samchain/econo-pairs-v1 huggingface dataset:
Advantages and disadvantages of a higher inflation target The most obvious advantage of raising the inflation target to, say, 3 or 4 per cent would be that this increases the possibilities to stimulate the economy in future deep recessions and to bring up demand and inflation. The experience of the financial crisis shows that the risk of very deep and prolonged recessions has previously been underestimated. Prior to the financial crisis the risks of deep economic crises were assessed on the basis of experiences during the post-war period, when cyclical fluctuations were small and it was thus easy to underestimate the risks. If one studies economic data extending much further back in time, one can see that large downturns have been much more common. At the same time, there are several factors that make raising the inflation target problematic, not least how the actual transition to a new inflation target would be implemented. For instance, the credibility of a new target would be weakened if it were announced in a situation where inflation was far from the old target. It could also be problematic to introduce a new, higher inflation target in Sweden in isolation, if other important central banks around the world stood firm by a target of 2 per cent. Swedish competitiveness could be weakened, for instance, if inflation and wage increases in Sweden were higher than those abroad. In theory, the Swedish krona should weaken in this situation, so that competitiveness would be restored.

Beneath the surface of these encouraging macroeconomic data, there is - and has been for some time a serious imbalance, with some parts of the economy doing very well (including many of the services sectors and some manufacturing activity) while other parts of the economy (including much of agriculture, many manufacturing businesses and even other services sectors such as inward tourism) face the toughest business conditions that many of them can remember. To take just manufacturing, total output has risen by only 2% over the past two years, and it has actually fallen by 0.9% if you exclude the so-called “high tech” sectors (ie computers, office and telecommunications equipment and electronic components). Total employment in manufacturing has fallen over that period by some 230,000, of which 200,000 were outside the “high tech” sectors. For what it’s worth there is a similar imbalance in the US, where total manufacturing has increased by 10½% over the past two years, but by only about 1½% similarly excluding the hi-tech sectors; total employment in US manufacturing has fallen by some 435,000, but by nearly 600,000, outside the “high tech” sectors. There is no single explanation for these developments. They result partly from continuing and unavoidable long-term structural adjustment of capacity to market demand; it results also partly from the effect of increasing global economic integration, inducing the relocation of manufacturing capacity in response to shifts in comparative productive advantage.
There are no insolvency laws or bankruptcy forum to address sovereign solvency problems, and IMF attempts to do so during the last decade failed, for several reasons. What is clear is that in the case of an insolvent sovereign, further official finance can only be provided when that sovereign restructures its debts and, at the same time, undertakes serious and credible domestic fiscal adjustment and structural economic reforms.5  3  See US Treasury Secretary Rubin, 1998. 4  The results of the simulations have to be viewed with caution since they are sensitive to the quality of the underlying data and the assumptions used in the exercise. 5  See, for instance, Roubini, 2002. 2  BIS central bankers’ speeches  The third feature that generally sets sovereign and corporate debt workouts apart is the externalities they may generate. A debt restructuring of a sovereign may have severe implications, both for the debtor’s and the creditor’s economies. Most of the experience in this area has involved less developed countries. In these cases private sector involvement has largely been a concern for foreign creditors. Taxpayers in creditor countries were affected, depending on the size of the exposure of their respective financial system and on whether the soundness of that system was jeopardised. Measures have been used in the past to try to reduce this impact, in particular through regulatory forbearance. One example is the prudential measures which, during the 1980s, permitted US banks to book Brady bonds at their nominal value.

However, experience has shown that when a country requests such assistance, the national authorities tend to blame European institutions, including the ECB, for having pushed them to do so. “Europe” thus becomes a scapegoat and this may fuel strong – although unjustified – anti-European sentiment in the countries concerned. So governments have a natural inclination not to request financial assistance at an early stage. The second thing that has gone wrong has been the implementation of the Greek programme of reforms. Reform fatigue set in at an early stage and it probably went unnoticed for a while. Member States adopting IMF/EU programmes have to remain firmly committed to very specific measures, which need to be acted upon from the outset. Monitoring has to be strengthened. I will not elaborate on these two first issues but – being here in Berlin today – I would like to focus on the third issue which has not gone well, in my opinion, namely the whole discussion about private sector involvement. The point I would like to make is that having the private sector actively involved in preventing and resolving sovereign crises is a good idea. However, the practical implementation of this idea is fraught with complications and, if done unwisely, may actually be very damaging, and turn out to be more costly for taxpayers. The events of recent months seem to confirm my views.
This will support the banking sector’s ability to make long term sustainable business plans into the future. In fact, central bank governors and heads of supervision indicated that they are committed to not significantly increase overall capital requirements across the banking sector. In the euro area, the situation in the banking sector now is very different from what it was in 2012. Perhaps most importantly, euro area banks have significantly strengthened their capital positions over the past few years, notably as a consequence of the Comprehensive Assessment conducted in 2014. For significant institutions, the CET1 ratio has increased from around 9 to 13%, making them more resilient to adverse shocks. In addition, the quality of the banks’ capital has also been substantially improved. With the 2015 Supervisory Review and Evaluation Process (SREP), the ECB has outlined the steady-state Pillar 2 supervisory capital requirements. This means that, all things equal, capital requirements will not be increased further. Hence, the banking sector can now conduct much better capital planning. Moreover, in 2015, the banks under ECB supervision further increased profits relative to 2014. This allows banks to have appropriate distribution policies while still meeting regulatory capital requirements and buffers, and to support lending to the economy. In addition, the ECB’s monetary policy actions continue to support banks’ financing conditions and, more broadly, economic activity. Clearly, some parts of the banking sector in the euro area still face a number of challenges.

But in practice we tend to say that there are prices that are beyond the control of monetary policy, that are somehow disconnected from the conduct of monetary policy, or that are “completely different”. Real estate prices, asset prices etc. Interesting, isn’t it? And conversely, in practice we know what financial instability looks like and what it is. But in theory we haven’t created a rigorous operationalised theoretical system for achieving financial stability, or even for defining financial stability. There is no single, universally accepted definition of financial stability, as quantifiable as the definition of price stability. And what is worse, many believe there will never be one. Again, quite interesting. So this, in my eyes, is the first constraint we face. At least in the area of financial stability, theory lags behind practice. Inflation targeting is a formalised, practical and handy system, while “financial stability targeting” is not, despite huge steps forward recently. And I can’t resist dreaming of a day when we have a system in the financial stability area that is as operationalised as inflation targeting. After all, back in 1978, the U.S. economic historian Charles Kindleberger, in his now classic book “Manias, Panics, and Crashes: A History of Financial Crises”, pointed out that financial upheavals had virtually always been preceded by credit booms, property price and asset price booms and increased leverage in the financial system. All these are, in a sense, monetary phenomena. So why couldn’t we go further here as well?
What the typical student expects from higher education in terms of quality will increase once he or she is contributing to its financing, and higher expectations are known to be one of the drivers of an improvement in standards. Anyone who perceives something sinister in these proposals might look up a recent study by economist Andre Sapir. Using a fairly well-established typology, Sapir grouped the EU15 into four main social models, the Continentals, Nordics, Mediterraneans and the Anglo-Saxons, and then estimated the efficiency and equity of each. He shows that there does not need to be a trade-off between efficiency and equity. Just as importantly, however, he underlines that efficiency is always necessary for sustainability 3 . How do other countries approach this challenge? The experience of Singapore, which is twice as well off as Malta on a per capita GDP basis, is instructive. There, undergraduate education is heavily subsidized by the government, but the remaining cost is borne by the student. The student’s annual contribution ranges from the equivalent of Lm1,300 for an engineering degree to Lm3,800 for a medical degree. There are, however, means for the student to finance this co-payment through borrowing from the Central Provident Fund. This is a social security savings plan funded by contributions from employers and employees, and which go into three accounts. Let me mention two of them. One is the Ordinary Account, which can be drawn upon to pay for the family’s educational expenses, or to buy a house.

(2) Up to 25 March 2008. Sources: Central Bank of Chile based on a sample of investment banks (IB), Consensus Forecast and International Monetary Fund. WTI oil price $  2008 (f)  2007  2009 (f)  Jan. MPR 93  Mar.08  Jan. MPR 88  Mar.08  DoE (11 mar) Deutsche Bank (07 mar) JP Morgan Chase (14 mar) Scotiabank (14 mar) Lehman Brothers (29 feb) Barclays (19 mar)  87 80 70 90  82 75 65 --  87  94 85 82 95 86 101  --  86 80 75 95 78 --  Goldman Sachs (04 mar) Merril Lynch (19 mar)  97 76  97 102  --  ---  IB's Mean (1)  83  90  74  83  97  97  --  --  Central Bank of Chile  Actual Mean (2)  72  (1) Excludes Goldman Sachs and Merrill Lynch. (2) Up to 24 March 2008. Sources: Central Bank of Chile based on a sample of investment banks (IB), Consensus Forecast and International Monetary Fund. We are in the presence of a significant relative price shock. The relative price of foodstuff and energy has changed in a number of countries. Given the persistency of these international relative prices changes, domestic prices are adjusting accordingly, giving the appropriate signals for resource reallocation. Chile is an interesting case in this respect.
Nevertheless, for many observers, Switzerland remains a tiny spot on the European map, a country of 7.5 million inhabitants completely surrounded by the European Union whose population has already grown to several hundred million. Our geographical position obviously puts the question of joining the European Union squarely in the centre of often heated debates. For our economy, however, the real challenge is not to become more European, but to open up further to global markets. Today, Switzerland is more than merely a quaint little country for tourists; it is not only home to watchmakers and bankers or trains that run on time. This cliché is a thing of the past. Switzerland today is a global production platform with 4 million jobs within its borders and 1.8 million people working in Swiss companies abroad. This ratio is unique for an industrialised country. It is the result of a long tradition of Switzerland’s presence abroad. We are all familiar with the big names in our industry which, as early as the beginning of the last century, courageously invested abroad with the goal of conquering new markets. Switzerland’s identity in the world has often been better perceived through the activities of the International Committee of the Red Cross and through our big companies, rather than through diplomacy. The internationalisation of the Swiss economy has not slowed down in recent years - on the contrary, it has amplified. Let’s look at the figures: 20 years ago, our current account surplus, i.e. foreign investment, accounted for 5% of Swiss GDP.

In this respect, the exceptional stimulus measures announced by the ECB and the consequent easing of financial conditions in the currency area, the depreciation of the euro and the sharp drop in oil prices provide a favourable financial backdrop for the euro area and, in particular, for countries like Spain that have made a tremendous effort to correct their imbalances. The benefits of the adjustments made under adverse conditions may now be further bolstered by a favourable financial climate. It is important that the Spanish economy consolidate these gains and that it maintain the pace of reform and the improvements in competitiveness in a framework of stability. BIS central bankers’ speeches  3
Accordingly, much of the burgeoning fiscal deficit that emerged during the crisis is eminently structural. And correcting this means the unavoidable adoption of a far-reaching budgetary consolidation process that bears down precisely on the most permanent and inertial components of public spending. This process is all the more urgent given the seriousness of the repercussions of the Greek fiscal crisis and the pressing need to halt the deterioration in the perception of Spanish public finances. Indeed, the worsening of the fiscal crisis in Greece has substantially altered the conditions governing the design and execution of a fiscal consolidation programme. Systematic and substantive non-compliance with the commitments acquired by the Greek authorities in respect of public finances, added to a repeated lack of informative transparency, resulted in a strong loss of confidence by the markets in the Greek government’s capacity to meet its payment commitments. That gave rise to a completely new situation and, what has finally proved most telling, one not foreseen in the institutional arrangements underpinning the euro area: the perception of a potential risk of insolvency of one of its members. This lack of foresight translated into difficulties in promptly setting up a sufficiently forceful institutional response. These difficulties were clearly identified by the markets and meant that the specific risk of insolvency of a Member State rapidly turned into a systemic risk for the whole of the area.

We have thererfore today decided to continue our expansionary monetary policy, maintaining all of the measures we implemented on 12 March. Inflation forecast chart How has our inflation forecast been revised? The dashed red curve on the chart represents the new forecast. It covers the period from the second quarter of 2009 to the first quarter of 2012, and maps the future development of inflation on the assumption that the three-month Libor remains unchanged at 0.25% over the forecasting period. For purposes of comparison, the dash-dotted green curve shows the inflation forecast of the March monetary assessment, which was also based on a three-month Libor of 0.25%. The new forecast still shows negative inflation for 2009, but with a very slight adjustment upwards. This is explained by the recent upturn in prices of fossil fuels and of commodities in general. However, as an average for the year, inflation will remain negative, at an unchanged rate of -0.5%. In 2010, inflation is likely to return to slightly positive rates and could be a little above the figure forecast in March. This is due to the fact that although domestic inflation is falling it will still amount to around 1% at the end of the year while imported deflation recedes more rapidly. Finally, for 2011, the new forecast shows that inflation will accelerate a little at the end of the forecast horizon if the Libor remains at a level as low as that being aimed for at present.
Furthermore, the response of yields to a given quantum of asset purchases seems to vary. There are times – particularly in periods of stress in financial markets – when government debt is viewed in markets as a relatively poor substitute for central bank money, and QE is therefore more powerful. At other times it’s less so. If you also believe that markets (and therefore market prices) embody any impact of QE or QT expected to occur over the future, a forecast conditioned on those prices will also capture its effects. This is why it would not make sense, I think, to include in the MPC’s forecasts some separate and additional drag from the ongoing (and pre-announced) QT. That would be to doublecount its impact. All this said, there will certainly be times when movements in broad money are identifiably more supply than demand-led. The jump in household deposits during the pandemic may not have been the inevitable result of QE but, from the perspective of households, it certainly looks like a windfall addition to their money holdings (i.e. something closer to Friedman’s “helicopter drop”). One might have expected an extra boost to spending whatever the form of these additional assets. But the MPC certainly allowed for a somewhat larger effect because of their liquid nature. In the event, that forecast was too strong. Even before the squeeze on real incomes from the subsequent jumps in import prices, consumer (and aggregate) demand was weaker through 2021  Page 30  than the MPC projected.

As a result the demand for (broad) money rose alongside its rising supply – “velocity” declined, if you prefer – and the rate of M4 growth consistent with on-target inflation was significantly higher than 2%. These were deposits accumulated not as a “medium of exchange” but as a “store of wealth”. What those years also demonstrate is that commercial banks can supply and create such deposits with any commensurate growth in the balance sheet of the central bank. QE is neither necessary nor sufficient for broad money to expand. To take a more recent example, it’s not clear that the jump in household deposits during the pandemic was the direct and inevitable result of the central bank’s asset purchases at that time. If that were true one would presumably have expected to see something similar after every other previous episode of asset purchases. That’s not the case. For me, the more plausible cause is the combined impact of severe restrictions on spending and, thanks in part to fiscal support (in the shape of the furlough scheme), continuing growth in household income. At least in the first instance the resulting jump in saving had nowhere to go but into household deposits. More generally I think it’s better to understand the impact of QE through the lens of asset prices – what it does to bond yields – than quantities (still less as “printing money”). As with commercial banks, the demand for central bank money can change (sometimes very abruptly).
The changes came into force on 1 January 1999. 1 [13]  In a moment I will look more closely at the new environment and discuss a few properties that characterise it and that monetary policy will need to relate to going forward. Lastly, I also intend to provide an overall picture of what might characterise the way forward. But before doing that, allow me to say something about what has brought us here. Where we are coming from I spoke earlier about 2018 being a year of celebration. Another anniversary, but one which does not give cause for any kind of celebration, is that it is also ten years since the collapse of the investment bank Lehman Brothers. The problems on international financial markets, which had been escalating for a long time, came to a head. Confidence in the financial system evaporated and the financial crisis was upon us. Much has happened during the ten years since then. The actions of central banks during this period have not just been about managing the direct crisis of 2008, even though many of the problems stem from there. It is more accurate to describe the actions as reactions to an interconnected series of crises, or, if you like, a crisis that consists of several phases. These have, in turn, formed the backdrop to the different phases of monetary policy that Sweden has gone through.

Before I go into the major socio-economic contexts, I thought I might begin with an anecdote from a smaller context, a personal experience from one of my most recent visits to Hradec Králové, in Bohemia, Czech Republic, the region where my relatives come from. Every time I return there I am pleased and surprised at the changes that have taken place, but during my most recent visit last year I was quite astonished. There, in the small provincial town of Hradec Králové, with only around 100,000 inhabitants, they now have a shopping mall worthy of Stockholm's smartest shopping area, as well as a couple of large discount stores and a D.I.Y. store, all selling goods of better quality but a fraction of the price of those in Sweden, and all full of shoppers. When I left the shops loaded up with shopping bags to take home to Sweden, I remembered how things used to be, when we in Sweden sent parcels to family and friends containing clothing, medicine and even decent soap and washing powder, along with various other things that weren't available in Czechoslovakia then. And here I was doing all my shopping there! This is just a fragment from daily life, but to me it illustrates two things that are typical of our relationship to the coming new members of the EU. One thing is how quickly these countries have changed, how rapidly they are integrating with and moving closer to western Europe.