samchain/econo-pairs-v1 huggingface dataset:
One aspect that indeed needs further thinking is the issue of financial cycles and how they could be mitigated and whether monetary policy should play a role in doing so. Let me say a few words about this. Before I became involved in central banking I was state secretary in Sweden’s Ministry of Finance in the early 1990s and dealt, among other things, with the management of our nation’s banking crisis. Being in the middle of a crisis like that was indeed a frightening experience. Financial crises would seem to evolve from excessive optimism. That is, credit expansion (domestic or foreign), which feeds into asset prices, lowers the cost of capital, stimulates investment and subsequently leads to an economic boom. Eventually, the investments are found not to be sustainable in that they do not generate profits. The whole structure may ultimately collapse, the economy moving from boom to bust, often followed by banking or currency crises or a combination of the two. The most severe bubbles have historically been those that involve rapid credit expansion in the banking system. Economic history books are full of examples of this process. Also, the 1990s provided many illustrations of similar events. The discussion about financial cycles is far from new. One example is the major debate of the 1920s and 1930s between the Austrians (Hayek, etc.) on the one hand, and Keynes on the other.

Against this economic backdrop, and amid heated banker-bashing, it is easy to see how the social benefits of segregation were perceived as far outweighing the private costs at the time. Kennedy (1973) describes how “Stock dealings which had made bankers rich and respected in the era of affluence now glared as scarlet sins in the age of depression. Disillusionment with speculators and securities merchants carried over from investment bankers to commercial bankers; the two were often the same, and an embittered public did not care to make fine distinctions”. Glass and Steagall made just such a distinction. They underpinned it with legislation, signed by President Roosevelt in June 1933. As with McFadden, Glass-Steagall appears to have been effective from the 1930s right up until the latter part of the 1980s. Measures of concentration in the US banking system  14  Chapman and Westerfield (1942). BIS Review 40/2010  5  remained broadly flat between the 1930s and the late 1980s (Chart 2). But competitive pressures were building from the late 1970s onwards. Strains on US commercial banks intensified from alternative lending vehicles (such as mutual funds and commercial paper markets) and from overseas banks. The private costs of restrictions were rising. Legislators responded. After 1988, securities affiliates within BHCs were permitted, though were still subject to strict limits. In 1999, the Gramm-Leach-Bliley Act revoked the restrictions of Glass-Steagall, allowing co-mingling of investment and commercial banking.
The exceptional nature of the situation can be seen not least from the long duration of interest rates close to zero. Apart from the case of Japan in the 1990s, there has been no other example of this in monetary history. There is certainly no precedent for the extent to which unconventional instruments have been used. Central bank independence and mandate Ladies and Gentlemen, I would now like to turn to questions relating to the independence and mandate of central banks. During the crisis, central banks intervened flexibly and on a huge scale, and with success. The downside of this success is that politicians and the general public have higher expectations of central banks when it comes to crisis and economic management. This carries the risk that monetary policy will be overburdened in the long term. In addition, the unconventional measures of the past few years have blurred the boundaries between monetary and fiscal policy in places. This is not without its problems as, ultimately, the central banks have no political authority to make fiscal policy decisions. In its recent Annual Report, the Bank for International Settlements issued a stark warning about the political economy risks of unconventional monetary policy. Risks of this nature mainly relate to the potential long-term impact on central bank independence. These warnings should be taken seriously. As you probably recall, in the 1990s, following the painful inflation experiences of previous decades, a global consensus developed that monetary policy should focus primarily on maintaining price stability over the medium term.

The more complex and interconnected it gets, the more vulnerable it is when exposed to small, and localized, shocks. These may worsen and compromise the stability and integrity of the whole. This is what is now happening in Europe, as it happened before with subprime mortgages in the US. In both cases, problems of limited size – the Greek public debt in the case of Europe – have had a disproportionate impact because amplification mechanisms have occurred inside the financial system. In Europe, three separate dynamics have been at work. BIS central bankers’ speeches  1  First, between solvency and liquidity of sovereign debtors. In times of turmoil, sovereigns, like financial institutions, can be either illiquid or insolvent, or both. In many cases, the distinction is blurred. When uncertainty is high, sovereigns face liquidity shortages, and they can only issue new debt at ever higher interest rates. This, in turn, creates doubts about their ultimate solvency, triggering a negative spiral. Good fundamentals are an absolute necessity, but not always a sufficient condition. Liquidity spirals, when allowed to develop, can lock a country, just like a financial institution, into a bad equilibrium. This process has clearly been at work in peripheral Europe, especially Spain and Italy, since the beginning of August. A second interaction occurs between sovereigns and banks. Both are perceived as closely linked by the market. Indeed, sovereign CDSs act as floors to bank CDSs. And, conversely, banks’ creditworthiness depends on their exposure to sovereign risk.
These challenges lie less in the types of things that can be captured in a financial ratio or balance sheet, or in changes to the risk premiums attached to the financial claims on the country. They lie more in the realm of improving how markets work and how efficiently resources are allocated. These factors include the development of the types of institutions that are the subject of DeSoto's work or the reports. They involve the development of the legal system and World Bank's Doing Business its ability to ensure that property rights can be established and that the protections they engender can be enforced. They are about creating the conditions for more competitive domestic financial and product markets by reducing barriers to starting and building a business, and by building better transportation, power and telecommunications infrastructure. And they are about broadening access to and improving the quality of public education. Allowing competitive pressures to operate is undoubtedly the best way to foster the investment, innovation and risk-taking that is central to raising an economy's long-run sustainable growth rate. But markets can't solve all problems, and they don't always function perfectly. This means that the policy imperative isn't simply to reduce regulation; it is to improve the design of the regulations that are important to dealing with market failures. Finally, future growth outcomes will depend importantly on the success of governments in fostering the development of the domestic financial system.

These two regulations must naturally be enhanced by proposals on the deposit guarantee fund and the crisis resolution mechanism, which are the two other essential pillars of the banking union. The ECB, and all the other national authorities concerned, must now continue the preparatory work so that the Single Supervisory Mechanism can become operational as soon as possible. The Banque de France and the ACP provide an important contribution and intend to play an active role in the new mechanism. This is particularly the case given that around a dozen major French banking groups will be subject, according to the criteria set out in the regulation, to direct supervision by the ECB, even though the ACP will remain responsible for day-to-day supervision. 2. Resolutely pursuing efforts to strengthen the resilience of the financial system by preparing for and implementing new regulations  The international financial regulatory framework evolved substantially in 2012, and will continue to do so in 2013. It is therefore particularly important to adapt to these changes. 2.1  The insurance sector must continue, in France and Europe, to prepare itself for the application of the new prudential regime, Solvency II  Admittedly, 2012 was marked by tough discussions about the Omnibus II Directive and in particular the question of the treatment of insurance products with long-term guarantees. These discussions were unfruitful and will delay the entry into force of Solvency II.
But set those tools to one side for a moment. Monetary policy could be used to reach a point more like P in Chart 5, with less variation in the output gap and more variation in inflation than we have actually experienced over the past 20 years. Put another way, higher interest rates in the run up to the financial crisis might have reduced the impact of the subsequent bust, at the cost of below-target inflation and below-trend output before the crisis hit.2 In practice new macroprudential tools and better micro-prudential supervision will improve the possibilities available to monetary policymakers. Having additional instruments in effect brings about a favourable shift in the Minsky-Taylor frontier (or surface) which defines the possibilities open to policymakers.3 Nevertheless, consistent with the new remit4 given to the Monetary Policy Committee by the UK Government last month, the experience of recent years suggests that there may be  2  A more detailed appraisal of this argument is contained in “Twenty years of inflation targeting”, a speech by Mervyn King (2012), available at http://www.bankofengland.co.uk/publications/Pages/speeches/2012/606.aspx. 3  A social planner would use both instruments together to pick the welfare maximising point on the frontier / surface, and in the UK the Monetary Policy Committee is expected to work closely with the Financial Policy Committee which has the statutory power to deploy macro-prudential instruments.

Considering it as a very significant recommendation, we have recently added our contacts with the Albanian Banking Association in order to find a quick solution. A concrete action plan on the part of the recommendations directly related to the activity of the Bank of Albania and its competencies has already been completed and introduced to IMF authorities. What I deem as crucial is the complete assimilation of each suggestion made, and based on this absorption we have tried to build up a realistic and fully possible action plan. We believe that the successful accomplishment of the tasks included in the action plan shall be a key factor in enhancing the banking system financial stability. It shall influence the establishment of a modern payment infrastructure, increase financial market efficiency, perfect human capacities and set up a safe foundation for more sophisticated future developments. I would like to take this opportunity to emphasize that the Bank of Albania shall provide all its expertise to the inter-institutional group established to meeting many other FSAP recommendations. We hope the commitment of other institutions, be they central or supervisory, shall be provided properly, in order for these recommendations to be accomplished in due course. I am convinced the Minister of Finance and me share the same objective, which is to lead our institutions to stepping this process forward, aiming at achieving a sustainable and sound financial sector development in the country.
However, some of the new players adopted risky business models, growing very quickly, and to do that they attracted deposits with high interest rates. In addition, they did not adequately assess risks in lending, and sometimes lending was directed to related persons. The number of banks increased considerably, and peaked in 1998 at 60 – the highest number of banks that ever operated in Croatia, twice as much as before Croatia's independence and three times the current number. That is when I joined the central bank. Just before the next crisis was about to happen. In the second case, the trigger of the crisis that started in 1999, and lasted for the next two years, was again macroeconomic – the recession caused by drying-up of global capital flows in the aftermath of the Russian and Asian crises and negative spillovers of the military intervention in Kosovo for the tourist industry. However, this time around none of the large banks were affected. It was a crisis of small and medium-sized banks. Mostly the newcomers. Within a very short period of time the central bank submitted proposals for bankruptcy proceedings for a total of 16 banks and five savings banks. In only one case was the rehabilitation of the bank proposed in order to preserve trust in the banking system and safeguard financial stability, all other banks that operated at too high a risk were removed from the market. This time around, however, the fiscal cost was much smaller, around 1 per cent of the GDP.

The experience accumulated over the past several years, both in Chile and in other countries, has brought new challenges and posed new questions on the conduct of monetary policy under inflation targeting. Among these burning questions, let me single out a few: (1)  How uncertainty affects all the dimensions that influence monetary policy decisionmaking  In Chile—as in any other country—monetary policy is subject to several sources of severe uncertainty. To the classical doubts about the timeliness and quality of statistical data necessary to gauge the state of the economy, one must add imperfect knowledge about the nature and persistence of the intense shocks that hit our economy, uncertainty on how appropriate are the models we use to understand economic signals and make projections and, ultimately uncertainty on the value of the models’ parameters. Knowledge is also imperfect on the preferences of the society and of those responsible for the policies applied. Does this generalized uncertainty that permeates central banks around the world justify slower policy reactions to shocks to inflation or GDP? How must dissimilar projections, coming from different models, be weighted in policy decisions? These and other questions raise the need to invest heavily in data, models and economic projections and research, a task to which the Central Bank of Chile devotes great efforts.
Chart 1  Chart 2  Inflation close to target despite protracted Lower bond yields not always associated decline in short term interest rate with higher equity prices  2  Note: * adjusted for changes in leverage Source: Bank of England and ONS  Source: Bank of England and Datastream  The decline in the natural rate of interest At around the time that inflation targeting began, the economist John Taylor proposed a simple representation of rate-setting by the US Fed – the so-called “Taylor rule”. This suggested that variations in real short rates were well explained, empirically, by movements in the “output gap” and inflation. Allowing for these real short rates looked relatively stable. The word “rule” wasn’t meant prescriptively. In this context it simply meant “reaction function” – a description of the way US policy rates had in practice, and over a particular period of time, responded to the economy. But as the concept took hold, many began to interpret the relationship not just as a description of what central banks had been doing but as an indicator of what they should do. In particular, the Taylor rule cemented a view that only cyclical factors could justify deviating from a particular level of the policy rate.

Norwegian banks have made good use of the solid earnings and low loan losses of recent years. Banks have built up their capital and adapted to new buffer requirements. The buffers can be used in the event of a pronounced economic downturn. Banks will then be able to absorb loan losses without a significant reduction in new lending. The build-up of financial imbalances can be difficult to identify. Financial crises can occur suddenly and unexpectedly. When they do occur, the banking system must be solid. Most regulatory components should be as stable as possible. The aim of macroprudential supervision cannot be to fine-tune the economy over the business cycle. But when financial turbulence occurs, the authorities must be prepared to act quickly and in concert. In Norway, the Ministry of Finance has the overriding responsibility for macroprudential supervision. It is natural that the political authorities make decisions regarding the framework and permanent regulations. It would be an advantage to delegate the responsibility for timevarying instruments to an independent authority with a view to ensuring effective implementation and predictability over time. Conclusion After two decades that can be described as a golden age, the Norwegian economy is heading for a demanding period. We have always known that the long oil-driven expansion would come to an end, either because the activity level would pass the peak, or because oil prices would fall. We have now reached that juncture. The challenges are twofold.
The FPC’s responsibilities are encoded in the Bank of England Act and the Chancellor’s annual FPC remit letter.7 The FPC’s primary objective is to identify, monitor and take action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK’s financial system.8 Subject to meeting their primary objective, the FPC has a secondary objective to “support the economic policy of Her Majesty’s Government, including its objectives for growth and employment”. The emphasis on supporting economic growth over the medium to long term is underpinned by the so-called “stability of the graveyard clause” in the Bank of England Act, which does not “required or authorised the Committee to exercise its functions in a way that would in its opinion be likely to have a significant adverse effect on the capacity of the financial sector to contribute to the growth of the UK economy in the medium or long term”. The FPC’s actions support its secondary objective in several ways. The FPC minimises the negative impact of financial stability policies on growth including in the near-term by implementing financial stability policies gradually, and by choosing targeted policy tools. The FPC’s remit letter also tasks the FPC with taking actions to promote actively productive finance and growth as long as these actions do not compromise the primary objective of financial stability. These actions 7 The Chancellor’s annual “Remit and Recommendations” letters to the FPC, alongside the FPC’s responses, are  available here.

25  All speeches are available online at www.bankofengland.co.uk/news/speeches  25  When there is an economic shock, the FPC can release the CCyB to 0%, reducing banks’ capital requirements. This frees up capital to absorb losses and preserve lending capacity. By continuing to lend, banks help to cushion the economic shock, and promote a quicker economic recovery. That is, the ability to cut the CCyB reduces GDP-at-risk, improving overall welfare.27 To give you some idea of scale, a cut in the CCyB from 2% to 0% today would preserve banks’ capacity to lend to UK households and businesses by £ By comparison, net lending was around £ over the past year. This is a stark departure from the pre-crisis framework. Banks’ capital requirements were determined by microprudential supervisors focussed on the safety of individual institutions. When shocks hit, this incentive created by a purely microprudential objective was more likely to motivate supervisors to conserve capital at all costs, with the consequence that banks restricted lending and exacerbated the macroeconomic downturn. The CCyB also supports the central GDP forecast by ensuring banks do not have to carry at all times sufficient capital for an elevated risk environment, with the associated knock-on to borrowing costs, investment, and output. For example, Bank of England work suggests that - had the current capital framework been in place before the crisis - the CCyB would need to have been between 3.5% and 5% to absorb losses.
I would like to speak about the role institutions can play in the economic advancement of a nation and use the central bank as an example.1 My co-speakers will view the issue from different perspectives and the ensuing debate will bring forth yet further aspects.2 Good institutions provide sound frameworks that increase confidence and promote economic progress. This is so in relation to minor, everyday situations as well as to major life choices. At the fishmonger’s, the Norwegian Metrology Service ensures that you pay for the actual weight of your cod fillet. When you buy a home, clarity about ownership and encumbrances is ensured by the land register.3 The Norwegian Industrial Property Office grants patents so that entrepreneurs can make profits on their innovations. In the absence of such institutions, each of us would have had to spend more time on taking precautions and fewer investments would have been profitable.4  1  Among the many who have shed light on the role of institutions from this perspective is Douglass C. North, a 1993 Nobel laureate in economics together with Robert W. Vogel. In his work, he refers to institutions as: “Institutions are the rules of the game of a society and in consequence provide the framework of incentives that shape economic, political, and social organization. Institutions are composed of formal rules (laws, constitutions, rules), informal constraints (conventions, codes of conduct, norms of behaviour), and the effectiveness of their enforcement.

The introduction of the Deutschmark was followed by measures to deregulate the economy and dismantle price controls. Virtually overnight, goods were available in the shops again. In the wake of these reforms, the Bank deutscher Länder, the precursor of the Bundesbank, was founded. The launch of the Deutschmark was an institutional prerequisite for the beginning of the postwar German Wirtschaftswunder. The successful reform bolstered the reputation of the monetary policy authorities and provided fertile soil for the trust the Bundesbank has enjoyed as a defender of stable money up to the present day. 21  The events in Argentina in 2007 led to the initiation of a research project at the MIT Sloan School of Management to collect price data from retailers on a daily basis using scraping technology. The project, currently referred to as the Billion Prices Project (see http://bpp.mit.edu/) is primarily associated with the MIT researchers Alberto Cavallo and Roberto Rigobon. The project started on a very small scale where in 2007. Cavallo used the technology to collect price data from supermarkets across Argentina, and he showed that inflation in Argentina was between twice and three times as high reported in the official figures. Today, the project is being continued under the direction of the private company PriceStats, which provides data collection and processing services. The Billion Prices Project currently involves the collection of price information from more than 70 countries and daily inflation series are published for over 20 of them.