking a while to bring down inflation is that our job is also to contribute to keeping as many people in employment as possible. We do not want to restrain the economy more than that required to tame inflation. Many people are now worried about trying to make ends meet. Borrowers are facing higher interest rates on top of high inflation. Many families are facing tighter budgets, which will be hard for some groups. But by raising the policy rate, we are helping to bring down inflation. Norges Bank  Economic perspectives 2023  10  The road ahead The past few years have reminded us that price stability cannot be taken for granted. We have also been reminded that events that constrain the supply of goods and services can have a substantial impact on prices. We must be prepared for potential threats to price stability in future too. Some of the driving forces that kept inflation low in the decades up to the pandemic may be going into reverse. Globalisation has been met with growing opposition. Already before the pandemic, new trade barriers were erected – often to promote a country’s own economy. The pandemic and Russia’s invasion of Ukraine have demonstrated that long global value chains and trade in strategically important goods make us vulnerable. Lower trade globally and measures to build more robust supply chains could lead to lower productivity and higher prices. Demographic trends are also shifting. In many countries, the working population is on the decline.