samchain/econo-pairs-v1 huggingface dataset:
Comparing policy actions across the Atlantic The best way to convey the message that monetary policy actions and liquidity management are by and large two separate things is probably to draw some lessons from a comparison of what has been happening on both sides of the Atlantic. While liquidity management strategies appear to have been roughly identical over the last few months in the US and the euro area, monetary policies seem to have diverged quite a bit, with the Fed cutting the fed funds target by 3% over three quarters down to 2.25%, while the ECB has maintained its repo rate unchanged at its pre-crisis level of 4%. Let us first take a look at liquidity management issues. Interestingly enough, in an attempt to rein in the soaring short term spreads on its money market (e.g. the 3-month OIS-BOR spread nosed above 100bp in December) the Fed adjusted its operational framework in a way that roughly closed the gap with its euro area counterpart. In particular, the new Term Auction Facility that the Fed implemented in mid-December enlarges both the range of eligible borrowers, from about 20 primary dealers to all banks that are judged to be in generally sound financial condition, and the range of eligible assets that can be brought as collateral to the auction, from T-bonds to corporate bonds and MBS. Consequently, longer term liquidity injections by the Fed now run along similar lines as the ECB’s ones.

This may involve a risk that capacity utilisation will remain high and that inflation will eventually overshoot the target. Household debt has increased at a faster pace than income over the past ten years. Norges Bank’s calculations indicate that debt growth may largely be due to the sharp rise in house prices in recent years. Higher house prices have a fairly prolonged effect on household debt growth. Even though the rise in house prices is expected to slow, credit growth will therefore remain high for a fairly long period. Given the assumptions underlying our projections, it is likely that debt will continue to grow at a faster pace than disposable income through the entire projection period. The household debt burden has increased over the past year and is now record high. The interest rate burden is, however, relatively low. A normalisation of interest rates will increase households’ net interest expenses, but according to the projections the interest burden will not be higher than it was at the end of the 1990s. Households will be vulnerable if unexpected disturbances result in higher-thanexpected interest rates. Challenges ahead Petroleum activities give us an economic base that is not available to many other countries. But it also presents us with many challenges. 5/7  First, our petroleum resources are part of our national wealth. When oil is extracted and sold, petroleum wealth is transformed into financial assets. This wealth belongs not only to our generation, but also to future generations.
While it is unclear how effective domestic monetary policy can be in checking excessive asset price volatility, the threat of financial instability has given rise to a more prominent role for macro-prudential measures to reduce the procyclicality of the credit market. As we see it, the primary challenge in this respect is how best to move forward. Combining the use of prudential measures with monetary policy is a useful policy option, but it is still an unsettling issue because of the concern for efficiency. In practice, discretionary prudential measures pose difficulty in the  4  BIS Review 89/2007  form of potential regulatory forbearance, market distortion, timing effectiveness, and the difficulty in modeling early warning system. Rule-based prudential measures, on the other hand, pose difficulty in policy calibration. This is to say calibrating this type of policy tools has so far proven difficult for emerging market where data availability is limited and large structural breaks are usually present. Turning to longer-term perspective, the attainment of monetary and financial stability is determined predominantly by embedded structural features of the economy. This points to the importance of pursuing long run structural reforms. On this issue, we discuss the role that financial sector development and policy institutions and framework can play in this respect. First, financial development The first point we make on financial development is the importance of a well-balanced financial structure.

And the second is the observation that economic agents in emerging market face limitations in the ability to smooth consumption in response of shocks. BIS Review 89/2007  1  Table 1 summarizes the empirical evidence from the two recent studies. As documented in Aguiar and Gopinath (2007), consumption in emerging markets is around 40 percent more volatile than income at business cycle frequencies. The same is true when comparing relative volatility in growth rates of consumption and income. A study by Prasad and his colleagues in 2005 also shows greater income and consumption volatility in emerging market relative to developed economies. Such heightened volatility in macroeconomic outcomes undoubtedly has adverse implications for welfare. Our central proposition is that a large part of the explanation for higher macroeconomic volatility rests with key differences in the nature of shocks hitting emerging economies as well as the way in which their economic systems propagate those shocks. Figure 1 depicts how observed macroeconomic outcomes are the result of the interaction between the nature of shocks hitting emerging market and the structural features of the economic system. On the nature of shocks, a particularly pertinent example in this context is capital flow shocks. As shown in Table 2, capital flow shocks, especially debt and equity, are more volatile in emerging markets relative to advanced economies, as well as relative to other developing economies.
An important risk we highlight in this Report is an intensification of financial volatility and the slowdown in the growth of emerging economies. In Chile, the effects of this greater international volatility have so far been limited and have manifested mainly in the depreciation of the peso and a stock market downturn. Another important source of risk that we consider in this Report is related to China. As we have mentioned time and again, the evolution of this economy concerns us not only for its importance as driver of global growth, but also for its impact on exports from Chile and, in particular, the price of copper, since China is the largest copper consumer in the world. In recent times there have been doubts about the situation of their financial system, especially after the strong growth in bank credit and non-bank intermediation from 2009 onwards. Another source of risk is the behavior of oil prices because of the geopolitical situation in the  BIS central bankers’ speeches  1  Middle East. Moreover, although there are encouraging signs from the Eurozone, risks remain associated with its complex political, fiscal and financial outlook. These external risks are important enough for us to evaluate that Chile’s economic growth risks are biased downward. The challenges from abroad are diverse, but as we have mentioned several times, the Chilean economy is well prepared to face them.

All of this points at more favorable current-account balances in the medium term. Anyway, for the purposes of assessing this risk we also need to review the evolution of the deficit measured at trend prices. In this sense, news is pointing in the right direction, because the estimate for this year went from 5.7% of GDP last March, to 4.9% in this Report. We estimate that in 2014 it will continue to recede to 4.6% of GDP. The international economy is undergoing a normalization process that influences the Chilean economy. This means a lower external impulse, with more balanced world growth between developed and emerging economies, terms of trade approaching their long-term level and global financial conditions more in line with historic patterns. A smaller boost from foreign investment is also to be expected – especially in mining –, which will take pressure off the current-account deficit and the use of internal resources. Monetary policy is well equipped, if so required, to back this adjustment process. The Board follows closely the evolution of the external and domestic macroeconomic scenario and its implications on inflation, and reaffirms its commitment to conduct monetary policy so that projected inflation stands at 3% over the policy horizon. I would like to end by sharing with you some final thoughts. Final thoughts We have been 19 months with the same monetary policy interest rate. And as with the exchange rate, during this time we have received the most diverse recommendations and suggestions from the market.
For the household sector, spreads on securitised portfolios of both secured and unsecured credit fell between 2003 and 2005 (Chart 6). That will have contributed to the fall in effective rates on the underlying mortgages and personal loans (Chart 7). The same broad picture holds for the corporate sector (Chart 8). An illustrative decomposition suggests that, especially for sub-investment grade borrowers, the compression of spreads could not be explained solely by reduced compensation for default risk, with the excess possibly reflecting lower liquidity premia (Chart 9). 4 These falls in spreads were material relative to the changes in the MPC’s Bank Rate and to the risk-free yield curve. For example, in the latest “policy cycle”, we increased Bank Rate by 125bp over 11 months from August 2006. During that period, effective rates on new mortgages rose by closer to 50bp. In other words, from around 2003, monetary policy needed to take account of a progressive loosening of credit conditions. The tables have now turned. Spreads have risen; the issuance of securitised portfolios of household loans has collapsed; corporate bond issuance has fallen (Charts 10-11). It is pretty clear that, for the time being, there has been an adverse shift in the supply of credit from the non-banking sector. In part, that seems to be due to investors becoming less confident that they can base decisions about exposures to complex credit portfolios on rating agency ratings; this is akin to lenders deciding that their monitoring of risk was less good than they thought.

6 Second, the “twin engines” view draws too absolute a line between banks and non-bank financial intermediaries. Alongside other asset managers, banks have been material investors in securitised credit. In some respects, it may be more useful to distinguish  4  See Churm R., and L. Webber (2007), “Decomposing corporate bond spreads”, Bank of England Quarterly Bulletin, Q4 2007 (forthcoming). 5  Alan Greenspan made this point a few times. 6  For example see Tucker P M W (2007), “A perspective on recent monetary and financial system developments”, speech at Merrill Lynch Conference on Hedge Funds, Bank of England Quarterly Bulletin, Q3 2007, pp 310-16. BIS Review 149/2007  3  between intermediaries on the basis of whether they undertake some combination of maturity transformation, leveraging their balance sheets, and mark-to-market valuations. Banks are not alone in having these characteristics, and so there can be common shocks to bank and non-bank investors. In a recent series of papers, 7 Hyun Shin has argued that balance sheet management of this kind amplifies the credit cycle. That sounds like the “financial accelerator” model, except that Shin’s position is that the outcomes can exceed those warranted by fundamentals. His argument is that in the upswing of a business cycle, the rise in asset values increases the accounting net worth of banks and other intermediaries, enabling them to leverage up their balance sheets. This expands credit; and increases the liquidity in capital markets, reducing liquidity premia embodied in asset prices; and so on.
It is fair to say that the task of addressing risks to financial stability fell between the cracks. The rapid expansion of debt and accumulation of risks in the financial sector ended, as we all know, in a damaging and painful crash – for the financial sector and for the economy as a whole. There is a substantial body of international evidence that recessions are deeper and more painful when they follow a sharp run-up of debt and a banking bust. The UK recession in 2008–9 was a case in point. The costs of mopping up afterwards are still very clear today. Despite interest rates being effectively at zero for over five years now, the economy is only just now back to its pre-crisis level. There are still over half a million more people unemployed in the UK than before the crisis. The amount of net public sector debt has pretty much doubled relative to GDP. On current plans, the OBR expect it will take a further five years until the public sector deficit is eliminated. I think, knowing what we now know, we would be more prepared to use monetary policy to address financial stability risks. Indeed the MPC’s latest remit letter from the Chancellor notes the MPC might wish to allow inflation to deviate from the target temporarily to avoid the development of imbalances that pose a potential risk to financial stability. But it is not without cost.

Jon Cunliffe: The Bank of England’s Monetary and Financial Policy Committees – guiding the economy towards a sustainable and safe recovery Speech by Sir Jon Cunliffe, Deputy Governor for Financial Stability of the Bank of England, at the International Festival for Business conference, Liverpool, 3 July 2014. *  *  *  When my friends and relations discovered I was going to join the Bank of England I was inundated with the same request. From politicians and senior Whitehall mandarins to family and young children, after wishing me congratulations and good luck, the first question was: “can I please come and see the Bank’s gold?” I of course promised excursions to see the Bank’s gold to all and sundry. On arrival at the Bank, however, I was made aware of the sober reality. The Bank only owns two bars of gold. And they are in the Bank Museum for all to see. Of course, the Bank looks after a great deal of other people’s gold – over 5000 tonnes including the UK Government’s reserves and some of the reserves of other countries. Visits to the vaults in which it lies – as I also found out on arrival – are politely but very heavily discouraged. But apart from the two bars in the museum, the Bank of England itself no longer owns any gold. I am pretty sure that most of those who wanted to see the Bank’s gold would not really be surprised by that.
Banking institutions are facing competition not only from each other but also from non-traditional competitors such as non-bank financial intermediaries as well as from alternative sources of financing, such as the capital markets. Indeed, the Malaysian capital markets have broadened and deepened, and are now playing a more pronounced role than before in the financial intermediation process. In this respect, the challenges to the banking sector are manifold. On the funding side, consumers' continued interest in diversifying their investments in search of higher returns, have seen funds flowing directly into the financial markets instead of going into banking institutions' deposits. At the same time, companies are increasingly meeting their financing needs in the equity and bond markets, thereby reducing their reliance on banking institutions. This is evidenced by the growth of outstanding private debt securities or PDS in the market by 10.7% to RM160 billion as at end of 2004, accounting for approximately 25% of the total financing channeled to the economy. The challenge to banking institutions is to enhance their competitive edge by being cost efficient without compromising on the quality of their services. On the other hand, the disintermediation process also offers opportunities to banking institutions. In particular, they can enhance their income by cross-selling mutual funds products and increasing their role as advisors, arrangers, underwriters and brokers for corporate financing arrangements. There is also bancassurance and bancatakaful in the area of cross-selling.

As we announced at the end of our last monetary policy 2  BIS central bankers’ speeches  meeting in January, the Governing Council will review and possibly reconsider the monetary policy stance in early March. The focus of our deliberations will be twofold. First, we will examine the strength of the pass-through of low imported inflation to domestic wage and price formation and to inflation expectations. This will depend on the size and the persistence of the fall in oil and commodity prices and the incidence of second-round effects on domestic wages and prices. Second, in the light of the recent financial turmoil, we will analyse the state of transmission of our monetary impulses by the financial system and in particular by banks. If either of these two factors entail downward risks to price stability, we will not hesitate to act. In parallel, other policies should help to put the euro area economy on firmer grounds. It is becoming clearer and clearer that fiscal policies should support the economic recovery through public investment and lower taxation. In addition, the ongoing cyclical recovery should be supported by effective structural policies. In particular, actions to improve the business environment, including the provision of an adequate public infrastructure, are vital to increase productive investment, boost job creations and raise productivity. Compliance with the rules of the Stability and Growth Pact remains essential to maintain confidence in the fiscal framework.
The central bank balance sheet as a policy tool: past, present and future  Speech given by Andrew Bailey Governor of the Bank of England  Jackson Hole Economic Policy Symposium 28 August 2020  I am grateful to Jonathan Bridges, Richard Harrison, Josh Jones, Aakash Mankodi and Nick McLaren for their assistance in helping me prepare these remarks. 1  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  Introduction It’s a great pleasure to be participating in the virtual Jackson Hole conference. Well done to the Kansas City Fed for keeping up the tradition – albeit we have to imagine the beauty of Jackson Hole is around us. A tradition of the Jackson Hole conference is to encourage us to look forwards. This time is not only an opportunity to do just that, but in doing so to apply the lessons of the last few months, as well as the last decade or so since the financial crisis of 2007-09. I am going to do that through the lens mainly of monetary policy, but bringing in financial stability where relevant, with a particular focus on central bank balance sheets. My remarks are a summary of a paper being released today.1 It isn’t a review of the record of monetary policy or the framework of policy, but it does cover a good deal of recent evidence and experience. The paper, and my remarks today, focus on the UK case, drawing on lessons from international experience.

One way of looking at these questions is in terms of the stock of assets available for purchase. There is currently a large outstanding stock of government bonds which could be purchased. And if the state contingent effects of QE are driven by the need for holders of safe assets to exchange them for deposits, then it must always be possible for the central bank to purchase more assets. In other words, the central bank would need to own a high proportion of safe assets for that to become a constraint. But if negative shocks continue to arrive from time to time before any reversal of the stock of asset purchases takes place, and hence the stock owned by the central bank continues to rise, the odds of this situation arising go up. This effect may become more likely if the equilibrium real interest rate remains low for a prolonged period. Expanding the range of assets purchased is another way for central banks to create more headroom. The Covid crisis has seen a further broadening of the range of assets that central banks stand ready to purchase. In part, this has reflected another objective of central banks and governments, given the scale of the crisis and its economic effects, namely to direct and target funds to the corporate sector, and thus supplement the more normal role of banks and financial markets. But it also reflected a need to act on a broad front in terms of ensuring liquidity gets to the places where it is needed.
First, such a facility should enable the Federal Reserve to improve its control over the level of money market rates. By offering a new, essentially risk-free investment, one would expect that anyone with access to such a facility would generally be unwilling to lend instead to someone else at a rate below that posted for the facility. This should help to establish a floor on the level of overnight rates. Right now, most short-term rates trade between 0 and 25 basis points, but occasionally T-bill and repo rates go negative, for example at quarter-end or when financial stresses increase the demand for very safe assets. The full allotment element of the reverse repo facility would increase the availability of a risk-free asset, satisfying the demand when the appetite for safe assets increases. This should help tighten the relationship between these and other money market rates. These reverse repos would be available to an expanded set of counterparties that includes many of the money market lenders who are ineligible to earn the interest on excess reserves (IOER), such as GSEs and a number of money market funds. Depending on the facility rate, these lenders who cannot earn the IOER rate might get a better rate by investing in the overnight RRPs compared to lending to banks or to broker dealers. This competitive effect could, in and of itself, put a stronger floor on money market rates. Second, this new facility is also likely to reduce the volatility of short-term interest rates.

Second, the recent data suggest that the downtrend in the inflation rate may be coming to an end. For example, the core personal consumption expenditures deflator rose at a higher rate over the past three months than during any other 3-month period since mid-2012. Third, measures of longer-term inflation expectations, whether discerned from financial asset prices or from surveys of households or professional forecasters, remain well anchored at levels consistent with our 2 percent objective. This is important because inflation expectations are a major determinant of the inflation process. As long as inflation expectations stay well-anchored, it will be hard for inflation to fall further. Putting these factors together along with my forecast of a gradual pickup in real economic activity, my outlook is for inflation to drift back toward our 2 percent objective over the medium term. However, much like the case of the real growth outlook, there is significant uncertainty around this forecast. Monetary policy So what does this all imply for monetary policy? As you are aware, at last week’s FOMC meeting we made no changes to our monetary policy. In particular, the Committee decided to continue to purchase long-term Treasury securities and agency mortgage-backed securities  4  BIS central bankers’ speeches  at a monthly pace of $ billion and $ billion, respectively.