samchain/econo-pairs-v1 huggingface dataset:
For example, the FOMC’s Statement on Longer-Run Goals and Monetary Policy Strategy, issued in January 2012, set a 2 percent longer-run inflation goal. It declared: “Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances.”1 The 2 percent longerrun goal and the importance of well-anchored inflation expectations were reaffirmed in the FOMC’s updated Goals and Strategy statement released in 2020.2 Theory It is one thing to say that anchored inflation expectations are important, but what do we mean by well-anchored expectations, and how would we know if they are well anchored? I will start by describing some theoretical implications of well-anchored inflation expectations, and then turn to an empirical assessment based on U.S. data from the past few years. My thinking on this issue is based largely on a series of research papers I wrote with Athanasios Orphanides. We used models with adaptive learning to contrast the predicted behavior of inflation and inflation expectations in two environments: when the public anchors its expectations on the central bank’s long-run target and when the public’s perception of the central bank’s target evolves depending on incoming data.3 This analysis and related studies imply three criteria for well-anchored inflation expectations: “sensitivity,” “level,” and “uncertainty.” Let me take each in turn.

You can learn more about how we use cookies by reviewing our Privacy Statement. horizon. Transitory responses of inflation to shocks imply uncertainty about future inflation, even far in the future. The  uncertainty criterion is about the relationship between the magnitude of uncertainty and the forecast horizon. It is closely related to the sensitivity criterion, in that permanent shocks to inflation are ruled out. The counterexample is if inflation follows a random walk process, whereby shocks have permanent effects on inflation, then uncertainty, as measured by the standard deviation from the distribution of future outcomes, rises linearly with the forecast horizon. Applying Theory to the Real World In the years up to and including the first year of the pandemic, inflation had been running consistently below the FOMC’s 2 percent longer-run target. Then, in the spring of 2021, inflation readings surged, bringing the personal consumption expenditures (PCE) inflation rate to around 6 percent, where it has remained through the first nine months of 2022. Consumer price index (CPI) inflation rose by even more. This episode represents a unique opportunity to assess the three criteria of well-anchored expectations during a period of high and volatile inflation.4 In empirically assessing the sensitivity and level of longer-run inflation expectations, one must specify what forecast horizon corresponds to the “long run.” Surveys don’t typically ask about inflation in the “long run,” but rather the inflation rate over a specific period of time.
A similar regime already exists in the broker-dealer context, in which supervised institutions are required to file U4 and U5 forms when they hire and part  6  BIS central bankers’ speeches  ways with licensed professionals. Banking supervisors could consider whether it was appropriate to import these concepts to the banking industry. To help support the completeness and accuracy of the filings, the filing firms could be subject to a safe harbor, akin to the civil immunity for filing a Suspicious Activity Report, so that employers do not fear liability for good faith reporting. Under this approach, new regulations could also require that all financial institutions search the database prior to hiring any trader or financial professional; so that any prior reported events could be taken into account in the course of a hiring decision. As I mentioned, there would, of course, need to be adequate safeguards for employees to challenge an entry, consistent with due process. Furthermore, as a complementary step to the registry, it would be helpful if individuals in finance who are convicted of an illegal activity were prohibited from future employment in the financial services industry. Currently, Section 19 of the Federal Deposit Insurance Act prohibits anyone convicted of a crime of dishonesty, breach of trust, or money laundering from working at an insured depository institution or bank holding company. 7 One possibility could be to amend Section 19 to cover the entire financial services industry.

Another important element affecting culture has been the shift in the prevailing business model away from traditional commercial and investment banking activities to trading; that is, from client-oriented to transaction-oriented activities. Clients became counterparties – the other side of a trade – rather than partners in a long-term business relationship. In general, interactions became more depersonalized, making it easier to rationalize away bad behavior, and more difficult to identify who would be harmed by any unethical actions. High-powered pay incentives linked to short-term profits, combined with a flexible and fluid job market, have also contributed to a lessening of firm loyalty – and, sometimes, to a disregard for the law – in an effort to generate larger bonuses. Often allegiance to an external network of traders has been more important than the ties the trader has to his or her particular employer. This is particularly evident in the illegal manipulations of the London Interbank Offered Rate (LIBOR), and with respect to reference rates in the foreign exchange markets. Although cultural and ethical problems are not unique to the finance industry, financial firms are different from other firms in important ways. First, the financial sector plays a key public role in allocating scarce capital and exerting market discipline throughout a complex, global economy. For the economy to achieve its long-term growth potential, we need a sound and vibrant financial sector. Financial firms exist, in part, to benefit the public, not simply their shareholders, employees and corporate clients.
In the thought-experiment, this shift in the balance of global activity has important implications for the balance of global capital flows. (a)  The evolution of home bias  With mixed success, theoretical studies have sought to explain cross-country patterns of home bias (Lewis (1999) and Karolyi and Stulz (2003)). Perhaps the most cogent explanations are grounded either in legal restrictions (including capital controls and lack of property rights) and information asymmetries between home and host countries (Gehrig (1993)). Globalisation is likely to have eroded both of these market frictions somewhat over the past decade, in particular among emerging markets. That is consistent with the evidence in Table 1. Predicting the future course of these (legal and information) factors is far from easy. But one plausible instrument for financial diversification is economic development. Cross-country evidence suggests so. Chart 8 plots a cross-section of measured equity home bias in 58 countries against levels of GDP per capita in those countries in 2005. The correlation is strong and significant: GDP per capita accounts for almost 60% of the cross-sectional variation in home bias. As a ready-reckoner, every $ per capita rise in GDP is associated with a fall in home bias of around 0.1.4  3  For example, O’Neill (2011). 4  This cross-sectional relationship was also used to counter-factually predict time-series patterns of home bias in a number of G20 countries. GDP per capita was a reasonable predictor of historical movements in home bias, in particular among advanced economies.

107(2), pages 407–437. O’Neill, J (2011), “It is Time to Re-define Emerging Markets”, Goldman Sachs Asset Management Strategy Series. Prasad, E, Rajan, R and Subramanian, A (2007), “The Paradox of Capital”, Finance and Development, Vol. 44(1). Reinhart, C M and Rogoff, K S (2008), “This Time is Different: A Panoramic View of Eight Centuries of Financial Crises,” NBER Working Paper 13882. Von Peter, G (2007), “International Banking Centres: a Network Perspective”, BIS Quarterly Review, December, pages 33–45. 10  BIS central bankers’ speeches  Annex: Charts and tables Chart 2  Chart 1 (a)  Gross portfolio equity inflows relative to lagged market capitalisation for G20 emerging markets(a)(b)  Gross portfolio equity flows to emerging markets in 2010  Cumulative flows since Jan 2010 $ billions) 90  Index, 31/12/1987 = 100 1,200 1,150  Dedicated EMEs  80  1,100  MSCI EM $ Index (LHS)  70 60  1,050  50 1,000 40 950  30  900  20  850  10 0  800 Jan 2010  Mar  May  Jul  Sep  Nov  Source: Emerging Portfolio Fund Research, Thomson Reuters Datastream and Bank calculations. Source: Institute of International Finance, Thomson Reuters Datastream and Bank calculations. (a) Flows to equity investment funds. (a) Chinese equity market capitalisation includes A, B and H shares. A-shares are currently available for purchase by domestic residents only but are included since we assume capital market liberalisation occurs in China over our forecast projection.
If recent claims experience is suggesting increasing risk when models are not, that should raise questions for management. The risk of misuse of models might be particularly acute when an insurer buys in a model from a third party. Its people have not developed the model and become familiar with its limitations. Management might be tempted to put too much trust in the reputation of the supplier and assume that if many other insurers are using the model, ‘it must be fine’. The Senior Managers and Certification Regime requires insurers to allocate certain prescribed responsibilities to individual senior managers. Responsibilities for managing capital, funding and liquidity and for the Own Risk and Solvency Assessment, for example, entail a good understanding of an insurer’s internal capital model. In practice however, it is unrealistic to expect that everyone using a model will fully comprehend how it works. The crux of good model risk management is to ensure that decision makers know enough. My former boss, Andrew Bailey summarised this when discussing our expectations of boards in 2015, “the challenge is to reduce complexity to simplicity, so that Board members feel that they understand:  where is the model expected to work well;  in what circumstances is it likely to break down;  is the overall model output credible;  what “moves the dial” in terms of key assumptions or judgements; and  are those assumptions and judgements reasonable?”8 LIBOR Transition  Before I conclude, I would like to spend a moment on a different subject, LIBOR transition.

It has become commonplace that shadow banking somehow exacerbated the boom, and complicated the rescue efforts of the authorities during the bust. 1 That is true. But there has been relatively little discussion about what this means for policy. We do not need to get too bogged down in defining what is meant by “banking” here. I mean it simply to refer to firms that take on-demand or highly liquid deposits, and use those liquid savings to provide term loans to households, firms and other parts of the financial system. Banks are, therefore, absolutely central to the monetary and payment system; and they are also vital to the credit system. They are leveraged; they run maturity mismatches; and their net worth is often uncertain. So they are exposed to runs, with spillovers to the rest of the system and the economy more widely. Reflecting that, they have long functioned within the terms of an established social contract with the authorities. 2 It has involved industry-financed deposit insurance (and now special resolution regimes); prudential regulation and supervision; and liquidity insurance from central banks. That regime reflects the spillovers (“negative externalities”) that flow from bank failure. But precisely because the regime aims to place a higher weight on the safety and soundness of banking than banks and their shareholders would themselves, it sets up incentives for some types of business to be booked outside the banking system.
Uncertainty about future returns on financial assets is the essence of the modelling of financial markets. An excellent introduction to this area is contained in the two 2003 Nobel lectures by Robert Engle (2004) and Clive Granger (2004). 2  BIS Review 73/2004  death.5 Collective risk - that average expectation of life will rise or fall in the future - cannot, by definition, be shared among members of the same generation. The principle of insuring individual longevity risk is that those who live longer than average can be paid using the contributions of those who die earlier than average. But if the average itself rises all contributions must increase - there is no possibility for insuring changes in the average from within the cohort. Can we quantify this risk? The expectation of life has risen significantly over the past century. But how will it change in the future? To answer that question we need to model and quantify longevity risk. 3. Modelling and quantifying risks  Quantitative modelling has been one of the great advances of the social sciences over the past fifty years. But forecasts, whether of longevity or any other economic or social variable, inevitably require a judgment about how far the past can inform us about the future. Projecting longevity is fraught with difficulty.

Distinguished Ladies and Gentlemen, allow me to conclude my remarks by reminding commercial banks that they must become proactive in identifying new markets and developing appropriate new products and services, especially for the excluded population if they have to remain competitive and relevant in our fast growing banking sector. As has been echoed at various meetings, the Bank of Zambia has financial inclusion as one of its strategic objectives and initiatives by market players to make this vision a reality are always highly commended. The Bank of Zambia will play its own role and make every effort to create an environment that supports innovation and market developments by financial institutions. Managing Director, distinguished Ladies and Gentlemen, It is therefore, the Bank of Zambia’s expectation that Zanaco and other banks will take advantage of opportunities arising from the general positive economic outlook on account of improving macroeconomic conditions and improvements so far recorded in various sectors of the economy and foster greater developments in the financial sector. Finally, let me extend my gratitude to the Board of Directors and the Managing Director of Zanaco inviting me on this occasion to mark the official launch the Ndola west Branch. It now my honour and privilege to declare the Ndola west Branch officially opened. I thank you. 2  BIS central bankers’ speeches
It was an important signal to the foreign exchange market that the change, which was expected, took place without a depreciation of the krona. On the contrary, the krona was linked to the ECU at a rate somewhat above the central exchange rate. A number of measures had preceded a formal change of the stabilisation policy. The most important document that marks a new direction is the Government’s budget statement in January 1991. The Minister of Finance and the Government wrote there that combating inflation was to be given precedence over other political goals. This decision was reflected in the budget by a 40 per cent reduction of appropriations for relief work. In spring 1993, unemployment rose month by month and it was clear that the Government was not giving priority to full employment in the same way as before. This was the first major change of course in stabilisation policy. Now it was combating inflation that was important by means of a fixed exchange rate. The change was well prepared by experiences of previous failures and by the intellectual debate on stabilisation policy that had begun in the USA during the 1970s. From the beginning of 1991, a price stability goal was applied. This was given priority over full employment. The means was a fixed exchange rate. Employers and trade unions would be forced to bear the consequences of excesses in wage formation. The exchange rate was to be maintained.

It is clear, however, that the ambitions of most countries still fall short of the requirements in the Stability and Growth Pact. This is certainly attributable in part to the economic slowdown, with Italy as the clearest example. But it is also notable that the ambitions for budget consolidation are now lower than before the move to Stage Three. The relatively good growth during 1998 ought to have left room for budget consolidation in many countries but it was not used and in certain countries the structural deficit has actually increased. The Ecofin Council has in fact criticised a number of countries, including Germany, France, Austria and the Netherlands, for the low level of ambitions in their stability programmes. In Sweden, the budget position looks comparatively healthy. Our fiscal policy is likewise less restrictive than before but the structural deficit has been turned into a surplus that is now growing and the ambition is still to achieve a budget surplus of 2 per cent of GDP on average over the business cycle. At the same time it should be underscored that some variation in the objective across countries seems reasonable. The degree of fiscal readiness — and thus the requisite size of the surplus — depends on a number of factors. One is the cyclical sensitivity of government finances and another is the level of government debt. It is then reasonable that a country like Sweden has a larger public sector financial surplus than a country where the automatic stabilisers and government debt are smaller.
9 Another question is whether long-term GDP growth has fallen as a result of the crisis. Experiences from previous financial crises indicate that there frequently is a connection. However, in the report mentioned, the OECD writes that it does not expect any decline in long-term GDP-growth (after 2015) due to the crisis. The OECD states that it will indeed decline, but as a result of demographic developments. At the Riksbank, the crisis has not led us to make any new assessment of the long-term GDP growth used in our models. We expect long-term GDP growth to be just above two per cent per year. Resource utilisation can also be measured in the labour market by, for instance, the employment rate 10 , unemployment, the employment gap and the hours gap. The  8  IMF (2010), World Economic Outlook October 2010. 9  See OECD (2010), OECD Economic Outlook, no. 87, May 2010. 10  The employment rate is defined as the proportion of the population aged 15–74 in employment, expressed as a percentage. 4  BIS Review 130/2010  employment gap and the hours gap have been estimated with the aid of HP trends and are thus subject to the problems entailed by such estimates. In contrast, the employment rate and unemployment are not associated with the same type of technical problems, but here it is instead difficult to know what can be considered to be normal levels for the respective variables.

BIS central bankers’ speeches  7  Similarly, reforms designed to reduce bottlenecks to new investment that come from onerous business conditions should also have mainly benefits in the short-term. This would include measures such as reducing the administrative burden on young firms, or speeding up insolvency proceedings that raise the opportunity cost of investment by tying up capital for years longer than initially assumed. For many euro area countries there are several “low hanging fruit” that can still be picked in this area (Chart 10). The EAGLE simulations show that if reforms are also well coordinated across the euro area, the short-term benefits for a medium-sized country can be further maximised, especially in terms of limiting the downward effects on inflation (Chart 12). This reinforces what I have said about the need for stronger common governance of structural reforms in the euro area: if all countries reform together, then all countries benefit more. And these findings hold even under the assumption that monetary policy is constrained. Interaction with other policy measures But it is also important to underline that this assumption is in fact inaccurate for the euro area today. Contrary to models in the literature, monetary policy is not constrained because we have reached the lower bound. Rather, as I laid out in a recent speech in Washington, I think we have demonstrated in recent months how effective monetary policy can be when it has to resort to unconventional measures.
The trends towards regional financial integration also present significant opportunities to tap into the enlarged pool of savings in Asia . Besides institutional pools of wealth, the rapidly expanding middle class has been a key factor sustaining the high savings rate. In Asia alone, we now have more than 2.6 million high net worth individuals who collectively control an estimated USD8.4 trillion in financial assets. These trends underpin the increasing demand for more sophisticated consumer finance and wealth management products. There is also potential to tap the appetite for growing international diversification among the more developed economies in Asia , to meet the rising demand for regional financial assets. Furthermore, the continued growth momentum in the region has created demand for infrastructure. It is estimated that Asia needs USD 1 trillion worth of infrastructure investment over the next 5 years, offering huge potential for financing opportunities. Third, reinforcing the move towards regional financial integration, authorities across the region have encouraged greater financial sector development and progressively liberalised their capital accounts. Many regional countries are moving beyond financial restructuring to promote more diversified and vibrant financial systems that embrace a broad range of service providers and asset classes, including private equity, hedge funds, structured products and Islamic finance. In Malaysia, the gradual but progressive liberalization of foreign exchange administration rules undertaken since 2003 has led to significant benefits in terms of providing enhanced  1  Refers to Japan (rank: 2), China (4), India (10) and Korea (12) based on 2005 nominal GDP in USD terms.

We at the Fed need to very closely monitor the data to make sure that inflation remains contained. And we will. But as I believe I will demonstrate this morning, the most likely result is that these supply shocks cause slower growth in the near term while having only a modest effect on longer-term inflation rates – which has been the U.S. experience since 1986. Unemployment remains quite elevated, at 8.8 percent, and I anticipate a slower return to full employment than we would have experienced absent these supply shocks. With the core inflation rate over the prior year at a little above 1 percent, I anticipate only a gradual return of core and total inflation rates to something like our consensus “stable” rate of about 2 percent, over the medium term. If the economic data continue to support this outlook then the current, accommodative stance of monetary policy is appropriate, and can remain in place and continue to support economic growth – so that we continue to make progress toward our goals of returning to full employment and a sustainable long-run inflation rate – the two elements of the Federal Reserve’s dual mandate from Congress. 1  My colleague Geoffrey Tootell, Director of Research at the Boston Fed, has prepared an illuminating public policy brief that investigates whether commodity price spikes cause long-term inflation.