samchain/econo-pairs-v1 huggingface dataset:
Mr. Hannoun discusses the operational framework for EMU and the challenge of managing price stability Speech by the Deputy Governor of the Banque de France, Mr. Hervé Hannoun, at the Financial Times European Economic and Monetary Union Conference in London on 20/11/97. I am delighted to take part in this discussion on the framework for the single monetary policy in Stage Three. I will address what I consider to be the two main categories of issues in this context: those related to monetary policy strategy on the one hand, and those related to the execution of monetary policy operations on the other hand; in other words, strategic and operational issues. 1. STRATEGIC ISSUES What are the main strategic issues relating to the formulation of the single monetary policy? I will consider in turn: •  the final objective,  •  the intermediate target,  •  the role of the exchange rate as an indicator, and  •  the starting level of interest rates in the euro area at the end of next year. 1.1. Final objective: a quantified definition of price stability The final objective of the single monetary policy is clearly stated in the Maastricht Treaty: according to article 105, “the primary objective of the ESCB shall be to maintain price stability”. Only a monetary policy geared towards the objective of price stability can create the conditions for durable and sustainable growth.

He cared deeply for his staff’s welfare and, like any parent, was stern to those under him so that they may grow into the best versions of themselves. He treasured friendship and spoke of his close relationship with fellow central bankers as one of the “most satisfying things for a Governor”. This underpinned his unwavering commitment to harness the spirit of trust and cooperation amongst the regional and international central banking community amidst the rising crescendo of challenges confronting the global economy and financial system. He sowed the seeds for collaboration, such as through the establishment of the South East Asian Central Banks Centre (SEACEN). Governor Ismail Ali strove for perfection, yet he understood that neither economic assumption, ceteris paribus, nor econometric models can accurately predict this world. He said that “the central bank works in an uncertain world, with policy tools that are often not easily understood, and seeking to meet objectives of policy that are always broadly defined. With these uncertainties in an imperfect world, the central banker needs to have the serenity to accept what cannot be changed, the courage to change what cannot be accepted, and the wisdom to distinguish one from the other". As we sifted through the mementoes of Governor Ismail Ali for the book, we noticed that rarely were there pictures of him at the centre of attention; in most, he was at the side of a dignitary dispensing advice. I believe this aptly encapsulates his deep understanding of the role of a central bank.
At the same time, the objectives of monetary policy have become clearer, with the primary objective normally being low and stable inflation. Thus, the authorities in many countries have thereby committed to give priority to the long-term goals in monetary policy. The conduct of monetary policy under a flexible inflation targeting regime, given the defined objectives, also gives rise to challenges concerning commitment to a pattern of behaviour. However, the benefit of a commitment policy in relation to a discretionary policy is not as straightforward as for example that of a fixed exchange rate regime. The benefit of commitment to a pattern of behaviour lies in the fact that today’s prices, wages and exchange rates depend on expectations concerning future activity levels and interest rates. If, for example, a shock brings down inflation to a level that is considerably lower than the target in the short run, it is not only a low interest rate today, but even more so expectations of low interest rates in the future that will push up inflation. By committing to a response pattern that implies an expansionary monetary policy, not only in the immediate term but also somewhat further ahead, inflation may pick up faster again. But if economic agents’ expect the central bank to discard this promise, inflation will not pick up to the same extent as would otherwise be the case. Over time such a commitment policy will improve stability in both inflation and the activity level compared to a policy based on discretion.

Let me attempt to illustrate the gains of committing to a response pattern rather than pursuing a purely discretionary policy. We have developed tools that allows us to find interest rate paths that minimise the loss function, given a model of the economy’s functioning and given economic shocks. Within the framework of a small macroeconomic model, we have estimated the magnitude of the shocks to which the Norwegian economy has been exposed over the past 10-15 years. Under the two assumptions about monetary policy, discretion and commitment, we have estimated how large the variance of output and inflation will be over time. We have assumed that the economy is exposed to the same shocks as in history. Let me emphasise that this exercise is only meant as an illustration based on a stylised economic model. 10  BIS Review 10/2007  The chart shows the variance of inflation on the vertical axis and variance of the output gap on the horizontal axis. By minimising the loss function that I presented above under discretion and commitment respectively, we obtain different combinations of the variance of inflation and the variance of the output gap. By varying the weight on the output gap, lambda, in the loss function, we obtain a line for each strategy. The lines represent the minimum loss that can be achieved under commitment and under discretion.
You have clearly argued in favour of indicating who voted for what and why. Now it seems that these will be more like summary accounts indicating the primary arguments. My opinion has not changed. I do indeed believe that demands are higher today in terms of transparency. The ECB was once right at the forefront in this regard, when it introduced its monthly press conferences. Now, though, we are lagging way behind when you see what other central banks are doing. That’s why I believe that publishing accounts that summarise the general course of the discussion would be helpful. I personally would also be in favour of indicating how people voted. That would require all members of the Governing Council to explain how their own arguments and their own voting behaviour were in line with the ECB’s European mandate. What about the argument that individual central bankers would then be put under pressure? I think the concerns that the pressure would become too great have been exaggerated. Someone who takes on a job like that must be capable of withstanding pressure. Nobody will be put in prison for voting for an interest rate rise in the euro area. People shouldn’t be that sensitive in this regard. I was in favour of OMTs because they were – and still are – the right response for Europe, despite the fact that many in Germany are opposed to them. The OMT programme has made a significant contribution to the easing of the euro crisis.

The Bank of Canada already regularly does this, and the Federal Reserve is currently undergoing a review of its framework and strategy.8 Absent such changes, central banks will be severely challenged to achieve stable economies and well-anchored inflation expectations. Outside of monetary policy, there are a number of avenues by which fiscal authorities can enhance the resilience of economies to negative shocks. One is to strengthen the “automatic stabilizers” that provide a boost to the economy during a downturn. A second is to align debt management decisions more with monetary policy. For example, during a downturn, the fiscal authority could choose to shorten the duration of debt issuance to reinforce the effects of central bank quantitative easing. Third, regulatory and supervisory policies that support the resilience of the financial system can limit the economic effects of negative shocks. Finally, fiscal and other economic policies can attack directly the sources of slow growth and low r-star. This includes raising public and private investment in human and physical capital, infrastructure, science and technology, and policies aimed at removing barriers to participation in the labor force and the economy more broadly. Conclusion The facts have changed, and so it is time our change our minds also. It is often said that change is hard. But, experience teaches us that it is better to prepare for the future than wait too long. Ultimately, failure to prepare often means preparation for failure. 1 This is not true for all population groups.
Taking into account the favorable developments in the credit markets and the moderate recovery in economic activity in the last quarter of 2009, the Monetary Policy Committee (MPC) slowed the pace of rate cuts, and finally decided to keep rates unchanged at the last two meetings. However, it was also noted that lingering problems across the global economy were still a concern and that uncertainties regarding the strength and durability of the recovery remain. Considering these factors, the MPC reiterated that it would be necessary to keep policy rates at low levels for a long period of time. At its January meeting, the MPC indicated that tax adjustments and base effects would cause inflation to rise significantly in the first two months of 2010 and afterwards remain above the target for some time. Noting that the underlying trend implied by core inflation indicators would remain at levels consistent with medium-term targets, the Committee emphasized that, given the levels of resource utilization, the state of labor markets, and global economic conditions, general pricing behavior would not be affected adversely by the temporary rise in inflation, and therefore, inflation would display a declining trend once the transitory factors taper off. Market yields have been broadly shaped by the monetary policy stance during the last quarter of 2009. This is particularly important as it demonstrates the increased effectiveness of monetary policy. Market interest rates slightly increased in October with rising perceptions that the policy rate cut cycle is coming to an end.

As the responsibility for structural reforms in the EU and in the euro area rests with the individual Member States, a wide variety of institutional solutions and regulatory arrangements across countries and sectors exist. In many areas I consider this decentralised approach to be an opportunity, not a disadvantage. It makes possible healthy competition between differing policy designs of national authorities and enables solutions that are tailored to the particular needs of a country or region. This fact, which is a clear advantage of the euro area economy compared with other more centralised economies, is often not recognised enough. Decentralised policies offer a unique opportunity to explore different solutions in a competitive manner, allowing the testing of various approaches and, if thought useful, selection of best practices with a high degree of confidence. Fiscal policy is a good example of a field where Europe found an efficient solution in the form of common rules which keep the advantages of decentralisation and subsidiarity. As is well-known, budgetary policies remain under national responsibility, but effective common rules have been developed in the form of the excessive deficit procedure and the Stability and Growth Pact. These rules are designed to ensure that a high degree of fiscal discipline supports the single monetary policy in its primary objective of maintaining price stability.
Fortunately, the financial guillotine is not preordained, for Benoît did not spend his days in power as did Louis XV. Where the king grew idle, Benoît remained frenetic (189 public speeches during his eight years). Where the king was conservative, Benoît was radical. Where the king became nostalgic, Benoît always looked forward. If central banks are to rise to their challenges and serve our citizens, we will need to build on Benoît’s legacy. I. Improving market functioning Let me start with market functioning. Before the crisis, financial alchemy appeared to have sliced, diced and distributed risk to those who wanted it most. The revolutions in securitised and derivative finance were cheered on by policymakers who saw more markets as the solution to any market failures and who believed the lie that markets always clear. But of course markets always clear only in textbooks. In reality, people are irrational, economies are imperfect, and nature itself is unknowable. The pre-crisis system had merely spread risk, contingently and opaquely, in ways that often increased it. 2  All speeches are available online at www.bankofengland.co.uk/news/speeches  2  Once the crisis began, risk quickly concentrated on the balance sheets of intermediaries that were themselves capital constrained. And with the fates of borrowers and lenders tied together via hyper-globalised banks and markets, problems at the core spread violently to the periphery. The post-crisis response included major reforms to simplify markets and make them more robust.

Temporarily high inflation is needed to reduce unemployment One consequence of high unemployment over a long period of time and of unemployment tending to become entrenched at higher rates, is that inflation will be higher for a given rate of unemployment. This means that a sufficiently large demand for labour to bring down the high unemployment towards a long-run sustainable rate will lead to higher inflation than normal for a period of time. It is therefore important to allow inflation to overshoot the target for a number of years. This would be a necessary cost that should be weighed against the gain of bringing down unemployment. As inflation on average has fallen below the target, an inflation rate above the target would at present also have the advantage that average inflation over a long period would come closer to the target, something that would contribute to avoiding the unnecessarily high average unemployment that earlier policies have caused. According to Prospera’s surveys, inflation expectations have stabilised at 2 per cent from 1997, despite average inflation being lower. Inflation expectations would thus probably be stable even if inflation were to overshoot the target for a period of time. Summary: Monetary policy too tight My conclusion is that monetary policy in Sweden is and has been too tight.
Access to credit enhances welfare but also exposes the borrower to the scrutiny and discretion of creditors. A good example of how this works is provided by the Swedish economy. From the mid 1970s, problems with government finances led to external borrowing, which mitigated the effect on interest rates. But debt accumulated and an acceleration of this trend in the early 1990s led to an acute loss of confidence: interest rates shot up and after a time the krona fell. Besides illustrating how a country can be hit if its economy is not managed properly or if problems arise from other causes, this example shows that the imbalances may be generated gradually, so that timely signals can be an advantage. Perhaps prompter warnings would have put a stop to the economic mismanagement at an earlier stage. Something may thus be gained from the market sending clear signals without delay. But the situation should not be idealised. The functioning of financial markets is by no means perfect. Real economic problems can build up without attracting attention and when they are detected, the financial unrest is liable to spread to other countries for no apparent reason. The financial market’s reaction may also be out of proportion to the underlying imbalance. This brings me to the next type of problem. Financial instability in a global market Just as in any other market, financial market prices are basically a function of supply and demand.

At the same time, there has been an ambition to construct any measures so that they do not have larger negative consequences later on, for instance by deterring banks from providing desirable credit. These two perspectives are liable to conflict. The discussion has focused on preparatory measures as well as steps that can be taken in more extreme situations. As regards the preparatory measures, it has been proposed, for example, that bond contracts be constructed so that the renegotiation of scheduled repayment can be authorised by a majority. Another proposal is that capital adequacy standards be constructed so as to limit the proportion of short-term interbank credits from industrialised countries to emerging markets. Recently, moreover, a decision was reached on contingent credits to countries that are judged to have a sustainable economic policy and have nonetheless been hit by a loss of confidence and liquidity. This is intended to reduce contagious effects. The IMF also plans to promote increased contacts between the borrowers in the emerging markets and their private creditors. If a crisis has already occurred—without there being a clause for renegotiation—credit to the country in question can be renewed instead by the lenders acting in concert. The central banks in the countries with the largest bank loans to the crisis area can then agree to try to persuade those banks to prolong the loans. That is what happened in South Korea; the credits were renewed when the banks’ loans had been monitored.
18  The cross-bank dispersion of sovereign losses is explained by factors such as the geographical composition of the portfolio, the maturity structure and the accounting classification of the exposures.35 As regards net interest income, the rise in interest rates envisaged in the scenarios has a positive impact on the net interest margin on loans to the private sector and makes investment in debt securities more profitable, whereas the cost of deposits responds more moderately.36 Accordingly, the cross-bank dispersion is associated with differences in the composition of loans to the private sector, the share of debt securities as a percentage of total assets and the weight of deposits among the sources of funding. To sum up, the results of the stress tests show that the aggregate resilience of the Spanish banking sector as a whole is adequate, albeit uneven across banks. Although large-scale materialisation of the risks would entail a certain degree of capital charge, this would not be sufficient to compromise the stability of the financial system. 35  In some emerging market economies, rising interest rates entail high discounts on holdings of their debt, although the depreciation of their currencies against the euro limits the impact on banks’ equity. Given that a significant proportion of the sovereign portfolio is held at amortised cost (53.7% overall), considering that banks intend to hold the debt on the balance sheet until maturity, the decrease in market value is only partially passed through to the balance sheet. This is an important factor mitigating the impact of the crisis.

29  These percentages should be considered as the lower bound of the total impact of the interest rate rise, as this would also reduce agents’ income, through its negative impact on economic activity, and would curb the accumulation of wealth on account of the higher net interest burden. 30  Moreover, these were the households whose energy expenditure increased the most, as a proportion of their consumption, in 2020 and 2021. 15  High debt levels also mean that public finances are more sensitive to interest rate movements. However, the low interest rate levels of recent years have led to a continuous decline in the interest burden as a percentage of GDP, while at the same time, longer average debt maturities have limited the short-term impact of higher issuance costs. Under a scenario of gradual interest rate rises consistent with the latest projections, the debt burden is expected to stabilise as a percentage of GDP. Under that same scenario, an additional 100 bp increase in short and long-term interest rates, with all other variables remaining constant, will drive up interest payments by 0.4 pp of GDP by 2024. 16  In the Spanish banking industry stress tests, two potential stress scenarios – dubbed adverse and severe – were simulated for the period 2022-2023.
Although a large part of this increase results from the valuation effect deriving from the peso depreciation, its level is high from a historical perspective. Moreover, the increase accumulated in the past seven years is high by emerging economies’ standards (figure 9). On the other hand, although the financial indicators of SVS-listed firms have not changed much since our last Report, debt is high and profitability is low, historically (figure 10). Anyway, various indicators show that the balance sheet exposure of these firms to exchange rate risks has remained low. Turning to the real-estate sector, housing sales remain dynamic and prices are on an upward trend, albeit with some moderation lately (figure 11). Advance purchases associated with the upcoming tax reform explain the strength of the sector to an important extent. Actually, most of the properties sold are either off-plan or in construction phase. The low interest rates on mortgage loans also explain part of this dynamism. The growth in housing prices has been reflected in the dynamics of mortgage loans, which are rising nearly 10 percent annually in real terms, due mainly to an increase in the average debt and, to a lesser extent, to an increase in the number of debtors. Notably, although many lending indicators remain stable, such as the loan to value ratio and the debt to income ratio, the share of households with more than one mortgage has increased: from 20 to 25 percent in the last five years. As for office space, the vacancy rate continues to grow.

In particular, fiscal spending will evolve in accordance with the fiscal rule and the consolidation objectives set forth by the Administration, which has pledged to reduce the structural deficit by about one quarter of a point of GDP per year. The worsened external scenario relevant for Chile is the main factor behind the downward revision to 2016 growth. This phenomenon is shared by all emerging and commodity-exporting economies, mainly because of the substantial drop in the terms of trade and less favorable external funding conditions. Commodity prices fell again in recent months, influenced by the steady appreciation of the dollar and slower global growth. In the case of copper, one must add prospects that the Chinese economy’s recomposition by sectors will continue to erode the demand for the metal. Thus, at the statistical cutoff date for this Monetary Policy Report, copper was trading at under 210 cents per pound, accumulating a drop of nearly 30 percent in the year. This, combined with a discouraging short-term outlook, has prompted a significant reduction in our copper price forecast for 2016 and 2017. We now estimate that it will trade at an average of 225 dollar cents per pound, compared with the almost 250 cents we anticipated in September. The price of oil has also dropped in recent months, to less than 40 dollars per barrel as of the closing of our Monetary Policy Report, around 30 percent with respect to the beginning of the year.