samchain/econo-pairs-v1 huggingface dataset:
It has long been known that real interest rates have shown a falling trend around the world over the last few decades. The “global” real interest rate, i.e. an average of real rates for risk-free assets (here measured using ten-year government bonds) in the major economies, has shown a falling trend of just over 4 percentage points since the end of the 1980s and is currently slightly below 1 per cent (see Figure 3(a)). The global real interest rate is important for small, open economies. In a world with the free movement of capital, it is difficult for a small economy to have real interest rates that deviate a lot from the global real interest rate level. This does not mean, however, that the real interest rate in Sweden always has to correspond exactly to the rate abroad. Deviations can exist both in the short- and long-term for various reasons. In the short-term, economic activity can develop differently in Sweden and abroad, which can affect real interest rates. Deviations can also take place over longer periods, depending, for example, on different trends in population development or productivity growth. But just as in other countries, there has been a downward trend in the real interest rate in Sweden. The real interest rate for two-, five- and ten-year government bonds has fallen from around 6 per cent at the end of the 1980s to almost -2 per cent today (see Figure 3(b)). 6 [23]  Figure 3.

The currency reserve should thus be seen as an insurance policy that not only reduces the risk of crises, but also ensures good protection when they nevertheless occur. The cost of borrowing the currency reserve should therefore be funded by the banks that create liquidity risks in foreign currency. The possibility of transferring this cost to the banking sector should be investigated as soon as possible. 21 See Bryant et al. (2012), who discuss the background for why coordination can increase social benefit, and  Jonsson and Moran (2014), who illustrate this in a number of example calculations. See also Spencer (2014) for an interesting discussion. 22 See IMF (2016). 23 See the Riksbank’s financial independence and balance sheet (draft proposal) from the Ministry of Finance. 19 [23]  The currency reserve’s share of the banking system’s foreign funding in 2016 was on the same level as in 2002, but would – if the Government’s proposal were to be implemented – fall dramatically (see Figure 7(a)). This is also a very low level from an international perspective (see Figure 7(b)). The countries with lower currency reserves are the euro countries (with the exception of Bulgaria) which, similarly to the United States and United Kingdom, enjoy the benefit of possessing a reserve currency. Furthermore, as members of the euro area, they also have greater chances of receiving liquidity in euros from the ECB. Figure 7.
Indeed, the ECB has taken a number of measures to provide liquidity to credit institutions in the euro area, thereby alleviating their funding needs. Such measures include fixed-rate tender procedures with full allotments, longer-term refinancing operations up to a maturity of  2  BIS central bankers’ speeches  36 months, the expansion of eligible collateral accepted in the refinancing operations, and FX tenders aimed at mitigating funding costs in foreign currency. And the ECB will stand ready to withdraw liquidity when upward risks to medium-term price stability materialise. Right now transmission channels are obstructed for two reasons, one conjunctural and one essentially structural. The conjunctural reason is that sovereign spreads in some peripheral countries, which are today the basis for the pricing of bank funding, can rise above what fundamentals would suggest, as they reflect various concerns felt by market participants, from over-pessimistic views of macroeconomic trends to redenomination risk. The correlations between the yield levels of euro area bank bonds and those of the respective banks’ sovereigns are elevated and have lately increased somewhat further, particularly in the peripheral economies. This has also been the case for credit default swaps. This reflects a spillover effect from the sovereign market to the banking sector’s funding costs and impairs the transmission of lower monetary policy interest rates to the real economy.

Moreover, within the euro area there would no longer be a host or a home supervisor, and this arrangement should ensure that cross-border allocation of capital and liquidity would be primarily driven by business considerations. Banks’ funding costs should start to indicate again their individual creditworthiness, without the premia that reflect their sovereign’s fiscal position or redenomination risk. A common resolution fund would decrease the too-big-to-fail problem and thus reduce moral hazard; furthermore, it would spread the burden of resolution rather than saddling any single sovereign with it. Finally, depositors would not need to consider shifting their funds across the continent in search of a safe haven, as all banks would offer the same insurance coverage. Of course, as with all structural changes and new institutional constructions, setting up a fully-fledged banking union will take some time. The most urgent component of the banking union is in my view the SSM, which should enter into force as early as possible in 2013 to allow the ECB to prepare for its new tasks, with full accountability and a governance structure that strictly separates monetary policy from supervisory decisions. I won’t go into the details of the current proposal put forward by the European Commission. For this, since we are at a research-oriented conference, I would refer you to the report 2 on the European Commission’s banking union proposals which has just been published by the Advisory Scientific Committee of the European Systemic Risk Board.
Of course there are many exchange rates for sterling against different currencies, but the relative strength of sterling and the dollar against the euro has been surprising. Over the past five years or so, sterling has risen by almost 40% against the euro. No doubt part of this euro weakness is accounted for by the strength of domestic demand in the US and UK, which, at least in the case of the US, has been driven by higher productivity growth. But the resulting current account deficits cannot be sustained at their present levels indefinitely. Following the sharp slowdown of the world economy last year, it is those countries with the largest current account deficits, the US and UK, which are experiencing a more robust recovery than that in countries, such as the euro area and Japan, with current accounts close to balance or in surplus. In the short run, this pattern of growth could exacerbate current account imbalances. But it is encouraging that the slowdown has proved more short-lived than was feared. US GDP growth was positive in the final quarter of last year, following only one quarter of falling output, and is expected to be substantially positive in the first quarter of this. Here at home, growth is expected to be positive in the first quarter, following one quarter of growth close to zero. And manufacturing output has now started to rise in both the US and UK. Surveys of business confidence have turned round markedly.

Only last November, the Monetary Policy Committee concluded that it was very unlikely that business confidence would bounce back as it did in 1998. But the quarterly survey of the British Chambers of Commerce, published last Thursday, showed that manufacturing confidence had returned to levels last seen in 2000, and there were further  BIS Review 26/2002  1  improvements in the services sector. And the CBI survey, published this morning, showed the highest level of business optimism for eight years. So the recent news has been encouraging. It is still too soon though to be confident that recovery is entrenched. The sharp inventory run down of last year appears to have come to an end, but investment has not yet picked up, either in the UK or the US. And consumption, which has remained strong, may well decelerate. So, as the G7 Ministers and Governors noted in their communiqué on Saturday, downside risks to the world economy remain. These risks, and the current account imbalances I referred to before, mean that we need to be prepared for the possibility of large changes in exchange rates, although no one can predict the magnitude or timing of those changes. The second price I want to consider is the oil price. Yesterday the spot price of Brent crude closed at $ a barrel, up 34% from the level at the time of the Bank's February Inflation Report. Volatility of oil prices has been a feature of the past few years.
More capital boosts market capacity, but can also test underwriting discipline. Putting the right ideas to work As supervisor, the Bank of England is monitoring closely how these new risks are being managed and how your business models are evolving. 2  BIS central bankers’ speeches  At the same time we’ll be implementing reforms. Reforms to promote a more resilient insurance sector without standing in the way of an effective insurance sector, and without imposing unnecessary impediments on your ability to evolve your business models in response to the challenges I described. To borrow the theme of this conference we will be “putting the right ideas to work”. Today I want to highlight three of them: •  Tailored, consistent and robust capital standards;  •  Holding the right people to account; and  •  Global standards for globally systemic insurers. With those right ideas, we are promoting a resilient, innovative insurance industry that supports the real economy. Right idea 1: tailored, consistent and robust capital standards The first right idea is to implement tailored and consistent capital standards to ensure the safety and soundness of insurers. Resilience against unexpected losses requires risk-based capital standards and robust valuation practices. The UK’s Individual Capital Adequacy Standards deliver this and were one reason why the UK’s insurance sector weathered the crisis so well. The Bank of England wants the principles behind ICAS to be applied as widely as possible; to establish as level a playing field as possible. That is why we support Solvency II.

Mr. Yam discusses “Intervention true to guiding policy” Discussion by the Chief Executive of the Hong Kong Monetary Authority, Mr. Joseph Yam, published in South China Morning Post on 24/8/98. The current debate revolving around government intervention in the stock and futures markets to deter currency manipulation brought a feeling of nostalgia to me. It made me recall the many debates on government intervention there were within the administration when Sir Philip Haddon-Cave was financial secretary. I was then, in the late 1970s, a young economist in the Economic Services Branch of the Government Secretariat, with little responsibility and a lot to learn. Those debates were, somehow, rather more healthy and more intellectual. There was certainly less mud being thrown around. But the contrast is understandable. Today, this is a controversial issue. There are interested parties airing their grievances through punchy and articulate expressions of their views on this philosophical issue of interventionism. This is also an issue in which, in a more politicised environment and at a time when the community is enduring the pain of economic adjustment, the politically minded see great political mileage. A government with the whole of the legislature arguably in opposition makes a vulnerable target. It is so easy to wave the banner of free markets and condemn any government intervention, and be seen to be righteous and knowledgeable; notwithstanding that the government concerned has been so successfully running the freest economy in the world.
They may arise, for example, because large parts of the system rely on the same sources of funding, or because they have similar exposures – to rising financial imbalances, to currency mismatches and to widespread mis-pricing of risk. We have also seen that turbulence can arise from relatively modest initial shocks. The system is so interconnected that what looks stable can turn out to be “meta-stable”, which means potentially highly instable. Snow on mountain slopes can be meta-stable, looking pristine and tranquil yet turning into an avalanche after only a minor disturbance. For all these reasons, we have established a new framework of macroprudential supervision as have our counterparts elsewhere, including in the United States with the new Financial Stability Oversight Council. In the case of Europe, there is still one more reason for macroprudential oversight, and that is the single European market. Cross-border and cross-sectoral financial integration within the EU is fostered by competition, freedom of establishment and the free flow of capital. The single financial market is a crucial component of the overall single market project, and macroprudential supervision should enhance the resilience of this market. So how exactly will the new discipline of macroprudential oversight be conducted? Financial stability is not an issue exclusively for central banks. Micro-prudential supervisors have a key role, because stable institutions are an essential and necessary condition for achieving financial stability.

In the last legislative period, a great deal has been done to restore stability as a key prerequisite for economic dynamism. This has resulted in a return of confidence to the euro area. But high public and private debt, low growth and unacceptably high levels of unemployment are reminding us that the most pressing matter now is to bring the euro area back onto a path of shared prosperity. To achieve this, the focus in the next five years should lie on thoroughly implementing the reinforced policy framework that was agreed in the last term, and on further increasing the resilience of euro area countries’ economies. For us at the ECB, this means assuming a new role in the banking union by supervising the euro area banks as from November. With the comprehensive assessment exercise that we are currently conducting, we will contribute to putting euro area banks on a healthy footing, so as to enable them to provide financing to the real economy. For euro area Member States, this means undertaking the necessary structural reforms to foster growth, and to avoid any new build-up of macroeconomic imbalances. It also means continuing fiscal consolidation to rebalance public finances in line with the rules underpinning the Stability and Growth Pact. The euro area policy framework was strengthened considerably by the agreement between this House and the Council on the six-pack and the two-pack.
But no one acted to make the financial system more resilient to those vulnerabilities. This was not just an intellectual failure, as is widely discussed and recognized now. It was also partly a failure of machinery. The FSB has been encouraging new machinery to survey and head off risks. The FSB itself has created a vulnerabilities group. It is probably the least prominent part of the Financial Stability Board’s effort to date, but it could have enduring significance over the years and decades. It is paralleled in various regions. Europe is setting up a Systemic Risk Board, which will be supported by the ECB but involve all of the EU. The USA is setting up a Systemic Oversight Council; and in the UK, the government is establishing a macroprudential Financial Policy Committee in the Bank of England. Maybe something is needed in Asia, too. Martin [Wolf] talked about complacency; for the machinery I have described to make any difference, people will have to stick to it year in and year out. 2. Supervision of individual firms  One of the things that should not be neglected is that the severity of this crisis was as great as it was partly because a large handful of individual massive firms failed due to poor management and weak balance sheets. Part of the solution lies, therefore, in much better microprudential supervision and regulation of individual firms. The Basel Committee has had Core Principles for Effective Banking Supervision for some considerable time now.

Far too many instruments that were held in the trading book were subject to low capital requirements but actually could not be traded, leaving values exposed to big swings in liquidity premia. This was a fatal design flaw in the existing regime, and it is one which I hope should be fixed over the next year or so though the Basel Committee’s “fundamental review of the trading book”. 4. Too big to fail  At the centre of the reform effort in the FSB work is “Too Big To Fail.” If one of the largest firms in the world got into trouble right now, in almost every country in the world we would not be able to cope with its demise other than through fiscal support. This is completely unacceptable. If there is one thing that I think unites the members of the G20 – at the political level and at the official level – it is that this will be consigned to the past. We will re-introduce market discipline back into the financial system, which really means re-introducing capitalism back  2  BIS Review 148/2010  into the heart of capitalism. The acid test has to be whether, for every financial institution in the world, it could be resolved if it faces distress in a way that does not disrupt the flow of essential financial services to the economy and without state solvency support. That is the single goal in this area.
It would have been very odd if we had ignored these risks with the justification that it is always more important to try to attain the inflation target in the short term – regardless of the consequences later on. For someone who believes that the risks linked to household debt are a threat to the stability of the Swedish economy, it is a little like feeling forced to step on the accelerator despite hearing that the engine is about to seize. It is not just a question of “bubbles” One thing I consider important to point out is that this policy does not necessarily involve what are often called “bubbles”, although the situation may of course be particularly serious if households have unrealistic expectations of interest rates.6 Quite regardless of whether or not an upturn in housing prices has natural economic or, as one often says, fundamental explanations, it is problematic if indebtedness is increasing at a faster rate than income over a very long period of time, and there are few signs that the trend will be broken. Households will then become gradually more vulnerable and liquidity margins will become smaller. Finally, one will reach a point where even fairly small shocks to income, asset prices or interest rates can trigger adjustments that have fairly substantial effects on the  4  See, for instance, Mian and Sufi (2011), Dynan (2012) and Jauch and Watzka (2013).

As this discussion illustrates, the literal-but-symmetric interpretation of the MINIMAX approach to robust monetary policy would imply very ‘activist’ policy responses in the face of uncertainty. In this framework, from having their foot to the floor with the monetary accelerator, policymakers might have to switch in short order to stamping on the monetary brake. Unsurprisingly, on my reading, that characterisation also finds little sympathy in policymaking circles. In the interests of avoiding tail outcomes, such activism threatens to induce volatility into monetary policy, financial markets, the economy and inflation in other circumstances, which is both costly and hard to communicate. But the research on monetary policy and uncertainty as a whole has influenced the discussion and conduct of policy in practice. I would pick out a number of lessons that have been drawn.  The magnitude and evolution of uncertainty and risk can, do and should influence monetary policy decisions.  Not all uncertainty is the same. The way uncertainty influences monetary policy decisions depends on the circumstances and the nature of the uncertainty – its source, its persistence, its magnitude – that is being faced  Monetary policy should not be paralysed in the face of uncertainty. If policymakers were to wait until all uncertainty is resolved before taking decisions, they would wait forever.  At the same time, there is no general rule that says policy responses should either be attenuated or more activist in the face of uncertainty.
Exter argued that that should be the case because of the inflationary or deflationary effects which the payment or the non-payment of profits can have on an economy. For instance, when the profits are transferred to the government, the reserve money will increase, raising both money supply and creating inflationary pressures. Exter argued that such an expansion that would have arisen from the Central Bank’s own contribution to inflation by raising its domestic assets should be prevented. Domestic assets of the Bank could go up due to the Bank’s lending to the Government or the commercial banks. If these assets have increased too rapidly, the result would be inflation through a similarly rapid increase in money supply. Exter’s prioritization of the appropriation of profits intended to prevent the Bank from paying to the government such profits earned by inflating the economy. But, he did not have any objection to the transfer of profits to the government, if such profits have been earned on the Bank’s investment of its foreign assets. Since the foreign assets are maintained by the Bank on behalf of the government, the latter have a right to receive its due rate of return. So, Exter concluded that if the domestic assets have not expanded (in other words, if the Central Bank has not inflated the economy), “there should be no ill-effects from paying out the Central Bank’s profits to the Government, especially since in this case the Government could not have been obtaining excessive accommodation from the Central Bank”.

The incentives must be set up in a way that leads each individual to chase the correct targets, and in a way that rewards superior performance. This is not a description of a traditional central bank culture, so the investment management unit may need to be built outside the existing structures. At the same time the existing structures may benefit  2  BIS Review 86/2006  from having a business unit within the central bank. There are lessons to be learned about efficiency in operations, and that has also proved useful for the civil service part of Norges Bank. BIS Review 86/2006  3  4  BIS Review 86/2006  BIS Review 86/2006  5  6  BIS Review 86/2006  BIS Review 86/2006  7
BIS Review 24/2007  1  The premium that is to cover the risk of a credit event corresponds to the premium the corporate bond commands over a government bond without credit risk. The prices of the credit derivatives are therefore strongly related to the prices of the bonds issued by the company. In actual fact, the market for credit derivatives is often more liquid than the market for the underlying bonds. In this case the prices of the company risks are determined in the credit derivatives market rather than the market for the underlying corporate bonds. The most common credit derivatives are called Credit Default Swaps, abbreviated as CDS. A swap is usually an exchange of payment flows and one might wonder what is being exchanged in this case. It concerns what happens if the insurance needs to be used, that is, if a credit event occurs. Then the bank (the insurance policy owner) would have to sell a bond corresponding to the credit amount to the insurer at a nominal value. This is despite the fact that the bond has become worth much less or even worthless as a result of the credit event. The bank thus swaps the bond for a cash payment. 2 This is no stranger than a house-owner swapping his burnt down house for cash if he has paid his insurance. Why are credit derivatives so popular? The example using TeliaSonera illustrates some of the properties that have made credit derivatives so popular.

I wish you an interesting debate. Thank you for listening. 2/2  BIS central bankers' speeches