samchain/econo-pairs-v1 huggingface dataset:
10 Years of Romania’s EU Membership: Looking to the future Liviu Voinea, Deputy Governor, National Bank of Romania 26 October 2017  Ten years after Romania’s EU accession, the world has changed dramatically: the global financial crisis of 2008-09 led to the revision of rules in the international banking system, to growing social discontent with major consequences in terms of flourishing populism and protectionism, as well as to a reshuffle of maps – be they geopolitical, military or economic.  Uncertainty is running higher today than prior to the crisis and the room for quantitative easing policies based on stimulating demand has narrowed considerably.  Looking ahead, both the European Union and Romania need structural reforms. As regards the EU:  Many steps have been taken so far at institutional level: Stability and Growth Pact, CRD IV (Capital Requirements Directive), Banking Union, SRB (Single Resolution Board), SSM (Single Supervisory Mechanism), ESRB (European Systemic Risk Board). When needed, monetary policy undertook – in Europe as well, similarly to the US, UK or Japan – to escape recession and deflation and to foster renewed economic impetus.  A challenge to the EU is to maintain the pace of economic growth as the ECB gradually exits from quantitative easing.  Another challenge facing the EU is to manage Brexit properly and avoid other exits, which would question the very essence of European identity.

 The growth potential should be enhanced also by an increase in capital flows and stock, the absorption of EU funds and a better allocation of resources via investment prioritisation.  Achieving convergence is not enough, as convergence should be sustainable, balanced and equitably distributed.  Real convergence should be pursued not only in terms of income, but also in terms of output structure, by means of the level and composition of budget revenues and expenditures. 3   Good European practices should be used to fight tax evasion and strengthen financial discipline.  In the medium run, a balanced primary budget should be ensured and the MTO (medium-term objective) should be again pursued; public debt should be maintained at sustainable levels and inappropriate incentives leading to over-indebtedness of private sector and households should be avoided.  It is necessary to improve the access to financing. 83% of households have 6% of deposits, whereas 0.3% of households hold 25% of deposits. Housing loans have been accessed by only 1% of very low income earners (the 1st quintile) and by only 4% of relatively high income earners (the 4th quintile). 12% of the highest income earners (the 5th quintile) have accessed housing loans.  A roadmap is necessary for joining the euro area.  The public goods that should be preserved and even strengthened include: the country’s security, financial stability, investors’ confidence. European Union – Romania joint agenda for 2019  Conclusion of Brexit negotiations.
We think that the underlying strength of the economy gives grounds that inflation convergence will continue in the period ahead, even after a gradual winding down of net asset purchases. What is that confidence based on? There is a path of gradual improvement towards our inflation aim, as the euro area economy will continue to grow above potential. Increasing pressure on the utilisation of resources, notably in the labour market, will continue to support inflation over the medium term. Is the ECB comfortable with the recent projection pointing to annual inflation of 1.7% over the period to 2020, clearly below the 2% aim for these three years? The Eurosystem staff projections are only one element of our assessment. What is crucial is that we see a sustained path of adjustment of inflation towards levels that are below, but close to, 2%. Over the projection period, the contribution of energy to inflation declines, and inflation excluding energy and food gradually rises, as capacity constraints become increasingly binding. What the ECB anticipated last week was the halving of asset purchases between October and December. But there was a proviso: the measure was subject to data confirming the medium-term inflation outlook. What does this mean in practice? Our baseline scenario is that the euro area expansion will continue in the period ahead. But new uncertainties have arisen in 2018.

Finally, addressing impediments to investment, increasing productivity and further improving the business environment remain key for strengthening potential growth. To conclude, my assessment is that significant progress has been made, but that ensuring prosperity on a lasting basis requires continuing the implementation of an ambitious reform agenda going forward. BANKING It is essential to complete the banking union. In this respect, the European summit on 28 and 29 June is very important. The European banking landscape is still characterised by one important feature: a strong exposure of banks to their national economy, including a high exposure to domestic public debt. The completion of the banking union will, over time, lead to a lower exposure to national economies. Regarding the situation of the banking sector, there is still a sizeable legacy of non-performing loans in some banks. An impressive effort has been made to reduce the level, but the situation has not yet been fully rectified. The banks are now much more capitalised. Their liquidity is much stronger. But, on the other hand, we have to be clear: for the large banks, the new regime under the Bank Recovery and Resolution Directive – BRRD, to use its English acronym – has still not been tested in the event of a crisis – luckily. The banks still have a strong national orientation: they have exposures to the public debt of their country and a strong focus on the domestic economy.
Pension funds are active in repo markets but do not run highly leveraged positions. Financial leverage for risk taking is most prevalent in the hedge fund sector, but even here it appears to be relatively low compared to banks. 18  The risks from synthetic leverage - the leverage that is embedded in derivative contracts - is, however, much harder to measure, let alone categorise. Funds make very significant use of derivative contracts. An FCA survey published in 2015 suggested hedge funds have outstanding notional derivative positions 28 times greater than their net asset value. But, in many cases derivatives seem to be used to hedge and reduce rather than to gear up risk. And notional values are rarely an accurate measure of risk exposure from a derivative. So measures of total net economic leverage are preferable. That is, measures which show the extent to which derivatives increase or decrease a fund’s overall exposure to risk factors such as asset prices or interest rates. The issue here is not just whether we can identify how much synthetic leverage is being used to reduce rather than to take on risk. It is also to identify, at the level of the financial system, whether the large-scale use of derivatives to manage risk at the fund level creates a risk in the system as a whole. There are perhaps two related ways in which this could happen. The first is simply the degree of inter-connectedness this creates in the system as a whole.

If the substantial optimism regarding the future that is reflected, for instance, in the development in savings proves partially unwarranted, the problems may become even more difficult to handle at a later stage. Although the focus is on the USA at the moment, concern over developments in Japan has increased recently. Here there appear to be both severe problems in the real economy and in the finance sector, as well as political difficulties in dealing with these problems. In the insurance sector there are a number of major life insurance companies that are insolvent in the technical sense, as they have promised pensioners a return that they are unable to deliver. A large part of the insurance companies' assets are of course traditionally invested in low-yield treasury bonds. The Japanese 10-year bond rate is currently around one and one-third per cent. The Bank of Japan has declared that it intends to continue with its zero interest rate policy for the foreseeable future and the market expects to see prices falling rather than otherwise during the coming year. If interest rates and inflation were to gradually rise, which at the moment does not appear likely, this would of course further erode the value of Japanese pension money, as the bonds stock in the insurance companies would fall in value.
BIS Review 37/2008  13  Over the past year, we have seen a growing international debate about government-owned investment vehicles; so-called sovereign wealth funds (SWFs). The increased attention reflects their rapid growth over the last decade. The debate has revealed some scepticism towards these funds, where key concerns relate to a lack of transparency and possible nonfinancial investment objectives. In my view, the debate should also reflect these funds’ potential to positively influence international financial markets through enhancing market liquidity and financial resource allocation. Typical features of this type of funds are long investment horizons, no leverage and no demands for the imminent withdrawal of funds, unlike the growing number of leveraged hedge funds with short time horizons. Hence, sovereign wealth funds have a high risk-bearing capacity and are resilient to short-term volatility. They may therefore act as a stabilising factor in financial markets by dampening asset price volatility and liquidity risk premiums. Let me elaborate and exemplify this by looking at the Government Pension Fund – Global: The Pension Fund is a policy tool to support long-term management of Norway’s petroleum wealth and avoid the resource curse. An important objective is to shield the Norwegian economy from fluctuations in prices and extraction rates in the petroleum sector. The Fund is only invested abroad in financial markets. The alternative to an oil fund would have been to regulate the extraction path by putting a conservative upper limit on annual extraction.

First, large exchange rate appreciations have not resulted in external adjustment of the Swiss current account. Instead, key components of the Swiss current account are determined by structural factors that behave independently of the exchange rate. Second, there are good and legitimate reasons for countries to have current account deficits and surpluses to smooth their output and consumption. And third, independent central banks need to fulfill their mandate of price stability in an inter-dependent environment that constrains their policy choices. More specifically, the SNB has had to – and still has to – ensure that monetary conditions do not become restrictive for Switzerland in the face of extreme exchange rate appreciation and deflationary risks. The critique does not take these three points into account. Structural factors and Switzerland’s surplus Let me first address the question of specific structural factors in the Swiss current account surplus, and why this surplus is not a reflection of Swiss franc weakness. In a nutshell, these factors are more closely correlated with external developments in real economic activity than with exchange rate movements. I’d like to highlight these structural factors with the help of three figures. Figure 2 shows the current account surplus and the real trade-weighted exchange rate of the Swiss franc. I have two observations here: In the short run, when the franc appreciates in real terms, the surplus in the current account does not automatically decline. Nor does the surplus automatically increase when the franc depreciates.
Is the central bank forward-looking or rather “behind the curve”? These are actually some of the recurrent criticisms I have heard about the Eurosystem’s monetary policy: too obscure, too narrow-focused, too late. One can build up (see Figure page 7 of the Annex) a forward-looking Taylor-type rule for the ECB’s minimum bid rate. As an overall assessment, the Taylor-type rule closely matches Eurosystem’s monetary policy decisions. Under the proviso that this rule provides a good benchmark, it is quite unclear why the Eurosystem has attracted so much criticism: in particular, the output stabilisation “objective”, as encapsulated in a standard Taylor rule, has not been overlooked by the overriding objective of price stability. In that regard, one should be aware that, in the euro area as elsewhere, price stability aims at providing the highest sustainable growth and employment in the longer run; finally, the decisions have been taken in a timely fashion, the Eurosystem conducting its monetary policy in a forward-looking and pre-emptive way. However, the same figure shows that policy decisions deviate from the Taylor rule benchmark. Actually, being rule-based doesn’t imply being rule-bound and monetary policy decisions are not taken on the basis of mechanical rules. I already mentioned the Eurosystem adopted a full-information approach, which besides the usual array of economic and financial indicators also gives a key role to monetary analysis not factored in usual Taylor rules. Identifying in real time the nature of monetary developments and their implication for future price developments represents however increasing challenges.

And there have been a number of exercises and co-ordination initiatives in different regional groups (for example amongst the Nordic countries, Dutch and Belgian authorities, and more widely across the EU). But there has been less progress on the wider international front. Overall, I do not know anyone who believes that we have established either the common approach to crises or the practical machinery which would enable us to handle a complex cross-border failure with confidence. I would like to make some suggestions tonight on how we might take matters forward. When and how should the State intervene to prevent or manage a financial crisis? Of course the underlying questions are very difficult even for one country. Financial markets are often volatile and they can only work well if investors and firms expect to live or die by their own decisions and do not come to rely on a safety net to mitigate their losses. To avoid that ‘moral hazard’, authorities have tended to be reluctant to spell out in what circumstances and what ways they would  1  Gerard Caprio and Daniela Klingebiel, 2003. “Episodes of Systemic and Borderline Financial Crises”, World Bank Research Dataset. http://econ.worldbank.org  2  http://www.fsforum.org/home/home.html  BIS Review 112/2006  1  be willing to help support a market or a participant, beyond making clear that it would only be in exceptional circumstances and where it was essential in the wider systemic interest.
Asia’s young and increasingly urban and increasingly more affluent population, supported with policy initiatives to strengthen social safety nets – including for healthcare and retirement – will further enhance domestic demand in the region. This will further unlock our trade and growth potential. Our diversity also continues to be an important source of strength for the region. The complementarities between the economies in the region provide significant opportunities for greater shared prosperity and mutually reinforcing regional growth. The progressive liberalization of the domestic financial sectors, the development of domestic capital markets and the integration of payments and settlement systems have opened up new channels for regional financial institutions and markets to intermediate funds across borders. These developments have facilitated the recycling of surplus funds from the region for economic development in the region, while also enabling greater diversification of risks. The lessons drawn from the Asian financial crisis more than 15 years ago also continue to shape our financial sector reforms, liberalization and economic and financial integration in the region. The focus is on developing a financial sector that serves the needs of the real economy, and which is built on solid foundations of sound risk management and strong financial buffers. An important precondition for financial liberalization and integration in the region has been ensuring that we build the capacity and financial infrastructure that would enable us to respond to emerging risks while also minimising their contagion effects.

The Journal can have a significant influence in drawing attention to the financial stability issues that are most important and thus contribute towards the thinking and responses on these issues. It is a process that should have an inclusive participation in this important agenda of financial stability. BIS central bankers’ speeches  3
In this context, and as part of our main responsibility to guarantee the stability of the financial system, we - regulatory and supervisory authorities - must ensure that the materialisation of climate risks does not endanger financial stability. Therefore, we must make sure that financial firms address these risks. In particular, we should contribute to identifying climate-risk drivers and their transmission channels, to the adequate measurement of the economic and financial impact of the different risks, and to the definition and development of the potential mitigation and riskreduction measures. If we succeed in incorporating these risks into the decisions of the financial sector, this will translate into a change in the relative prices of financial instruments. And, in turn, that will help to internalise those consequences originating from both transition and physical risks that affect directly providers and users of funds. This will be a powerful and much-needed complement to the use of the fiscal and environmental instruments that are needed to fight against climate change. In practical terms, climate risk can probably be captured in the traditional financial risk categories (credit, market, liquidity or reputational risks). However, several crucial limitations and challenges are coming to light when trying to measure these risks. In particular, there are few sufficiently deep and harmonised databases to analyse and understand the potential effects of physical and transition risks. Data granularity is particularly important given the high heterogeneity of the potential impacts.

The decline in natural rates has shrunk the space for interest rate policy owing to the existence of a lower bound on nominal interest rates, thus making it harder for central banks to achieve our inflation aims. Climate change will likely affect the natural interest rate, but it is not obvious in which direction. On the one hand, it could (further) depress natural rates through negative effects on productivity, such as the impact of higher temperatures on labour supply and the destruction of capital stemming from natural disasters. However, the transition towards a more sustainable economy will require substantial investment in green technologies, which may push real rates up. Clearly, more analysis will be needed before we have better answers for the implications of climate change on the economy and on monetary policy. And, in this regard, we have to step up our efforts, at both the Banco de España and the Eurosystem, to develop the tools and models needed for such an analysis. In addition, climate change will affect the risks of the assets held on our balance sheets. Monetary policy implementation exposes us to such risks directly through holdings of assets and indirectly through collateral pledged by counterparties. In this regard, and very much related to my previous comments on the implications of climate change for the financial sector, central banks also have to step up their efforts to incorporate climate change into their risk management models and frameworks.
When profit expectations ultimately fall back to more realistic levels, share prices drop. Corporate investment slackens as the economy’s aggregate capital stock is adjusted to match a more reasonable long-term return. This is accompanied by decreased household consumption, not least of capital goods, to match a more realistic assessment of the long-term development of income. The Austrian School also provides us with a fundamental insight into economic policy’s limitations. If a technological breakthrough leads to a period when the growth of investment and consumption exceeds what is sustainable in the longer run, there is bound to be a fall-off. After a supply shock of this type, measures of economic policy are simply not capable of preventing an adjustment to a more realistic appraisal of the future. The necessity of the adjustment means that the measures only postpone it and presumably tend to make it all the more painful when it does occur. History teaches us that after a period of what I would call “growing pains”, the optimism about what the new technology can achieve will be restored, albeit in a more orderly, realistic guise. In my opinion, neither the rapid fall-off in global activity nor the terrorist attacks on 11 September have upset the grounds for being optimistic about the new technology’s potential. Problems for many companies After the investment boom and the marked slowdown we are now experiencing, there is a risk of a good many companies having balance-sheet problems.

Conclusions for monetary policy All in all, growth prospects for the short term are somewhat more unfavourable than when we published our most recent inflation forecast. However, the major economic policy realignment in a number of important countries looks like paving the way for a recovery after a time. But this does presuppose that households and firms really do start to consume and invest. Major risks here are saving imbalances and over-investment. In Sweden, too, there has been an expansionary realignment of economic policy that is helping to strengthen household income. Provided there is an international recovery, the weak krona should have a stimulatory effect on exports. As regards inflation, the rate since April this year has been above the Riksbank’s target. The increase is mainly due to transitory factors and I envisage that it will, as before, dwindle during the spring. This presupposes, however, that the price rise does not spread to other items or lead to wage increases. Another argument for a future easing of inflationary pressure is the existence of unutilised resources as a result of the slowdown. However, in my opinion, the Riksbank must watch developments closely to ensure that the recent rise in the inflation rate actually falls and does not stick. Most indicators appear to imply that inflation will be close to the target level of 2 per cent, or at least within a small margin on one side or the other.