samchain/econo-pairs-v1 huggingface dataset:
I expect that it will be widely read throughout the Federal Reserve System as we continue our effort to evaluate potential long-run monetary policy implementation frameworks. The remarks that follow are my own personal views and do not necessarily reflect those of the Federal Reserve Bank of New York or the Federal Reserve System. As good and comprehensive as Ulrich’s paper is, it cannot cover everything. In my discussion I want to highlight topics on which we need additional insights, in the hope of encouraging further discussion and research that will help us make good decisions regarding monetary policy implementation. Three questions I will discuss are: •  Are some types of money market activity superior to others? •  How should we think of broad-based liquidity provision by central banks given the issue of stigma and taking into account the new liquidity regulations? •  How can we reconcile a desire for a “short” or “lean” balance sheet with asset purchase programs that derive their accommodation from holding assets for a long period of time? For each of these topics, I will try to bring a U.S. perspective that can hopefully complement Ulrich’s approach. While I commend Ulrich for seeking to identify universal principles, I believe he would agree that some features of monetary policy implementation frameworks can be dependent on country-specific factors, such as legal restrictions or the organization of the financial system.

This was judged to be especially important at a time when we wanted to quickly generate public confidence in the new monetary policy regime. It was also considered reasonable to attempt to stabilise the value of money in terms of a basket of goods that had great significance for the average person. Additional advantages that are usually put forward are that the CPI is published regularly and comparatively often, and that CPI inflation is normally not revised. Looking back on the ten years or so that have passed since the introduction of inflation targeting, we can conclude that the CPI has worked relatively well as a target variable. When the target was adopted it was probably considered by many to be unrealistic. But during these years inflation has averaged close to 2 per cent. The credibility of the target is also high today, judging by the inflation expectations of households and other economic agents. I don’t think it’s an exaggeration to say that we, through the new policy with a target for the rate of increase in the CPI as an anchor, coupled with a successful consolidation of the government finances, have essentially succeeded in achieving what we had hoped for. Sweden has gone from being a high-inflation economy, characterised by recurring cost crises and unstable economic developments, to being an economy with low, relatively stable rises in prices and wages, where the risk of periods of overheating and subsequent recessions has been reduced considerably.
In our forecast, consumption is initially supported by the growth in real incomes that result from the very low inflation we are now seeing – from the one-off windfall from lower international energy and food prices. But as the sharp, one-off, drop in oil and other prices washes out of the system, real incomes increase over the next three years mainly because both pay and productivity gradually recover. In terms of inflation, we are forecasting that this growth in demand from business investment and consumption against a background of tightening supply in the economy will push inflation back to its 2% target over the next two years. We expect interest rates to rise over the forecast period but gradually and to a level below the pre-crisis average. As with all forecasts, there are risks. There is of course geopolitical risk, including at present obvious risks around Greece. But that is not my focus tonight. Another risk that has attracted some attention is whether we see a change in people’s expectations about inflation due to the very low inflation over past months driven by the drop in oil prices. Clearly, if very low inflation expectations became entrenched this could weaken growth. Sustained deflation can also in more extreme cases lead to lower incomes and higher real debt burdens – so-called ‘debt deflation’. The MPC has made clear that it is alive to this risk and would act if necessary to counteract it.

On the one hand, the Bank of England is required set interest rates so as ‘to maintain price stability and subject to that to support the economic policy of HM Government, including its objectives for growth and employment’. On the other, the Government is required to specify what its economic objectives are, including what is meant by price stability. The remit of the Monetary Policy Committee (MPC) must be set out in writing at least annually and it must be published. The remit has always had important elements of flexibility. For example, while the MPC is directed to aim for the target ‘at all times’ and to treat deviations from target symmetrically, it is not expected to react mechanically. Instead, if inflation deviates from target by more than 1%, the Governor is required to write to the Chancellor explaining the circumstances and setting out what action the MPC considers necessary to return to target. No letter has been written so far, but only because circumstances have not warranted it. There is an explicit understanding that operational independence must be accompanied by transparency and clear accountability to Parliament and the general public as well as to Government. The Bank’s forecasts are published in the quarterly Inflation Report, the minutes of MPC meetings are published within two weeks, and the nine members of the MPC appear regularly in front of Parliamentary committees as well undertaking between them some 50-60 regional visits a year to different parts of the UK.
That means there is no room for the type of misguided economic policy that characterised the 1970s and ’80s, for example, when Sweden used repeated devaluations in an attempt to rectify the situation. Such failures must be avoided at any cost. Against this background it is not remarkable that the discussion about economic policy with EMU has focused on stabilisation policy. Even so, it is important to start from a broader perspective. The issues to do with stabilisation policy have featured prominently in the Swedish debate. This has to do with a strong Keynesian tradition and the ability of Lars Calmfors and his former colleagues to place the so-called insurance argument in the centre of the whole discussion about a monetary union. The latter naturally has to do with the fact that the very dramatic crisis which hit Sweden in the early 1990s was so closely connected with stabilisation policy. It is hardly surprising that in many other countries the discussion took a very different course before they adhered to the EMU. It is extremely important that our discussion about economic policy – with or without the euro – does not overlook or play down the supply side of the economy. Countries that create conditions for a smooth adjustment of labour markets and a favourable development of productivity will almost certainly do well as members of the monetary union. Measures to this end are naturally warranted in any event – they promote prosperity.

Ravi Menon: Introducing Zhou Xiaochuan Opening remarks by Mr Ravi Menon, Managing Director of the Monetary Authority of Singapore, at MAS Lecture 2019 by Zhou Xiaochuan, Singarpre, 19 September 2019. * * * Dr Zhou Xiaochuan, President, China Society for Finance and Banking, and former Governor, People’s Bank of China Mr Tharman Shanmugaratnam, Senior Minister and Chairman, MAS Mr Goh Chok Tong, Emeritus Senior Minister and Senior Advisor to MAS Distinguished guests, friends and colleagues, good morning. Welcome to the tenth MAS Lecture. Since its launch in 2000, the MAS Lecture has featured leading members of the international financial community to share their perspectives on the economic and financial issues of the day. I have been trying to get Dr Zhou to speak at the MAS Lecture almost since the time I became MD MAS eight years ago. On at least a couple of occasions, Dr Zhou actually agreed to deliver the Lecture, only to be prevented from doing so by pressing issues back home in China. And now, the stars have finally aligned to bring Dr Zhou to Singapore and to deliver the MAS Lecture. Perhaps, there is a deeper significance as to why the stars conspired to make Dr Zhou deliver the MAS Lecture in 2019 and not earlier. This year marks the 10th anniversary of China’s bold move to gradually internationalise the RMB. It was in 2009 that the People’s Bank of China launched a cross-border RMB trade settlement pilot scheme.
has committed to commence operations of infrastructure projects such as the South Harbour Development, Weerawila Airport and other highways within the framework of public private partnership, which will provide an opportunity to the private sector to take part in such projects. Reducing vulnerability to rising import prices In view of the significant volatility in oil prices in international markets, CPC has taken measures to hedge oil imports so that the price fluctuations do not adversely affect domestic prices. It may be worth  BIS Review 55/2007  1  exploring the possibility of introducing hedging to other critical imports such as gas, fertilizer to mitigate impacts of adverse price fluctuations in the domestic market. 3. Banks and financial institutions  Banks and financial institutions are expected to provide finances for economic activity. Some banks and financial institutions provide credit to government as well as the private sector, while others serve only the private sector. The continuing high growth in private sector credit could cause a threat to price stability as well as the financial system stability. High credit growth could deteriorate the quality of assets of commercial banks and increase the level of non-performing loans. In inflationary situations, lenders should be cautious not to fuel inflation further, but to direct investment towards productive activities. Banks and financial institutions continue to enjoy short term profits from lending at high rates to their customers and living on interest income. But the real value of their assets and profits continue to erode in an inflationary environment.

Reducing inflationary expectations The self-fulfilling prophecy that inflation is continuing to rise will eventually result in high inflation. All stakeholders are informed that action has been taken to reduce inflation by relevant authorities and that there is hope of bringing it down. In essence, inflation is eroding the value of assets, wealth and profits of the financial institutions, businesses, investors and public at large. Inflation can only be beaten with adequate commitment by all stakeholders. 4  BIS Review 55/2007
BIS Review 99/2010  9  Table 2 Economic growth and inflation  (annual change, percent)  2008  2009  2010 (f)  2011 (f)  GDP Domestic demand Domestic demand (w/o inventory change) Gross fixed capital formation Total consumption Goods and services exports Goods and services imports Current account (% GDP)  3.7 7.6 7.5 18.6 4.0 3.1 12.2 -1.5  -1.5 -5.9 -2.8 -15.3 1.8 -5.6 -14.3 2.6  4,0-5,0 14.5 11.3 23.0 7.8 1.0 25.8 -1.2  Average CPI inflation December CPI inflation CPI inflation in around 2 years (*)  8.7 7.1  1.6 -1.4  1.8 3.8  3.2 3.1  Average CPIX inflation December CPIX inflation CPIX inflation in around 2 years (*)  8.4 8.6  2.8 -1.8  0.7 3.3  3.5 3.5  Average CPIX1 inflation December CPIX1 inflation CPIX1 inflation in around 2 years (*)  7.8 7.7  2.8 -1.1  -0.1 1.8  3.2 3.2  2012 (f)  3.0  3.2  3.1  (f) Forecast. (*) Inflation forecast for second quarter 2012. Source: Central Bank of Chile.

As all of the central banks in the world do more or less the same things, albeit in rather different ways, it is always rewarding to see how others work. We therefore send experts in various fields out to the countries with which we have this cooperation, for instance, experts who design payment systems or make models for inflation forecasting. The other central banks send their staff to us for further discussion of these issues or to talk about other things, such as how we deregulated the financial system in Sweden in the 1980s, or how important information and transparency are if one is to run a central bank with independent responsibility for monetary policy. Recently we have received some young employees who have stayed with us for periods of a month to six weeks on “internships”, where they can, for instance, learn how to write a financial stability report from scratch. Long-term thinking is a central concept of our programme. It takes time to understand one another’s reality and to create relationships that lead to cooperation based on mutual trust. We usually say it takes at least five years. Central bank governors are always involved in various ways (both here at the Riksbank and at the other central banks), which is important for giving the programmes adequate status. In our view, it is important that we are colleagues, not consultants. We are rarely able to stay longer than a week, as we have our own central bank to manage.
We have been getting more and more dependent on electricity incrementally, in small steps, for many, many years now. So an electricity blackout now – in 2016 – would cause more harm and damage than it would have done say forty or fifty years ago, as many more devices, processes and productions are partially, or even fully, dependent on a continuous supply of electricity. And this continuous supply in turn incentivises the use of electricity as a tool of production and a source of power for various devices etc. This phenomenon of incrementally increasing dependence is also typical for financial services, or the banking sector as such, due both to state regulation (such as compulsory cashless transfers above certain thresholds) and to the markets and technological progress (such as credit cards, smooth money transfers, contactless payments etc.) All this is happening on-line in small steps, incrementally, and all this means banks might in bad times be seen as utilities, much less resolvable due to the complex services they provide, than in the past. And the complexity of the services of a utility is sometimes visible only very shortly before its potential collapse. So “utilities” providing products with incrementally increasing dependence will be able to exit the market in a much more complicated way, if at all. The same applies to the financial sector, all the more so if we go down the road to a lesscash economy (which is, of course, a slightly different concept than a cashless economy.

Better resolution tools, which would be needed if CoCos are not enough, can lessen the dilemma and are an essential part of the reform programme. They give the authorities extra options such as creditor bail-in through write-downs or debt-for-equity conversions. They provide a statutory backstop, enabling bail-in of private sector creditors. As such, they are a necessary ingredient for restoring market discipline. CoCos buttress market discipline and help lift the authorities from the horns of the timeconsistency dilemma. They augment regulatory discretion at the point of distress with contractual rules well ahead of distress. Capital replenishment is contractual and automatic; it is written and priced ex-ante and delivered without temptation ex-post. Because intervention would be prompt, transparent and rule-based, the scope for regulatory discretion would be constrained. For that reason, the time-consistency problem ought to be reduced, perhaps materially. A contractual belt is added to the resolution braces. To achieve these benefits, change would be needed to banks’ capital structure. But this reconfiguration would not be especially dramatic. Indeed, it would be as simple as CDE: C(oCos) + D(debt) + E(quity). The layer of bank equity would be augmented with a layer of CoCos, with slices defined by market-based triggers. Banks’ capital would comprise multisliced equity, some actual, some contingent. In some respects, this model is not greatly dissimilar to the one recently proposed by the Swiss banking commission.14 In achieving this capital structure, one option would be for regulators to require it, as in Switzerland.
Benoît Cœuré: Interview in Corriere della Sera Interview with Mr Benoît Cœuré, Member of the Executive Board of the European Central Bank, in Corriere della Sera, conducted by Mr Danilo Taino on 7 March 2019 and published on 11 March 2019. * * *  At its meeting on Thursday, 7 March, the ECB decided to add to the monetary stimulus already in place. What happened? Did the extent of the economic slowdown in the euro area take you by surprise? The slowdown didn’t come as a surprise. Economic activity was exceptionally strong in 2017, thanks to global economic conditions. We knew that euro area growth would adjust towards its potential rate. The slowdown has been stronger than expected and started sooner, which motivated the decisions we took. But those decisions don’t represent a turnaround in our policy; they have been carefully calibrated to this diagnosis. We are adjusting to the new reality rather than reversing our course; we don’t see signs of a recession at present. The ECB staff projections have been revised. They previously envisaged that growth would be consistently above potential, which would have pushed inflation towards our objective of lower but close to 2%, whereas they now foresee that actual output will be initially equal to or below potential output, which means it will take longer for inflation to reach 2%. In the event of external shocks, could the ECB go back to buying bonds on the market? We don’t see the need.

While at first read this looks like a rare piece of good news, viewed through the lens of efforts to return inflation to target it is a mixed blessing. Indeed, the association with the mid1970s is not reassuring in that respect. Tight labour markets support wage growth, currently running at rates above those we typically deem as consistent with the inflation target. Crucially, the low unemployment rate reflects a fall in labour market participation to a significant extent. In other words, people are choosing to stop working or looking for work. The reasons for this rise in 'inactivity' are still being explored, but the after-effects of the pandemic on health are probably a key driver. Aside from the impact of long Covid, the backlog of operations and lengthening of waiting lists in the health service owing to the pandemic, the rise in mental health issues, and an increased need to provide at-home care for family members have all weighed on labour force participation. This is an area where we need further work, since the UK appears to be something of an outlier relative to its advanced economy peers. Another supply-side driver of labour market development is migration. Understanding the impact of Brexit and new government policies in the area are key. Demand issues are also now beginning to exert an influence. As the economy slowed through this year, vacancies have turned. Employment has stagnated and is now showing tentative signs of falling.
Considering these figures, it is clear that Europe has the resources to face a manageable financing gap in some parts of the region. And yet, it is in turmoil. The answer to this paradox can be found by considering the true nature of the crisis. Most observers would simply see the fiscal imbalances in peripheral economies. These may have been the trigger. But we are now looking at a true financial crisis – that is a broad-based disruption in financial markets. To understand what is going on, it is necessary to take a step back. Europe is the most financially integrated area in the world. There is full capital mobility inside the EU. Financial regulation is almost totally harmonized, financial infrastructures and payment systems are closely interconnected. Europe is truly a single financial market and, more importantly, a truly single financial system. The single capital market has brought significant benefits to Europe. Capital has been flowing to peripheral countries, triggering investment and growth. Financial integration has supported and underpinned the broader process of trade and economic convergence. At the same time, capital mobility has been used to postpone fiscal adjustment. Capital inflows have fueled credit and asset booms. Current account deficits have been financed through fragile sources of funding. The easy access to financing has created insensitivity to current account imbalances which, in turn, have weakened the incentives for preserving or improving competitiveness. An integrated financial system may be efficient, but not necessarily robust.

It is important to note that in our case, the objective was not to expand the monetary base. Central bank money created through these purchases has been sterilized. There have been some criticisms against this bond buying program. But it is; in my view, totally justified by our primary mandate. Faced with a clear risk of completely disrupted financial markets, and with huge divergences in credit market interest rates, the ECB was in danger of not being able to implement a truly single monetary policy, nor to meet its primary mandate, i.e. maintaining price stability over the medium term in the whole of the euro area. There have been calls for more. Both markets and some governments seem to consider that the ECB should take a more aggressive stance in buying public debt. Let me give you some perspective on the issue. In some jurisdictions, unconventional monetary policies have led central banks to purchase significant amounts of government debt – these purchases amount to 58% of total debt issued since 2009 in the UK, 21% in the US and between 9 and 10% in the euro area (there was a monetary policy objective in all cases). Although this was not the primary purpose, this policy stance has contributed to providing markets with an insurance, or even an assurance, against a potential dry-up in liquidity. In countries where significant amounts of debt have been purchased by monetary authorities, long-term interest rates have been kept at very low levels, irrespective of their fiscal situation.