samchain/econo-pairs-v1 huggingface dataset:
The inflation gap is defined as the deviation from the central banks’ target: 𝛱𝑔𝑎𝑝 𝑇𝑛 = 𝛱𝑇𝑛 − 𝛱𝑇∗𝑛 where 𝛱𝑔𝑎𝑝 𝑇𝑛 is the inflation gap at time Tn, 𝛱𝑇𝑛 is the inflation rate at time Tn, and 𝛱𝑇∗𝑛 is the central banks’ target at time Tn, or, in the absence of that, an average of long-time inflation. A theoretical graphical representation of the inflation gap for a six-period model can be observed in the attached figure. At time T0, at the peak value of real wage, we assume that inflation rate is above the central bank’s inflation target, given the inflationary pressures caused by high wages. Therefore, inflation gap at time T0 is positive. However, the relationship is valid even when this assumption does not hold. As wages enter an adjustment phase, inflationary pressures fade away and inflation rate declines. Inflation gap turns negative and reaches a minimum at time T3, the same as the cumulative real wage gap. In the next stage, as wages resume growth, inflation rate starts rising, but it remains subdued, below the central bank’s inflation target, until time T5, when the cumulative real wage gap is closed. Afterwards, wages continue to increase and the wage gap widens in the positive territory. Consequently, inflationary pressures strengthen, pushing up the inflation rate above the central bank’s inflation target at time T6.

As presented in international literature, some of these explanations are: de-anchoring inflationary expectations, the labor market slack, a lower natural rate of unemployment, changes in expectations regarding the real pay growth, the decoupling between growth and inflation, the role of global value chains 1  in keeping prices down, the role of migration in keeping wages down in the countries of destination, and others. While there is some truth in each and every of them, no alternative has been successfully suggested so far. I think that the Phillips Curve needs a reality-check. If we want to explain inflation, we need to make some adjustments to the Phillips curve. The following presentation is based on two working papers that I recently published with Center for European Policy Studies (CEPS)i, respectively and Global Labor Organization (GLO)ii. Three major changes are needed to the Phillips curve. First, we should work with observable variables only. The problem with econometric models which use non-observable variables is built-in: they tend to under-perform in bad times. Potential GDP is revised retroactively. The output gap depends on potential GDP. Plus, an economy can grow above its potential without being at its full employment (in particular, but not exclusively, in catching-up economies). Any measure of unemployment is controversial, given the impact of insufficiently accounted factors such as the underground economy, migration, inactivity, part-time employment. A nonobservable measure of unemployment, like NAIRU, is even more debatable. If Central Banks rest their decisions solely on such non-observable variables, they are at risk of getting them wrong.
Although the general government “structural deficit” is not directly observable and, therefore, its calculation is based on assumptions subject to a high degree of uncertainty, it is a useful indicator of the underlying state of public finances. This indicator will, moreover, play a more important role in the new phase of fiscal policy due to begin, in the event that the EU Council eventually rules that Spanish general government is no longer in an excessive deficit situation. As I have already mentioned, the latest data point in this direction. In fact, exiting the “corrective arm” of the EU’s Stability and Growth Pact would involve Spain automatically entering the “preventive arm”.

To reach that goal we have based our monetary policy on two “pillars”. As regards the first “pillar” we have set up a quantitative reference value, namely 4.5%, for the growth of the broad monetary aggregate M3; last December, we have confirmed this rate of growth of 4,5 % as an important factor for stabilising expectations. It should be noted that the concept of a reference value does not imply a commitment on the part of the Eurosystem to mechanistically correct deviations in monetary growth in the short term. However, the reference value for M3 is consistent with, and helps to maintain price stability over the medium term. The second pillar of the monetary policy strategy is a very comprehensive set of indicators that are important in our eyes in signalling future price developments in the euro area. This strategy, which ensures a great deal of continuity with the monetary policies of the participating national central banks, appears to have been understood by financial markets and the public at large. In particular, the yields on long-term bonds denominated in euros indicate clearly that the Eurosystem has kept intact the legacy of credibility that it has inherited. d/ Finally, the credibility of the euro also results from the Eurosystem’s constant efforts towards transparency and communication. I must stress here that the Eurosystem is one of the most transparent central banks in the world.
Things are more complicated when an adverse supply shock occurs, such as the sharp rise in oil prices that we saw during the first half of 2008. That tends to lower output at the same time as it raises inflation, so there is a tension between maintaining high growth and meeting the inflation target. But under the present regime, the MPC has “constrained discretion” to look through the inflationary impact of such a shock, provided it is temporary. What the regime does not permit is for such a shock to be accommodated in a persistently higher rate of inflation. That is what happened in the Seventies and I do not think we want to go back there. The essential point that critics of the current set-up need to bear in mind is that an adverse supply shock will always leave the policy maker with a difficult judgement, as the appropriate monetary policy response depends on the extent to which it is likely to lead to compensating increases in wages and other prices. Changing the objective does not alter that basic dilemma, but compensating increases in wages and other prices will be less likely if people already expect inflation to remain low and stable. Finally, as was illustrated in Chart 1, the inflation targeting period was, until the past two years, also a period of unusually steady growth. So, from a practical perspective, there was no obvious conflict between stabilising inflation and stabilising output. A second suggested change to the framework has come recently from the IMF.

The fact is that policy has to be made in ignorance of how the future will turn out, and one has to weigh certain near-term costs against uncertain longer-term gains. Moreover, it seems unlikely that higher interest rates in this country alone would have prevented us experiencing a severe recession. Events in the United States would have proceeded in much the same way, regardless of what the MPC chose to do. And, as we have seen, the downturn has been global in nature, not confined to those economies with overblown financial or housing markets. Would it have helped if our target variable had, say, included a measure of asset prices, particularly house prices? There is certainly a good case for including a measure of owneroccupied housing costs in any consumer price measure, as for many households it represents their largest single expenditure. And, depending on the measure used, that could have resulted in higher inflation figures during the years leading up to the crisis. That does not, however, translate directly into a higher level of Bank Rate. Monetary policy affects inflation with a long and somewhat variable lag and there is little the MPC can do to offset unanticipated movements in near-term inflation. Instead, we have to look at inflation prospects two or three years ahead. But it is in the nature of asset prices, including house  6  BIS Review 31/2010  prices, that one can say rather little about their likely direction of movement that far ahead.
The monetary stimulus intensity may increase further over the periods ahead, in the event the economic and monetary developments continue to shift the balance of the downside inflation risks. In any case, the Bank of Albania remains determined to ensure price stability, in accordance with its inflation target. The Bank of Albania deems that 2014 will be a turning point for the Albanian economy. Maintaining financial and economic stability, improving external environment, pursuing stimulating macroeconomic policies and continuing structural reforms would open the way to Albania's stable and long-term development. BIS central bankers’ speeches  3

Banks are in a special position. They transform short-term deposits into long-term loans. They are responsible for payment settlements, and bank deposits serve as a means of payment. The volume of amounts outstanding in the interbank market is sizeable. As a result, problems in one bank may rapidly spread to other banks. The financial strength of banks is thus important for financial stability, even more so in countries where banks are the main financial intermediaries. Long-term profitability has a decisive influence on financial strength. Obviously, there are many factors that can influence the future profitability of banks. The topics you will discuss during these two days are of great importance. Financial unrest spreads through payment and settlement systems. These systems can also be a source of risk. This occurs when banks credit customers before they have received settlement from the payer bank. Payment and settlement systems must thus be designed to reduce settlement risk. This is an issue high on the agenda of most central banks. Interdependence of monetary and financial stability The objectives of monetary stability and financial stability are interdependent. High - and thereby in practice varying - inflation and unstable exchange rates can threaten financial stability through several channels. First, it is more difficult to assess the risk of an investment project. Inflation makes it difficult to differentiate between a change in prices for goods or service and a change in the overall price level. It makes it more difficult to determine the discount rate to be applied.
However, a full normalization of credit demand and supply will depend on the appeasing of the global financial environment, on more clarity about the definitive structure of the global financial system, and on economic growth prospects settling down in the larger economies of the world. Overall, it is important to note that this analysis has focused on the cost of credit for operations already materialized. The other central dimension of the financial system operation is clients’ access to credit. Lately loans have slowed down. It is difficult to figure out how much of this to blame on lower demand and how much on the financial institutions’ reluctance to lend. In any case, we believe it is important that financial institutions, provided good risk management, continue to lend to firms and households. We agree with the Superintendent of Banks and share the principle that through tough times the banks must stand by their clients and cooperate in the solution of their financial problems. I would like to inform you that, as part of our process of increasing transparency, particularly regarding public dissemination of information about interest rates charged on credit operations, we have decided to extend the available data on credit conditions by maturity, indexation, and type of loan. Thus, starting today our website has increased the level of detail of interest rate information made available to the public. 4 Part of said information was used in producing the results reported in this presentation.

Conclusion I am confident that the gears of monetary policy will continue to move in a way that will bring inflation down to 2 percent. We will we stay the course until our job is done. 1 Federal Reserve Bank of New York, The Layers of Inflation Persistence, January 5,  2023; Federal Reserve Bank of New York, Inflation Persistence-An Update with December Data, February 7, 2023. 2 John C. Williams, Shifting Gears: Rebalance and Realignment in the Economy,  remarks at the Fixed Income Analysts Society, New York City (January 19, 2023) 3 Board of Governors of the Federal Reserve System, Federal Reserve Issues FOMC  Statement, February 1, 2023. 4 Board of Governors of the Federal Reserve System, Plans for Reducing the Size of  the Federal Reserve's Balance Sheet, May 4, 2022. 5 Board of Governors of the Federal Reserve System, Statement on Longer-Run Goals  and Monetary Policy Strategy , adopted effective January 24, 2012; as reaffirmed effective January 31, 2023. 4/5  BIS - Central bankers' speeches  6 John C. Williams, A Steady Anchor in a Stormy Sea , remarks at SNB-FRB-BIS High-  Level Conference on Global Risk, Uncertainty, and Volatility, Zurich, Switzerland, November 9, 2022. 7 Federal Reserve Bank of New York, Survey of Consumer Expectations. 5/5  BIS - Central bankers' speeches
We have placed our trust in the measures taken by our government and in each other. This is what we do when our country is faced with a crisis. Come what may. 15  u

d. Transparent balance sheets can make it easier to unwind troublesome financial institutions and divest their assets. e. Monetary policy channels in a world with CBDCs may be faster and more powerful. Today monetary policy works by affecting the balance sheets of banks and some financial intermediaries, which do not pass on all the rate changes to final users due to market power and other frictions. If central banks can reach out to more and more agents (businesses, households), then their role will become ever more central and effective. Page 7 of 11  Central Bank of Chile September 2019  Lastly, use of CBDCs could be explored as a more efficient alternative for remittances. In Chile, immigration has had a sharp increase in few years. As in other parts of the world, they face high costs for their remittances when using traditional methods based on a structure of correspondent entities. An alternative option that is being used, although because of its nature is not possible to have detailed information, are remittances based on cryptoassets. While these remittances may be faster and even cheaper, they are outside of the regulatory perimeter and thus their customers are exposed to several risks (counterparty, liquidity, operational). The cross-border use of CBDC would reap the benefits of crypto-based methods, without their risks. Certainly, this would require coordination between the central banks involved.
If we take into account the margin provided by the loan-to-value ratio and the fall in real estate prices that has already taken place, it would be necessary to make catastrophic assumptions, beyond all reasonable expectations, regarding the expected losses in order for the total losses to be well above the total volume of loan loss coverage. Moreover, the Spanish system of specific provisioning has been tightened so that banks have an even greater incentive to speed up their balance sheet write-downs. Thus doubtful loans, once the value of the collateral has been taken into account, have to be fully provisioned within a period of one year. In addition, the value of collateral is subject to significant haircuts ranging from 20% for completed housing to 50% for land. Finally, the law requires provisions of up to 30% to be recorded for foreclosed assets that have remained on the balance sheet for two years. But perhaps the characteristic which makes Spanish provisioning regulations unusually strict is that the parameters determining the provisions are transparent and apply to all banks. Therefore, unlike in other countries, they are not left entirely to be negotiated between the bank and its external auditors. It is not only legislators and regulators who have adopted measures to anticipate future problems. Spanish banks too, savings banks included, have made an enormous effort to clean up their balance sheets, something which is not always duly acknowledged in analyses of the Spanish banking system.

Macro-stress testing models have become the workhorse of macro-prudential stability analysis in the last decade, notably including quantitative impact studies for specific scenarios. Their main purpose is to assess the resilience of the banking and financial systems against extreme but still plausible events. One problem with these models in the past was that even for large shocks they generated hardly any bank failures. This can probably be improved by using appropriate data, more granular than previously available, and by capturing better and a larger number of adverse feedback loops that can play a role in amplifying the transmission of instability in the financial system. These feedback loops could include contagion effects across banks, market liquidity and funding liquidity problems. 14 Another difficulty for these models is whether they should be extended to also capture feedbacks from real economy outcomes to financial stability variables. The assessment task is currently much less developed than the surveillance one. This is not only because it involves considerable analytical sophistication, but also and mainly because there are significant gaps in the information on the financial intermediaries themselves and on inter-linkages between the various parts of the financial system. Viewing the financial system as a network, more information is needed on the key network nodes, and well as on the links between those nodes.
By components of the CPIEFE, goods inflation began showing a more moderate expansion, with y-o-y variation going from nearly 5 percent at the end of 2015 to 4.4 percent in the latest figure. This responds largely to the fact that, despite important fluctuations, the exchange rate has not shown a comparable increase to the one between mid- 2013 and third-quarter 2015. CPIEFE services inflation has also slowed, but is still near 5 percent annually, reflecting past-inflation indexation and the effects of the depreciation. BIS central bankers’ speeches  1  Plus, gaps are still narrow and the labor market – despite a somewhat faster deterioration lately – still shows low unemployment rates and strong growth in nominal wages (figure 1). So, in our most likely scenario, annual CPI inflation will enter the tolerance range in the third quarter of this year and will approach 3 percent during the first half of 2017 (figure 2). This projection uses as a working assumption that the real exchange rate (RER) will hover around its current values throughout the projection horizon. Bear in mind that the RER has risen a little since the cutoff date of the last Report, to near 97 (index, 1986=100) (figure 3). The convergence of inflation is also linked to output gaps that are forecast to widen in the near future and with the labor market adjusting further during the year, especially helping drive a reduction – albeit moderate – of services inflation.

The connotation that people attach to the term “Nullzins” will likely be different from, say, “geldpolitischer Impuls” – although both terms in essence describe the same thing. Worse, monetary policy can quickly become overburdened if national fiscal and economic policies fail to internalise the effects they have on the common currency. The temptation to freeride is always present in a monetary union. It is easy to see that if fiscal policy is loosened during an expansion, or tightened during a recession, the burden on the central bank to stabilise the economy increases mechanically. Even today, euro area growth still relies too much on monetary policy support. According to ECB staff estimates, the contribution of our easing measures to annual euro area GDP growth was half a percentage point in 2017 and will still be around one-third of a percentage point in 2018. And monetary policy can do little to lift the long-term growth rate of our region. All of this means that our currency union needs further reform – both at Member State and euro area level. I believe there is wide agreement on this. Where we still lack agreement, however, is on how these reforms should look in practice. I have described elsewhere the requirements of reform from the perspective of the single monetary policy. 1 As the central bank of the euro area, we have a stake in the success of the current discussion.
[19] See, e.g., Bauer, M. D. and Rudebusch, G. D. (2014), “The Signalling Channel for Federal Reserve Bond Purchases”, International Journal of Central Banking, 10(3), pp. 233–290. See also Broadbent, B. (2018), “The history and future of QE”, Speech given at Society of Professional Economists, London, 23 July 2018, and Christensen, J. and Krogstrup, S. (forthcoming), “Transmission of Quantitative Easing: The Role of Central Bank Reserves”, Economic Journal, who argue for another channel emphasising the relevance of reserves for the balance sheets of commercial banks. [20] In addition to the press conferences following Governing Council meetings the events also include other public communication by ECB President Mario Draghi. At the press conference following the September 2014 Governing Council meeting, the first in the event cluster, the President explicitly answered a journalist’s question with the words “Yes, it was discussed. QE was discussed. […]. A broad asset purchase programme was discussed, and some Governors made clear that they would like to do more”. [21] See Lemke, W. and Werner, T. (forthcoming), “Dissecting long-term Bund yields in the run-up to the ECB’s public sector purchase programme”, Journal of Banking and Finance. [22] At the same time, the dominating role of the term premium is not a general feature or model artefact. As exemplified by the righthand bar in Chart 7, there are events where rate expectations are the dominating factor. The particular date shown there corresponds to an ECB press conference during the financial crisis that induced market participants to adjust markedly their policy rate expectations.

Second, as an immediate consequence of the induced tight link between the deposit facility rate and the € our forward guidance on the official ECB rate will effectively be mapped directly onto expectations of the market-relevant € And third, capital gains for bond-holding banks can free up balance sheet capacity that banks can redeploy to generate commercial loans under the TLTRO scheme. Summary of the yield curve effects of the ECB’s non-standard policies Putting several pieces of analysis together, ECB economists have come up with the following summary assessment of how the various non-standard policy measures since 2014 have affected the yield curve. Chart 10 Compression of euro area sovereign yield curve due to ECB’s non-standard measures (percentage points)  Sources: Based on Rostagno et al. (2019). Notes: The chart illustrates the contribution of individual measures. The results are based on a Bayesian vector autoregression. The impact of NIRP (negative interest rate policy) and FG (forward guidance) on sovereign yields works via the short-term rate and the OIS forward curve, and the impact of the APP operates via term premia. As we see in Chart 10, covering the annual averages from 2014 to 2018, the APP accounted for the bulk of the estimated yield compression at the long end of the curve. Negative interest rates and forward guidance, by contrast, account for the lion’s share at the short end of the curve.