samchain/econo-pairs-v1 huggingface dataset:
The French spread may also temporarily react to political uncertainties, but remaining in the euro over the long term continues to be our best protection. All economic players are benefiting from lower interest rates: households – when they purchase a property – and companies that invest, as well as governments and hence taxpayers. Some critics would like to leave the euro to let deficits rise without being constrained by European rules. But that is wishful thinking: the financing of deficits would be much more costly for euro area countries leaving the single currency, if we were to return to the spreads before the euro. Exchange rate stability and the strength of the single market The euro also helps consolidate the single market, which the European Member States have constructed step by step since the Treaty of Rome in 1957, 60 years ago. In order to achieve greater trade integration, it was necessary to reduce currency fluctuations: Europe first attempted this, as of 1979, with the European Monetary System, built on a common currency, the ECU. But this mechanism was insufficient to ward off speculative attacks: remember the severe crisis of September 1992 which forced the Italian lira out, making it lose 21% of its value, and which destabilised the European economy. The single currency put an end to these serious disruptions. It also considerably simplifies day-to-day life: there are no longer any conversion fees for individuals, or any more uncertainties relating to exchange rate volatility for companies.

In the meantime, however, there are significant implications for emerging market economies, as global investors search for better returns – better than the near-zero rates they get on cash and treasury bills. With large amounts of liquidity now moving between markets, short-term shifts in investor sentiment leads to volatility in capital flows. We have seen how a shock in the European periphery can send money that was invested in emerging markets rushing back to the US or other safe havens. To be clear about it, there is a lot that is good about capital flows, including even short term flows. They add liquidity to markets, by bringing more buyers and sellers together. However, we know too that capital inflows can also be too much of a good thing. They can lead to asset prices, or exchange rates, becoming disconnected from fundamentals. And the sudden withdrawal of capital from emerging economies when investors switch from ‘risk on’ to ‘risk off’ in their portfolios can be destabilising. As I mentioned, the current global condition is unprecedented. The policy responses in the advanced countries too are without precedent. Globally therefore, we need some humility in understanding the benefits and costs of QE3 and easy monetary policies in the advanced countries. But it will be wise to strengthen our policy toolkits in Asia, so that we can deal with unpredictable and often excessive capital flows. There are some lessons that come out of our experiences in Asia and elsewhere, and policy responses that we can learn from each other.
Financial crises typically result when we fail to identify vulnerabilities, and then unexpected triggers turn those vulnerabilities into points of weakness that can lead to catastrophic failure. The discontinuation of LIBOR, however, is different. We can see it coming, and we know the impact of a disorderly transition would be huge. Therefore, a half-hearted effort or a failure to act would be inexcusable, especially after all we have learned from the experience of the financial crisis. Moving this core piece of the global financial system to a firm and durable foundation is essential and worth the cost. This task is admittedly hard, but I am optimistic given our past successes. We have demonstrated that effective collective action can provide solutions to longstanding structural vulnerabilities in the financial system. A key lesson from the crisis is that structural vulnerabilities must be addressed continually. If they are ignored, larger problems eventually will result. For example, through collective action over the past decade, we have successfully addressed structural weaknesses in the tri-party repo market, the over-the-counter derivatives market, and money market mutual funds. Each of these challenges required a tailored solution that relied on different tools—including a diverse mix of market, regulatory and supervisory measures—to get the job done. Everything isn’t a nail, and the best tool is not always a hammer. You have to identify the problem that needs fixing and select the right tool for the job. This is likely to require both official sector engagement and private sector initiative.

William C Dudley: The transition to a robust reference rate regime Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Bank of England’s Markets Forum 2018, London, 24 May 2018. * * * Thank you, Mark, and thanks to the Bank of England for the opportunity to talk about the important issue of reference rates. I will focus my remarks today on reference rate reform in the United States—where we have been, where we are, and where we are headed. In short, I will argue that while much has already been accomplished, we still have a lot more to do—and it must happen within a compressed time frame. This is an important point that Andrew Bailey usefully underscored for us last year. Because of the great uncertainty over LIBOR’s future and the risks to financial stability that would likely accompany a disorderly transition to alternative reference rates, we need aggressive action to move to a more durable and resilient benchmark regime. As always, what I have to say reflects my own views and not those of the Federal Open Market Committee (FOMC) or the Federal Reserve System.1  LIBOR Scandal Demonstrated the Imperative for Reform Although the backdrop to current reference rate reform efforts is well known here, some historical context is useful when considering the issues facing us today. That history highlights why alternatives to LIBOR are needed.
This money is created by banks, not by Norges Bank. Chart 1 shows the money supply and the supply of banknotes and coins in Norway since 1960. In Norway, the money supply mainly comprises deposit money in banks. 6 In the early 1960s, banknotes and coins accounted for a fifth of the money supply. Current accounts and cheques were already becoming commonplace. Since then, banks’ deposit money has increased dramatically, and today, banknotes and coins make up less than 2.5 percent of the money supply. In other words, virtually all the money we use has been created by banks. 3/9  BIS central bankers' speeches  So how do banks create money? The answer to that question comes as quite a surprise to most people. When you borrow from a bank, the bank credits your bank account. The deposit – the money – is created by the bank the moment it issues the loan. The bank does not transfer the money from someone else’s bank account or from a vault full of money. The money lent to you by the bank has been created by the bank itself – out of nothing: fiat – let it become. The money created by the bank does not disappear when it leaves your account. If you use it to make a payment, it is just transferred to the recipient’s account.

But their ability to create money and extend credit could nonetheless be affected, especially if this new form of electronic money enters into widespread use. Norges Bank has begun the work of assessing what the future form of money should be. This is a long-term process. Whatever the conclusion, we can be fairly certain that banknotes and coins will be with us for many years yet. Deposit money in banks will most likely continue to be the dominant means of payment, even if electronic central bank money is introduced. Nevertheless, the very fact that these questions are being raised heralds a new era for our monetary system. Choosing the direction our future monetary system and payment system will take requires not only economists, but also technologists, lawyers and other social scientists. And political decisions will ultimately need to be made by our elected representatives. It devolves upon the Storting to supervise the monetary system of the realm. The questions are numerous, but we already have one of the answers. Central banks were established to build confidence in the monetary system. That is still our primary task. We cannot leave the monetary system entirely in the hands of private entities. There will be a role for central bank money. We must have a legislative framework and a means of payment backed by the authorities to ensure trust in our money – as history has shown. Thank you for your attention.
It is not only through low policy rates Norway’s economy is influenced by monetary policy abroad. In a number of areas, we import the effects other central banks are seeking to achieve through quantitative easing. Chart: Yields on 10-year government bonds One example is the government bond market. For investors seeking safe investments, Norwegian government bonds have been one of several alternatives. Norwegian 10-year government bond yields are now quoted at around 1½ percent. Other investors have turned to the Norwegian equity market. Equity prices on Oslo Børs have tracked the rise in equity prices abroad. Even when oil prices – and oil equities – began to fall, the rest of Oslo Børs continued to rise. The commercial property market is another example of foreign capital finding its way to Norway in search of higher returns. The required rate of return on attractive office premises has fallen in pace with long-term yields, and prices have risen considerably. At the same time, rental prices in a number of locations are showing a downward trend. Large foreign capital inflows have probably contributed to the fall in the required rate of return. Like their counterparts in other countries, Norwegian bond-issuing enterprises and banks have over time been able to obtain cheaper funding. Lower risk premiums on covered bonds, for example, have reduced banks’ residential mortgage funding costs.

Similarly, many euro-sceptics characterize the euro as a pure “political” or geopolitical, project – clearly implying that it has no economic rationale. It will come as no surprise to you that I do not share this view. Obviously, the creation of the euro has been underpinned by a broad political vision and ambition. But there was – and still is – a strong economic rationale in solidifying economic and financial integration in Western Europe by the creation of a single currency. This economic rationale is clearly perceived by investors and market participants who have made the euro the second world currency for investing in financial assets and holding foreign exchange reserves. This being said, history has also shown that the geography of the international monetary system may undergo fast and abrupt changes. Over decades and centuries, new currencies emerge and existing ones disappear as major vehicles for international trade and investment. Geopolitical changes may trigger such evolutions. But some endogenous dynamics are also at work. Past some stages, or “tipping points”, the use of a currency may expand or shrink quickly due to network and scale effects: the more people use a currency, the more attractive it becomes. This begs the question of possible “spheres of influence” appearing in the future with significant evolutions in the respective role and weight of existing currencies. In my remarks, I will simply define such “spheres of influence” as parts of the world economic system where the use of a specific currency might dominate.
If Bank Rate is increased, monetary conditions are being tightened; and conditions are being loosened if Bank Rate is cut. There are a few important simplifying assumptions being made here – assumptions whose validity in current circumstances is doubtful. In the first place, that view of the world implicitly assumes that the equilibrium real rate is stable over time, whereas in fact it will move about. 6 Sometimes the central bank will need to change its policy rate simply in order to maintain unchanged monetary conditions (as proxied in the literature by r minus r star). In the same vein, if near-term inflation expectations rise or fall, our nominal policy rate may need to change just to leave the actual short real rate unchanged. In other words, we can fix only one thing – the short nominal rate – but what any particular level of Bank Rate means for monetary conditions will depend on short-run inflation expectations and on the equilibrium real rate needed to balance the economy. Both will likely have changed materially in the face of the cost and credit shocks. What our Bank Rate will mean for monetary conditions will depend on how it relates to the panoply of other interest rates on financial contracts. In fully efficient markets, the risk-free  6  See Neiss, K and Nelson, E (2001) “The real interest rate as an inflation indicator”, Bank of England Working Paper No 130.

And then the greater the risk will be that the general public’s attitude to the framework deteriorates. I intend to try to describe my opinion on these questions today and on how they tie in with my view of the role of the central bank and how monetary policy should be conducted within the current framework. It may be useful to start by describing the framework we have lived with for a good twenty years now. Why do we have an inflation target and an independent central bank? Why an inflation target and independence? From credibility problems for the fixed exchange rate... When the international monetary system of fixed exchange rates – what was known as the Bretton Woods system – collapsed at the beginning of the 1970s, Sweden needed to find a new nominal anchor for its economy. The predominant view was that a fixed exchange rate was the best means for a small, open economy to attain stable prices and set a framework for the stabilisation policy. This was one of the reasons why Sweden chose to continue with a system where the krona was pegged to other currencies. But when the economy suffered problems in the 1970s and 1980s it became clear that the target for the fixed exchange rate was not regarded as credible. The target often came into conflict with the aim of bringing down unemployment, which became an increasingly important element of the stabilisation policy. This was resolved by means of recurring krona devaluations.
If we see clear signs that inflationary pressures are weaker than expected, we must continue to show through our actions that we take the inflation target seriously, by making monetary policy even more expansionary. Personally, I would be prepared to cut the repo rate even further, even if we were in the midst of an economic upturn. Is a monetary policy that takes indebtedness into account compatible with an inflation target? What conclusions can one draw from the Swedish case of monetary policy that takes into account indebtedness and housing prices? I would claim that the experiences so far argue against this type of monetary policy strategy. Inflation has been remarkably low and has moved further away from the target in a situation where the economy nevertheless appears to be in an upturn. Although there have been positive developments on the labour market, unemployment has remained around 8 per cent for a long time. Household debts have grown at around the same rate as disposable incomes, which mean that the debt ratio and the potential risks it entails are in principle unchanged. For me, it would appear as though the benefits have been small, while the costs have been high. However, it is of course difficult to draw any far-reaching conclusions on the basis of what we have been able to observe so far. We quite simply do not know how the Swedish economy would have developed if the Riksbank had conducted a more expansionary monetary policy.

If one looks at the estimates of the determinants of indebtedness used as a basis for our forecasts, one sees that the effect of the repo rate on households’ debt ratios (that is, their debts in relation to disposable income) is very small.12 A repo rate that is 0.25 percentage points higher during one year is expected to reduce the debt ratio by at most 0.3–0.4 percentage points (see Figure 4). 10  For example, in November 2010 Anders Borg warned of the risk that a housing bubble would build up, comparing developments in Sweden with those in Ireland and Iceland, and emphasising the importance of putting an early stop to it (Borg, 2010). The Liberal Party then proposed cutting the deductions for interest payments in January 2011 (Hamilton, 2011). 11  Finansinspektionen (2013). 12  See Laséen and Strid (2013) and Sveriges Riksbank (2014b). BIS central bankers’ speeches  7  Figure 4. Household debts Percentage of disposable income 182  182 Lower repo rate 2013 Main scenario  180  180  178  178  176  176  174  174  172  172  170  170 12  13  14  15  16  17  Note. The experiment with a lower repo rate in 2013 assumes a repo rate cut from 1 per cent to 0.75 per cent at the monetary policy meeting in February 2013 and a repo-rate path that from December 2013 follows the path published in December 2013 and again in February 2014.
Economists at the New York Fed have examined inflation expectations using a unique survey that we sponsor. As reported in a recent post on our new Liberty Street Economics blog, they find no evidence to suggest that a wage-price inflation spiral is getting underway. However, we will continue to monitor expectations for medium-term inflation very closely. To sum up, economic conditions have improved in the past year. Yet, the recovery remains moderate and we still have a considerable way to go to meet the Fed’s dual mandate of full employment and price stability. Regional economic conditions Now, how is our region doing? As attendees at previous press briefings may recall, the New York Fed produces Indexes of Coincident Economic Indicators to help monitor the performance of the region. I am pleased to report that the latest months of data no longer suggest that the regional recovery has paused, as they indicated in February. Based on these measures:   The recovery of activity in New York State and New York City continues at a steady and sustained pace. 2  BIS central bankers’ speeches    In New Jersey, activity also has begun to increase following a long period – roughly a year – where activity in the state was essentially flat. We monitor Puerto Rico using an index produced by the Government Development Bank of Puerto Rico. The index shows that the decline in activity on the island began in 2005 and continued through late 2010.

And, when we rebound from the shock of the pandemic, the Mittelstand will have to be one of the drivers once again. The coronavirus is a double economic shock. Its effects have hit activity extremely hard, with GDP falling by 6.8% in the euro area last year and 5% in Germany. But it has also accelerated structural changes that will transform our lifestyles and our economies. According to some estimates, the pandemic has brought forward the digital transition in Europe by seven years. [4] And it is estimated that 20% of work hours will move permanently from office to home. [5] This will lead to new patterns of demand and new ways of living. So, our challenge will not only be to recover from the crisis, but also to adapt to the changes it has set in motion. And the Mittelstand – thanks to its agility, its focus on innovation and its commitment to competing by adding value – will have to be at the heart of this process. For now, however, the pandemic is still weighing heavily on our economies, and especially on firms in the services sector. While manufacturing has recovered quite well since the first lockdown last year, buoyed by solid global demand, activity in the services sector has remained subdued owing to the social distancing measures that are still in place today.
Weak banks have been recapitalised, bad loans reduced, and prudential regulations strengthened. Government finances have been put on a firmer footing, while balances of payments have moved into surplus. The result is a stronger and leaner Asia, more prepared for storms and more ready to seize opportunities. A major development in recent years is the emergence of China as an economic powerhouse. China’s growth and transformation have been phenomenal. Its buoyant exports, supported by low-cost manufacturing capabilities, and its huge domestic market, have created strong competition as well as immense opportunities for the rest of the world. China’s growth has driven the rapid increase in intra-regional trade, and fuelled economic expansion in the region, if not worldwide. China’s economy is showing signs of overheating, but its government is mindful of the danger and determined to act decisively to rein in credit and investment. This gives them a good chance of achieving a soft landing. Beyond this cyclical issue, China is set to continue growing strongly for the next decade or two. The other Asian giant, India, is becoming a dynamic and prosperous economy. Liberalisation policies and market reforms are freeing up the long moribund Indian economy. State-owned enterprises are being privatised. Ports, airports, telecommunications and financial services have been opened up to competition and foreign participation. As the dead hand of bureaucracy is withdrawn, growth is taking off, especially in the services sector.

Like Kashmir, it is difficult to see a definitive solution to the North Korean problem. But this too can be managed. The six party talks have reduced the risk of accidental war. The key actors are rational and, despite their differences, share a common interest in a peaceful resolution of the issue. Kim Jong Il is a master of brinkmanship. But he too is rational and must know that war will lead to the outcome that he fears most, the disappearance of North Korea as a sovereign state. Therefore, while he may go to the very edge, unlike Saddam Hussein, Kim will not deliberately step over it. The North Korean issue is a strong incentive for the US and China to cooperate for their common interest. The risks of miscalculation are perhaps highest over Taiwan. The issue is extremely delicate because it engages the domestic politics of China, US and Taiwan. There is growing tension between economic forces that are integrating Taiwan with the Mainland and Taiwan’s desire for a separate identity. No PRC leadership can ever tolerate a bid for independence by Taiwan. If Taiwan pushes too far, the Chinese must react or be exposed as a ‘paper tiger’. The US stand, and perceptions of the US stand in China and Taiwan, are key to the problem. President Bush has said publicly that he does not support Taiwan’s independence. But the US may still be drawn into a Cross Straits conflict. If this happens, there will be serious consequences for the entire region.