samchain/econo-pairs-v1 huggingface dataset:
This poses a problem in terms of coordinating behaviour, which has to be resolved by policy-makers. However, time constraints prevent us from exploring this matter any further today. I would like to conclude by looking to the future. I agree with Franco Bruni’s analysis and recommendations. This crisis affirms the need for fully independent central banks in which the appointment of Executive Board members is not linked to electoral cycles, and where such members have long-term mandates. It also confirms how important it is for price stability to be the primary objective of monetary policy. This experience has shown that having more objectives than this does not make the task any easier, neither in terms of preventing a crisis, nor resolving it. Given the objective of price stability, central banks should also aim to contribute to financial stability but they should also have instruments at their disposal to achieve this. 4  BIS Review 82/2009  Finally, whenever central banks are given specific powers, they are also expected – and rightly so – to exercise accountability. Franco Bruni is no exception, but in this regard he cannot be distinguished from a certain trend which erroneously considers the ECB to be less accountable than the Federal Reserve, particularly with regard to parliament. The appendix gives details about the methods of reporting to the respective parliaments, in terms of reporting, hearings and responses to questions posed by the parliament.

No one, however, asked, in a world of uncertainty, how to measure the “neutral” level of the interest rate. That was assumed as a given. This is the theoretical basis of the so-called Taylor rule. Nor was the crisis understood by those who continued to assume that financial markets were perfect, without frictions, in which the inflating and bursting of speculative bubbles is part of a moving equilibrium condition, in which economic policy should not intervene. In accordance with this approach, monetary policy, or the prudential supervision system, should not intervene in order to avert erratic market behaviour, which causes excessive flows of indebtedness and unstable dynamics in financial activities, but rather intervenes ex post, in order to reinflate the bubble when it bursts. Doing it that way, by reinflating it, the bubble has finally burst with detrimental effects on the world economy. BIS Review 82/2009  1  Franco Bruni’s book demonstrates that the excessively accommodative monetary policy following the dot-com bubble and 11 September fuelled the subsequent speculative bubble, which then burst in the summer of 2007. He himself acknowledges that the main responsibilities probably do not lie with monetary policy, but rather with the absence of regulation of new financial instruments, which permitted institutions to increase their leverage capacity and favoured the indebtedness of households and firms. However, monetary policy contributed to the build-up of imbalances by keeping interest rates very low, above all, during the period when the US economy was starting to pick up again.
It is expected, however, that central banks will make more explicit their concern for all the “three aspects of stability” in their policy decisions, realising that price stability and financial stability are much more intertwined than we used to think. I believe this development has farther-reaching consequences when it comes to the future of central banking. I can easily imagine, some years down the road, a more “normal” world in which unconventional monetary policy tools are a thing of the past, since their relevance is ultimately circumstantial, but I cannot imagine a future where the explicit concern for financial stability and the macroprudential policy are not central banking fixtures. To be frank, the NBR has never had the luxury of being concerned exclusively with price stability and interest rate setting in the belief that financial stability and exchange rate stability will follow. In a world with freely moving capital, the idea of being able to manage aggregate demand exclusively via interest rates would have been an illusion: the interest rate hikes required to manage aggregate demand and anchor expectations would have entailed further capital inflows and an unsustainable nominal appreciation, thus boosting foreign currency lending and creating vulnerabilities on the financial stability front. That is why, when introducing inflation targeting in 2005, the NBR opted for the “light” version of the strategy, which meant retaining the managed float feature of the exchange rate regime.

There is not much that overall fiscal policy, still less monetary policy, can do directly to affect the supply-side capacity of the economy: they operate essentially on the demand side. And our recurrent experience showed that excessive demand growth spilled over into inflation and a worsening balance of payments which ultimately had to be corrected – the infamous boom and bust cycle. This macro-economic instability damaged the supply side of the economy, with a worse outcome over time in terms of our ultimate policy objective. It is now very widely understood that “stability is a necessary condition for sustainable growth” and that, of course, has become the universal central banker’s mantra. But the question is stability of what? You obviously cannot sensibly aim to stabilise everything. The aim has to be sustainable growth of the economy as a whole. But that cannot mean stable growth for every sector of the economy or for every business enterprise. Consumer demands change over time and so, too, do technologies and production techniques. Open market competition to identify such changes, and to exploit them to meet social needs more efficiently, is a vital driver of improvement on the supply side of the economy. At the micro-economic level, that means that particular sectors and individual businesses will continually rise and fall; and that is why established producers everywhere often see new competition, perhaps especially international competition, as an unwelcome threat.
Thus the degree of monetary policy activism can be different; this, however, is not on account of a different decision-making strategy, but on account of the different nature of the shocks impacting on the two areas. Comparative analyses show that the macroeconomic shocks on both sides of the Atlantic, 2 while of similar magnitude, appear to be partially different in their nature. Over the past ten  2  See, for instance, Smets, F. and R. Wouters (2005), “Comparing Shocks and Frictions in US and Euro Area Business Cycles: a Bayesian DSGE Approach”, in Journal of Applied Econometrics, Vol. 20, No 2, pp. 161-  2  BIS Review 135/2008  years the euro area has been worse hit by “supply shocks” than the United States. A supply shock tends to have an effect on growth with the opposite sign to that of inflation. One example is the decline in total factor productivity (TFP) in the early part of this decade which brought upward pressure to bear on inflation at a time when economic activity was slowing down, as occurred following the bursting of the dot.com bubble. Indeed, available evidence seems to suggest that the exacerbation of negative supply shocks is a recurring feature of economic slowdown phases in the euro area. As a result of that phenomenon, inflation in the euro area tends to react to an economic slowdown less rapidly than it does in the United States.

The US central bank’s mandate, on the other hand, envisions two goals: maintaining price stability and guaranteeing sustainable growth. No quantitative definition of price stability has been adopted. Another principle guiding the ECB’s monetary policy is the notion whereby, if monetary policy pursues a more stable and less volatile course, that fact will boost its effectiveness, thus increasing the central bank’s long-term ability to influence interest rates throughout the yield curve. This characteristic is particularly important in the context of relatively inert economies such as the euro area economy. On the other hand, a monetary policy that tends to react strongly to new data and to short-term economic developments is less effective in controlling inflation expectations, with the risk that inflation takes longer to return to price stability after a shock. Empirical analysis based on estimating a central bank’s “response function”, typically in the shape of the so-called “Taylor Rule”, proves that monetary policy’s degree of persistence is greater in the euro area than in the United States, even taking into account the 11 different trends in the business cycle. 9  A  stylised  neo-Keynesian  Phillips  curve  can  be  represented  as  follows:  where is the inflation rate, is the expectation factor, denotes the basic process that drives inflation (in other words the output gap), and ut is a shock that puts pressure on costs.
The third major challenge is that financial institutions need to further strengthen their financial standing in the recovery path after the crisis. Preparing for the New Accord means cost impact from building capacity in terms of people, know-how, IT, data, and business model re-engineering. Therefore, strong leadership is crucial to propel the financial institution through the short-term difficulties, while at the same time steering the institution with long-term vision and strategy to ensure that the financial institution survives the challenge and complies with international best practices. As for the regulators, our task at the Bank of Thailand is no less challenging. In addition to the need to build up our own in-depth understanding and capacity to implement the New Accord, we are also responsible for mapping out the strategy for its adoption in such a way that the financial sector will be capable of serving efficiently and effectively both the modern and traditional sectors of the real economy. In a dual economy such as Thailand, having the right financial sector structure for financial institutions to serve the basic function of resource allocation and risk management is a very complex issue due to the various market imperfections where market mechanism fails - particularly when one is dealing with financing smaller clients, and clients in the less developed segments of the country. In the past such issues were swept onto the domain of specialized financial institutions, but today the financial innovation and sheer creativity have made it possible for private sector solution.

We have recently conducted a survey of the financial institutions to check their readiness to conform to the credit risk guidelines under the New Accord. I have been reported that many plan to be ready for the standardized approach, while others are working towards the IRB approach, this is a welcome news. More importantly, financial institutions have all started the effort to strengthen risk management in their respective institutions with some notable progress so far, and we look forward to more progress to come. I would like to take this opportunity to commend all of you for such efforts. After all, the BIS capital requirement only serves as a cushion of losses or failure of an institution whereas it is the risk management that reduces the chance of failure. The significant progress you have made in the area of risk management deserves our full support and commendation, particularly so as this is a very difficult time for the financial industries. Ladies and gentlemen, Coming back to the issue of preparation for the New Accord, one can see that significant challenges remain ahead. I will now turn to these challenges. First, the technical and infrastructure aspects. It is important to build up a deep understanding of the technicality of approaches and methodology underlying the New Accord. Moreover, it is critical to achieve in-depth knowledge of risk management and the impact of such developments on business model of the financial institution. Therefore the task ahead is very challenging, far beyond just acquiring software that would crank out numbers.
When public sector balance sheets reached their limits, it was the turn of deleveraging at a national level through fiscal consolidation, a process which is likely to continue for some time to come in the UK and euro area. It would be overly pessimistic to have as one’s central case that the headwinds currently affecting the economy will persist for decades to come. Although they will be persistent, they will not be permanent. Indeed there are now nascent signs that some of these headwinds have already begun to ease. For example, against a backdrop of improved confidence in the recovery (Chart 5), firms have slowly but surely been increasing the amount they invest relative to the amount they save (Chart 6). And household saving has also declined from its very elevated precautionary levels. But that is not to say that it is imprudent of financial markets to attach weight to the downside risks – they are real. Indeed, reducing the probability of those risks materialising has been a driving factor in the MPC’s decision to maintain Bank Rate at its historically low level of 0.5% for 6 years, and the committee’s guidance that when Bank Rate does begin to rise, it is expected to do so more gradually than in previous cycles, and is expected to remain below average historical levels for some time to come. 4. Diminished potential output growth  Let me turn next to potential output growth.

When one thinks about the distant future – that is, the period beyond the influence of the current set of cyclical factors – one tends to think that interest rates will tend toward a level that reflects the rate of return on investment, and hence the potential output growth of the economy. Potential output growth matters a great deal for monetary and macroprudential policy. In the long run it determines the rate at which the economy can grow without generating abovetarget inflation, and it determines the rate of income growth in the medium term, and hence the sustainable level of debt today. During the financial crisis, we rediscovered the fact that recessions accompanied by financial crises tend to be followed by a sustained fall in the level of potential output. 13 The only silver lining was that although the level of potential output tended to be permanently lower, the growth rate could be expected to recover. However, if the current yield curve can be interpreted as an indicator of financial market participants’ expectations of the return on investment in the long term, it suggests they are  11  Barro (2006) shows that the potential for rare economic disasters can explain low risk-free rates  12  This can be broadly defined to include the higher cost of financial intermediation  13  IMF (2009)  4  BIS central bankers’ speeches  sceptical that potential output growth can even return to pre-crisis norms.
Amongst other examples, recent work by Jeremy Stein and Samuel Hanson at Harvard and, subsequently, by a Bank of England team11 has found some evidence that changes in Federal Reserve and Bank of England policy rates are accompanied by material (similarly signed) changes in long-term real forward rates. This is striking given the usual assumptions about monetary policy being both credible (no effect of cyclical policy on long-term inflation expectations) and neutral (no effect on real magnitudes beyond cyclical horizons). While, I must stress, not proving anything, this is consistent with a group of investors responding to lower short-term rates by moving along the maturity spectrum in a “search for yield”. That interpretation is, to my mind, fortified by a finding, for the US, that the effect on long forward real rates is greater when short nominal rates are low. Imagine the behaviour of asset managers who have guaranteed a minimum nominal return to investors. This is the “carry trade” – perhaps mythical for many years to many economists as there is a flavour of “irrationality” around it, but part of the fabric of the world for practitioners. Although current mainstream “structural” models of conventional monetary policy do not work like that, perhaps we should not be too amazed.

In such a scenario, the net result in the short term will not necessary be falling inflation - it could just as well be rising inflation. This is one of the risks in this context. Another risk that has not been discussed much yet refers to a longer-term perspective. Changes create both winners and losers. Lower purchase prices for a business owner or for us consumers may involve a lost profit margin for other companies. An increase in productivity may involve redundancies and that companies which are unable to keep up with developments are wiped out. The structural transformation thus contains not only possibilities, but also social maladjustment that must be dealt with by the labour market, the capital markets, the education system, etc. What does this mean for monetary policy? I intend to discuss four areas that have figured in debates on monetary policy and the ‘new and old’ economy: the effects on interest rates, the effects on purchasing power, the economic relations and the Riksbank’s intellectual framework. It would not have been possible for interest rates to lie at the current levels if price stability had not lowered the risk premium that lenders require for the uncertainty factor. In addition, the reduction in public borrowing and declining indebtedness has led to real interest rates being pulled down. But would this still apply if we had a higher growth in productivity in the future? One effect of higher growth and increasing investment could be rising real interest rates.
Some of the salient features of the Act, as can be read in the Consultative Paper prepared for this workshop are:   provisions to strengthen the legal basis, ownership and structure of Bank of Zambia as a modern central bank, as well as its primary objective;    provisions relating to adequate power and independence;    provisions relating to all aspects of the relationship between the Bank and Government structures;    institutional arrangements of the Bank including the appointment of governors, directors and auditors, internal budgets, reporting requirements, preservation of confidentiality and handling of possible offences;    adequate mechanisms for good governance and security of tenure for Governors;    measures to better manage and application of monetary policies, including the role of lender-of-last-resort, interest rate policies, exchange rate policies and Bank of Zambia’s involvement in money and foreign exchange markets;    creation of a Monetary Policy Committee; and    accountability to Government, Parliament and the Public. By tabling this draft Act before you the Stakeholders, the Bank of Zambia wants to maximise its consultative process by taking into account your views on this layman’s draft. We encourage constructive debate and assure you that your views will be taken into account before the draft is transmitted to our parent ministry, the Ministry of Finance and National Planning. The Ministry is responsible for initiating the legislative process that shall see this layman’s draft transformed into a Bill and tabled before Parliament for debate.

To give you a brief background on the central bank legislation, since its inception in 1964 the Bank has operated under 3 different Bank of Zambia Acts; the BoZ Act of 1965, the BoZ Act of 1985 and the current BoZ Act of 1996. Each of these Acts has responded to the era of its time. For example, the Acts of 1965 and 1985 were characterised by high Government involvement in the operations of the Bank. The Bank administered exchange control regulations. It also determined and regulated the frequency and rates of fees, commissions and interest rates etc charged by financial institutions. The economic reforms that swept the country in the 1990’s saw the ushering in of the current BoZ Act of 1996 which supported the Government’s free market policies. The Bank’s mandate was made clearer, exchange control regulations were suspended and the Bank’s regulation of interest rates etc was removed. There was also improved transparency and accountability. Since the enactment of the BoZ Act of 1996 two issues have precipitated the need to have the Act reviewed again; 1. In 2002, the IMF and the World Bank conducted a joint assessment of Zambia’s financial sector under the Financial Sector Assessment Programme (FSAP). The result of this assessment raised awareness of various weaknesses in our financial system which needed to be addressed. For this purposes, the Government approved the establishment of the Financial Sector Development Plan (FSDP) in 2004 to address these weaknesses and implement recommendations.
The management of the Global financial crisis and its aftermath in the advanced economies have highlighted the importance of this aspect of leadership. How then do we unleash and harness the leadership energy to perform and be effective in this new and more challenging environment. It lies in self-hacking the mind and the heart. We can draw inspiration from the brain-training secrets of the Olympic athletes which start with oneself and the ability to tap into our internal reservoir of strength. Just like athletes, one can tap into this impressive mental prowess to train the mind to remain focussed eliminate distractions, reduce stress and anxiety and build the stamina needed to achieve optimal performance. In the business of Central Banking – a business that I have described as being “an unfinished business” because there are always new challenges on the horizon, endless demands emerging in an ever changing and more complex environment and great  BIS central bankers’ speeches  1  expectations that the Central Bank will provide the solutions and the necessary actions to resolve the monetary, financial and economic problems that continue to confront our world. In conditions of financial and economic crisis, a phenomenon that has now become more frequent, in which Central Banks are at the forefront in its management. The drive to deliver in the face of great odds from my experience has been about having great focus on the results and goals to be achieved and a strong conviction of how this might be pursued.

Thriving and surviving in this world has demanded a new generation of leadership – forward looking leaders that are able to succeed and bring teams, organisations and countries, to new successes, to new frontiers and having the ability to sustain such performance in this new and more challenging environment. A further phenomenon that has intensified the demand for a new generation of leadership is the trend towards the relentless pursuit of instant results and the attainment of short-term goals. Additionally, the complexities of the world has also had the unintended effect of blurring our lens to focus on immediate challenges and problems. The scourge of shorttermism has defined a world where success is measured by short term results because the criteria for success and the incentive structures have promoted such behaviours. Such successes can however be only fleeting. The world needs leaders who offer a compelling vision with ambitious goals, where the outcomes will genuinely add value and make a difference, and with results that are sustainable. In this new environment of increased interconnectivity and increased inter-linkages, the role of leaders is also about galvanising and bringing together highly diverse entities and providing solutions to problems that have multi-facetted dimensions. It is also about managing diverse relationships that are often conflicting. While this is not new, what has changed is the intensity and the scale of the interconnectedness of businesses and of the goals that need to be achieved.