samchain/econo-pairs-v1 huggingface dataset:
I am, therefore, optimistic about the future.” It took the Bank of England almost 70 years to get to that point and introduce an inflation target. The objective of stability is best achieved by an inflation target because it stresses both what monetary policy cannot do – reduce unemployment in the long run – and what it can do – react to shocks in order to minimise undesirable volatility in output and employment. To that end, the pursuit of an explicit and symmetric inflation target is the relevant objective of monetary policy. With an inflation target and, more recently, the new Monetary Policy Committee, both unemployment and inflation have fallen significantly. I hope and believe that, with these new institutional arrangements, although we shall certainly make mistakes in the setting of monetary policy, we should be able to avoid the instabilities of the past 30 years which did so much to damage Britain’s economic standing. We should never forget that – as Milton Friedman pointed out in his 1968 Presidential Address (quoting in turn John Stuart Mill) – monetary policy becomes important for society only when it goes badly wrong. That is the basis for my proposition that a successful monetary policy should be boring, and that successful central bankers should be seen as neither heroes nor villains, but simply as competent referees, allowing the game to flow and staying out of the limelight. In the end, a central bank is doing its job when no one notices that it is there.

More (and more highly specialised) workers, better and more broadly invested capital and a rapid exchange of knowledge – all this led to higher economic growth and greater prosperity worldwide. Globalisation also had a major impact on monetary policy. The most important change in this respect was the increasingly global production of goods, which reduced inflationary pressure. The latter also fell because the global economy was able to satisfy increases in demand in individual countries comparatively easily. In the less integrated economy of the Cold War era, higher demand quickly led to bottlenecks and rising prices. With inflationary pressure lower, central banks were able to react more strongly to adverse economic developments. And this was often appropriate, in retrospect. For the global integration of the financial markets did not just foster growth, it also made it easier for local crises to spread to other countries. In the past 15 years, there have been repeated instances where such global crises have prompted the major central banks to substantially ease their monetary policies to prevent severe economic declines and persistently negative inflation rates. This easing was initially achieved through interest rate reductions, but then increasingly by means of unconventional measures such as quantitative easing and, in the case of Switzerland, foreign exchange market interventions. The expansion in the range of monetary policy instruments also has to do with globalisation. The traditional way to ease monetary policy is by lowering the policy rate below its neutral level.
It will be good for the euro, because it will help to repair our monetary policy transmission mechanism. In other words, it will ensure that the ECB’s low interest rates will be effectively passed on to those countries that probably need them most. It will be good for the internal market, because it will be of help to reverse the significant financial fragmentation that we have seen so far. And it will be good for the recovery, as banks will be put on a stronger footing, confidence will be improved, and ultimately credit will start to flow again to enterprises on affordable terms. But what are the necessary elements of a banking union? To our mind, two elements are indispensable: a Single Supervisory Mechanism (SSM) and a Single Resolution Mechanism (SRM). Furthermore, it is important to have a single rulebook and the implementation of the Capital Requirements Directive and Regulation IV is key in this respect. A single European deposit insurance is not top on the regulatory agenda today and it may be tackled in the long term only. In fact, the Bank Recovery and Resolution Directive (BRRD) and its liability cascade makes it clear that deposits will come in only at the very end in bank resolution and thus the need for a single deposit insurance scheme is less urgent and a better harmonisation could suffice at present. Let me start with the Single Supervisory Mechanism.

As you know, stabilisation in Europe takes place through national budgets and, in normal circumstances, they are sufficient to smooth the cycle. A recent study demonstrates that 47% of an unemployment shock is absorbed by the automatic stabilisers in the EU, compared with only 34% in the US.4 They were insufficient in some countries during the crisis only because they faced an exceptional circumstance: a very large shock from the financial sector. With a genuine banking union, however, the risk of this happening again should be lower. First, we expect the SSM to increase the quality of supervision and the assessment of systemic risk. Second, if a financial shock were still to appear, national budgets should be better insulated. The costs of banking sector repair would be shared with the private sector through the Single Resolution Mechanism and a more integrated European financial market. All this suggests that stabilisation at the national level could be more effective in future. Or put differently, the more successful we are in building a genuine banking union, the less we would need a central budget for stabilisation purposes. However, this does not mean I see no role for fiscal union in the stabilisation area. First, we would need the public backstop, namely for the future resolution fund, which would be fiscally neutral over the medium-term. In my view the ESM could play this role like the US Treasury does this for the Federal Deposit Insurance Corporation by providing a credit line.
(Figure 3) shows similar data for net liquid assets as a share of total assets. Large banks have improved their liquidity profile, both in aggregate and in the cross-section. Over the same period, banks have also shifted the composition of liabilities towards more stable sources of funding such as core deposits and away from non-core and short-term wholesale liabilities. Those funding shifts have bolstered system resilience by reducing the risk of runs and fire sale asset liquidations. (Figure 4) plots the return on equity for the U.S. banking industry, both as a whole and for the large banks used above on a merger-adjusted basis. This accounting measure of profitability shows an improving picture over the last few years, with ratios recovering towards historic norms despite significant headwinds from the low rate, flat yield curve environment and modest economic growth. This trend is particularly noteworthy when one considers the substantial increase in capital held in the banking industry. In addition, as shown in (Figure 5), earnings have shifted back toward net interest income and have been more stable in the post-crisis period, which is consistent with the idea of more sustainable and less volatile earnings streams. Finally, it is useful to compare the U.S. experience to other developed economies. As shown in (Figure 6), large U.S. bank outcomes compare favorably to their global peers from both a profitability and capital perspective.

The degree of integration in the euro area varies considerably across different market segments. The euro money market is already highly integrated, as it is closest to the single monetary policy and supported by area-wide large-value payment systems, such as TARGET or EURO 1. An important exception is the market segment for short-term debt securities, which shows some fragmentation owing to the prevailing differences in market standards and practices. The bond markets are also relatively well integrated. For instance, the cross-border holdings already constitute around 40% of the total of the long-term debt securities held by monetary financial institutions. Equity markets are less advanced than bond markets but show signs of increasing integration. For example, the proportion of variance of equity returns explained by euro area shock is around 38% when measured over the period of 1999-2007. Still relatively fragmented securities clearing and settlement systems continue to constitute obstacles to the further integration of securities markets in Europe. In general, wholesale and capital market-related activities of banks show solid signs of increasing integration, while retail banking and the underlying retail payment systems have remained more fragmented, as has been the case for mortgage markets. Finally, as was discussed in detail in an ECB staff presentation earlier during this Symposium, financial markets in the member states that joined the European Union in 2004 are significantly less integrated than those in the euro area.
Typically in a liquidity trap, the equilibrium real interest rate is negative, creating a persistent inability to match aggregate demand and supply. Before proceeding, I should make clear what I mean by the equilibrium (or natural) real interest rate. Let me use Roger Ferguson’s definition: it is the level of the real policy rate that, if allowed to prevail for several years, would place economic activity at its potential and keep inflation low and stable. For small open economies, like the UK, that equilibrium real rate is determined at the global level by the balance of the supply of savings and demand for investment. In the run-up to the crisis, that balance had shifted decisively as what Chairman Bernanke christened a “savings glut” from emerging economies developed. The flipside of that was low demand for advanced economy exports and low domestic demand in emerging economies. Only very low global real interest rates could spur sufficient domestic demand in advanced economies to maintain activity at its potential level. The problem of course was that the expansion of demand in advanced economies largely took the form of unsustainable consumption rather than business investment. The ensuing financial crisis pushed the equilibrium real interest rate down further and, with nominal interest rates stuck at zero and inflation low, monetary policy was unable to push actual real rates to a level low enough to maintain full employment.

The danger in such a situation is that it can become unstable as weak demand and uncertainty cause companies to hold back investment and households to postpone spending. With the balance of savings and investment deteriorating, the equilibrium real interest rate falls even further. At the same time, wages and prices are forced down, pushing actual real interest rates higher. A deflationary spiral results. That is not the only danger. Attempts to reach a very low or negative equilibrium real interest rate – both through conventional reductions in short-term interest rates and through unconventional asset purchases – can risk generating unbalanced, unsustainable demand. In particular, as my predecessor Mervyn King has emphasised, by encouraging spending to be brought forward from the future and debt to be accumulated in the present, a greater shortage of demand tomorrow will develop unless the income of those who have taken on  2  BIS central bankers’ speeches  the debt picks up.2 If it does not, monetary policy will have to “double down” in order to sustain demand. Such compounding stimulus could promote financial vulnerabilities through an indiscriminate search for yield, a compression of risk premia to unsustainable levels or via extrapolative expectations of future asset prices. Perceptions of a “central bank put” – where the market interprets all bad news as good news because it will be met with more central bank stimulus – can reinforce these risks. When the inevitable correction finally occurs, the shortfall in demand and scale of the liquidity trap is insurmountable.
The cost of credit for households remains high relative to Bank Rate (Chart 4), and there is still evidence from smaller firms that credit is either difficult to obtain or unacceptably costly. Banks’ own funding has become a little less costly, but the major UK banks still face a considerable funding challenge over the next few years, as well as uncertainty about how much capital they will be required to hold in the longer-term. However, there are grounds for optimism from recent data that the recovery is broadly on track. GDP in the fourth quarter of 2009 is now estimated to have grown by 0.3% with growth in consumer spending. Household balance sheets have already been strengthened. Employment trends have remained surprisingly robust, and firms’ employment intentions continue to recover from the low point early in 2009 in the bulk of the business surveys. I don’t think it is yet possible to be confident in the pace of recovery, and still expect the path to be bumpy. But some of the severe downside risks have diminished. 12  These impacts have recently been set out very effectively in Miles (2010). BIS Review 27/2010  7  Conclusions As this is my final formal talk as an MPC member, it is a good opportunity for me to say that it has been a real privilege to serve on the Committee for such a long period, and to have done so alongside such excellent and stimulating colleagues.

The implication of these possible explanations is, if these exchange rate and commodity price effects ease as expected, or credit conditions become less tight, inflation will fall as the influence of the underlying demand and supply imbalance becomes the dominant influence. But an alternative and less reassuring explanation might be that the pricing climate has changed (following a lengthy period in which firms appeared to set prices in conditions of intense competition), suggesting that firms’ prices might respond less for a given degree of slack in the economy. The key conclusion I would draw from this is, that although from time to time criticised for too much reliance on one model, the MPC has in fact shown itself open to considering a range of interpretations over time, and is fully aware that different circumstances may point to different challenges. At present, neither the extent of excess capacity nor the impact of capacity pressures on inflation are easy to assess. The track record of the judgements we made in more stable times may well not be a good guide to the future. It therefore makes sense to look at a range of estimates both of the gap and of its effect in order to give some guidance to the range of likely economic outcomes. Implicitly, such a range is contained within the fan charts of GDP and of CPI inflation published quarterly in the Inflation Report.
As to inflation, the latest data continue to evidence very moderate behaviour, with an increase in April, for the euro area as a whole, of 1.2%. The projected reduction in the degree of slack in the economy should enable inflation rates in the area to draw closer to levels compatible with the Eurosystem’s objective of price increases below, but close to, 2%. 3/9  Spanish economic developments and outlook Regarding the Spanish economy, the INE estimate for GDP growth in the first quarter of 2018 shows a rate of increase of 0.7%, in line with the two previous quarters. That said, there has been a slight decline of 0.2 pp in the year-on-year rate of change from 3.1%, at end-2017, to 2.9% in the first quarter of this year, which is consistent with the continuation of the current upturn, albeit at a somewhat lower rate of increase than that observed in the past three years. On the latest projections published by the Banco de España in late March, output is expected to expand by 2.7% in 2018, 2.3% in 2019 and 2.1% in 2020. The latest information would broadly confirm this scenario, albeit with a possible slight upward revision this year and next, as a result of the greater fiscal boost built into the draft State Budget for 2018 and in the recently published Stability Programme Update for the period 2018-2021, on which I shall comment later.

For 2018, the drive to correct the budgetary imbalance is totally concentrated in central government and in Social Security funds, which should reduce their respective deficits by 1.2 pp and 0.4 pp of GDP to 0.7% and 1.1%. Conversely, the targets for regional and local government for 2018 are less demanding than last year and stand at -0.4% and 0% of GDP, respectively, compared with -0.3% and a surplus of 0.6% posted by these administrations in 2017. The fulfilment of these targets and the macroeconomic projections should lead to a decline in overall general government debt to 97% of GDP in 2018, and 89.1% in 2021, down 1.3 pp and 9.2 pp, respectively, on 2017. Significantly, practically the entire adjustment in 2018, and somewhat more than two-thirds of that in the period 2018-2021, would be due to the cyclical effect, whereby the structural budgetary effort would be relatively modest. In terms of its composition, the Stability Programme envisages an increase in revenue somewhat outpacing that in GDP, in line with what occurred in 2017. Expenditure, meantime, after having posted very low growth in the past four years, is expected to increase by 2.7% on average over the 2018-2021 period, although its weight in GDP will continue to diminish. On the revenue side, the Stability Programme includes the personal income tax cuts included in the draft Budget for 2018, which mainly affect the lowest-earning taxpayers, and which are expected to reduce the revenues relating to this tax in 2018 and 2019.
In such a transaction, banks generally purchase the asset to be financed, and then sells it to the customer at a mark-up, to be paid on a deferred basis. 6  IFSB - Islamic Financial Services Board; IDB – Islamic Development Bank; AAOIFI - Accounting and Auditing Organisation for Islamic Financial Institutions; IIFM - International Islamic Financial Market. 7  The Bahrain Monetary Agency was the primary sponsor in establishing the Liquidity Management Centre. 4  BIS Review 147/2008  Financial Services Board Summit, Singapore's plan to set up a facility to provide Shariahcompliant regulatory assets to these financial institutions as part of our efforts to promote the growth of Islamic Finance in Singapore. The sukuk structure is based broadly on the Al-Ijarah structure, or the sale-and-leaseback of an underlying property. Sukuk issued by the facility will be given equal regulatory treatment as Singapore Government Securities, or SGS, and returns will be tied to the risk-free yield of SGS of equivalent tenor. The facility is open to all financial institutions that plan to or are currently carrying on Shariah-compliant financial services in Singapore. We are issuing on a reverse enquiry basis, which means we can size and time the issuance according to the needs of the financial institutions. A number of financial institutions have already expressed interest and we expect the first issue to take place at the start of next year. We invite eligible and interested financial institutions to approach MAS as we work towards a formal launch.

Last but not least, efforts to further international collaboration will need to be supported by a solid platform for co-operation and information sharing amongst regulators. Formal agreements between regulators on the scope of cooperation and information sharing will be helpful in this regard. Singapore, as a full member of the IFSB, and a signatory to MOUs with various GCC countries, is keen to explore further avenues for cooperation and collaboration. Underpinning all these, of course, is the need to continue to broaden and deepen knowledge and expertise on Islamic Finance among regulators and industry players. An investors' education platform to promote risk awareness of Shariah compliant products will also serve to reinforce market discipline by raising awareness of the characteristics and risks of Shariah products, as well as boosting demand for such products. Conclusion – opportunities for Islamic finance I would like to end on an optimistic note by reiterating the opportunities available in Islamic Finance. While we must expect the global economy and financial activities to slow in the coming months, the long-term structural improvements in Asia and the GCC will continue. Between Asia and the GCC, for instance, total trade grew by 17% annually since 2000 to exceed $ billion in 2006. 8 Total cross-border capital flows between Asia and the GCC are also predicted to increase from $ billion at end 2006 to $ billion by 2020. 9 Even if only half of these projections are realised, growth is still sizeable.
The third risk is induced rather by the effects of the global developments on the gradual deterioration of macroeconomic performances of the economies in the region, and resulted in impairment of the credit portfolio quality of the banking system, which has undoubtedly affected or will affect their future activities and performances. Let me summarize the first point – the region has successfully dealt with the euro area crisis so far, but the risks remain. Many issues are still open and accordingly, the alertness of policy makers has to remain high. What are the lessons learnt from the crisis? The financial crisis shifted many traditional views in the economy, including the role and the objectives of monetary authority, where besides the conduct of monetary policy and the concern for the price stability, there is an obvious need for more active engagement of the central banks in the maintenance of financial stability in the economy. The period of crisis worldwide is full of many successful examples, probably the most so far in the world history, of application of wide range of prudential measures, modifications in the standard set of instruments and implementation of nonstandard measures of monetary policy. The need of comprehensive risks monitoring in the economy and greater flexibility concerning the intensity and the type of measures, taking into account the ultimate monetary objectives, is probably one of the major lessons from the crisis.

On this occasion, I will briefly present my opinion on how the region has dealt with the crisis and the lessons learnt, leaving more time for panel discussion and for the presentations of the prominent representatives of international institutions and central banks in the region. How has the region been dealing with the crisis so far? In the recent five years of global economic crisis, generally we distinguish two subperiods. The first wave of crisis broke out in the US economy in the second half of 2007 and was primarily marked by the mortgage credit crisis and the collapse of large investment banks, destabilizing the international financial markets and deteriorating the expectations of economic entities. The second wave of crisis hit Europe in mid-2010 and was recognized as euro area debt crisis, causing new financial market disturbances, lower confidence among market participants, higher costs for financing and need of recapitalization of the banking sector. Apparently, the second wave of crisis broke out in the vicinity of our region. Yet, that the countries from the region get over this period relatively unwounded. One of the potential explanations is the fact that unlike the period of first wave of crisis, the countries from the region faced the second wave of crisis with fewer imbalances in their economies, i.e. better prepared to adjust to the external environment. Facing the outbreak of crisis in the euro area was relatively painless. Yet, it does not mean that the risks have passed.