samchain/econo-pairs-v1 huggingface dataset:
This ensures that governments continue to correct economic weaknesses while the ECB is active. The involvement of the IMF, with its unparalleled track record in monitoring adjustment programmes would be an additional safeguard. The consequences of the ECB’s actions So what are the likely consequences of the ECB’s actions? Before announcing the OMT programme, we considered very carefully the possible risks – and we designed our operations to minimise them. But I am aware that some observers in this country remain concerned about the potential impact of this policy. I would therefore like to use this opportunity to go through those concerns – one by one – and explain our views. First, OMTs will not lead to disguised financing of governments. We have specifically designed our interventions to avoid this. They will take place solely on secondary markets, where bonds that have already been issued are traded. If interventions take place, they will involve buying government debt from investors, not from governments. All this is fully consistent with the Treaty’s prohibition on monetary financing. Moreover, they will focus on shorter maturities and leave room for market discipline. Second, OMTs will not compromise the independence of the ECB. The ECB will continue to take all decisions related to OMTs in full independence. It will decide whether to intervene based on its own assessment of monetary policy transmission and with the aim of safeguarding price stability. The fact that governments have to comply with conditionality will actually protect our independence.

Clearly, it was not by chance that some countries found themselves in a more difficult situation than others. It was mainly those countries that had implemented inappropriate economic policies in the past. This is also why the first responsibility in this situation is for countries to make determined reforms and convince markets that they are credible. But many were already doing this, only for interest rates to rise even higher. There was an element of fear in markets’ assessments that governments, acting alone, could not remove. Markets were not prepared to wait for the positive effects of reforms to emerge. In our view, to restore the proper transmission of monetary policy, those unfounded fears about the future of the euro area had to be removed. And the only way to do so was to establish a fully credible backstop against disaster scenarios. 2  BIS central bankers’ speeches  We designed the OMTs exactly to fulfil this role and restore monetary policy transmission in two key ways. First, it provides for ex ante unlimited interventions in government bond markets, focusing on bonds with a remaining maturity of up to three years. A lot of comments have been made about this commitment. But we have to understand how markets work. Interventions are designed to send a clear signal to investors that their fears about the euro area are baseless. Second, as a pre-requisite for OMTs, countries must have negotiated with the other euro area governments a European Stability Mechanism (ESM) programme with strict and effective conditionality.
an increase in general riskiness) is also worth highlighting: output growth falls, credit spreads rise, real credit growth falls, and real house price inflation falls. This is all as one would expect from the discussion above regarding the risk-taking channel. In both countries, inflation also rises when macroeconomic volatility increases. Charts 4a and 4b show historical decompositions derived using the posterior means of the distribution of the coefficient estimates. As there is rather a lot of information to digest in these decompositions, we show just the main variables of interest: the policy rate, and the four-quarter growth rates of output, real credit and real house prices. We also combine the  6  BIS Review 111/2010  impact of the aggregate demand and supply shocks into a single composite factor, and do the same with the credit demand and credit supply shocks so as to focus more clearly on the impact of monetary policy and macroeconomic volatility. There are a number of points to be made. First, monetary policy (the green bars) during the 2002–5 period is loose relative to the estimated historical reaction function not only in the United States – as might be expected given the evidence from Chart 1 – but also, more surprisingly, in the United Kingdom. In the United States, the Federal Funds rate is, on average, 1.5 percentage points below the rate that would have obtained if the estimated reaction function had applied. In the United Kingdom, the corresponding figure is 2.1 percentage points.

To make it easier for the participants to manage their liquidity, it will be possible to move liquidity within the RIX family from RIXRTGS to RIXINST and vice versa around the clock, which guarantees smooth and cheap settlement of payments.10 The aim is that an institution wishing to become a member of RIXRTGS will not need to be a member of RIXINST or vice versa. If we add the TIPS platform to RIX, it will thus be possible for financial institutions to settle payments in central bank money around the clock. How would TIPS affect the Swedish payment market? If the Riksbank decides to use TIPS to provide a settlement service 24/365, most private individuals and companies will not notice any difference in the short term. However, the institutions participating in RIXINST will need to adapt their message formats and processes to the regulatory framework applying for instant payments in large parts of the rest of Europe. As with all other harmonisation, there will be a balance between a possible need for tailor-made national solutions and the profits that can be reaped from full participation in the EU’s single market. Of course there may be advantages if a market “does its own thing”, but in the long run I believe that Sweden has a lot to gain in adapting to the rest of the EU in this respect. Sweden is ahead of its European neighbours in the journey towards a cashless society, and Swedish banks and FinTech companies are well-equipped to continue launching innovative payment services.
The second element is to encourage new equity capital raising, so that the burden for preserving capital ratios does not fall principally on actions, such as asset sales or reduced lending, that might exacerbate the credit crunch. We have seen a very substantial flow of new capital into the financial system much more quickly than has been the case in past crises. More will come. Those institutions that move more quickly will obviously be in a stronger position to deal with the challenges, and take advantage of the opportunities, ahead. Fiscal stimulus Monetary policy can, of course, play a powerful role in reducing the downside risks to growth, but overall policy will be more effective, particularly given the strains to the financial sector, if  4  BIS Review 27/2008  the full burden does not fall on the tools available to the Federal Reserve. Fiscal policy can play an important role. The stimulus program signed into law by the President will provide a meaningful level of support to growth, somewhere in the range of three quarters to one and half of a percentage point of GDP growth over the next few quarters. Targeted support for housing Policy can also play an important role in helping cushion the effects of the fall in housing prices and the rise in foreclosures in the United States.

I would caution against over-interpreting the detail of this chart, as there are several ways to represent aggregate supply and demand, and thus the output gap. But, detail notwithstanding, it is clear that while a gap has opened up between demand and supply during the Covid pandemic, the overwhelming feature is the coincident hit to both demand and supply. That stands in marked contrast to the more pronounced impact on demand following the global financial crisis, and persistent period of spare capacity thereafter. As well as the Covid shock, the behaviour of supply and demand also reflects the nature of the policy response, and in particular the so-called furlough scheme (the Coronavirus Job Retention Scheme). By temporarily supporting jobs, this scheme has avoided a much larger spike in unemployment, which would other things equal have resulted in a smaller fall in supply and a much wider margin of spare capacity. For a monetary policy maker interested in the output gap and how it will evolve in the recovery from Covid, it is clear we need to focus on the recovery of both supply and demand. More so than usual, the recovery from Covid requires a recovery of the supply side. Some of the effects on supply directly related to restrictions on activity and voluntary social distancing are likely to be temporary, and should start to reverse as the health outlook improves and along with the vaccination programmes enable restrictions to be eased.
But the balance sheet will likely shrink materially as the APF is unwound, and our best current estimate of the level of reserves under our proposed framework is in the range £ As I mentioned earlier, this  15  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  15  number gives no indication about the extent of QE sales, because our proposed framework allows that to be determined independently from the question of our medium term balance sheet size. The Discussion Paper we issued in August last year was intended to stimulate debate – and from that debate improve our understanding of how the Bank of England’s balance sheet should be managed in the future. It succeeded in doing so. Conversations with our counterparties have reinforced our intention to employ the framework for controlling short term interest rates that we proposed in 2018. But it also helpfully raised questions about the challenges we and participants will face during this period. As a result we will be engaging carefully on the factors that will need to be taken into account in the design of our future open market operations. I hope my comments today will encourage thinking on this topic more broadly. At times it can appear from the history of central banking that, when it comes to implementing policy, practice leads theory by a long way. But practice always has to be underpinned by a clear grasp of reality: this is the only way to achieve the Bank’s monetary and financial stability objectives.

Table 1: Current estimate of the UK PMRR based on feedback to the Discussion Paper Estimate £ PMRR base  120 – 160  PMRR buffer  30 – 90  TOTAL PMRR  150 - 250  I should stress that there is no mechanical link between this figure and the quantity of gilts that the MPC will need to sell during QT: it does not for example mean that gilt sales must stop when reserves levels hit the PMRR. As I will come on to describe, the whole point of the balance sheet framework that we are proposing is that it will allow the size of the balance sheet to be determined independently from the quantity and composition of QE and QT. Adding back the current level of banknotes and other non-reserves liabilities to the PMRR, and assuming nothing else changes, suggests that a steady-state balance sheet after QT of £ (12-18% of GDP) would be needed to deliver the Bank’s monetary policy and financial stability policy objectives. That’s materially higher than pre-crisis levels. But it’s roughly half where we are today (Chart 10), and narrower than we’ve previously indicated, reflecting the more detailed information available from the Discussion Paper feedback.18 As one cross-check, the required reduction in reserves to get to the PMRR is proportionally similar to that estimated for the United States by the Federal Reserve19. 16  https://www.federalreserve.gov/data/sfos/files/senior-financial-officer-survey-201809.pdf and https://www.federalreserve.gov/data/sfos/files/senior-financial-officer-survey-201902.pdf 17 No attempt is made to estimate any potential future rate of return effect.
At the same time, our supervisory focus on capital planning and management across firms has led to greater focus and attention on the internal processes that firms use to manage their capital, including the prudent distribution of capital to shareholders, whether through dividends or share buybacks. In the area of liquidity, again, new rules and regulations have raised both the absolute level of liquidity in firms and the quality of liquid assets (that is, assets that are readily accessible). This provides for a much stronger ability to manage through stress conditions. As many firms learned in the depths of the crisis, what was once thought to be a liquid asset quickly became illiquid as markets seized up and normal outlets for converting assets to cash evaporated. Further, our enhanced focus today on liquidity management across the range of  BIS central bankers’ speeches  1  firms we supervise has led to heightened management – and board of directors – attention to liquidity levels, liquidity risk management and liquidity stress testing. In addition, global supervisors have finalized rules – or are in the process of finalizing rules – in the areas of both capital and liquidity, including additional and more stringent rules for the largest, most systemically important firms. For these firms, additional buffers will be required, as will stronger risk management practices. 2. In addition to becoming more resilient, firms have made some progress in becoming less complex – although the progress is somewhat less measurable and less dramatic to date.

Firms have begun to take a hard look at their legal entity structures, including having identified and mapped material legal entities. This was a necessary first step for a lot of firms, which have begun the difficult task of making sense of their legal entity structures. This will be a focus of our future supervisory work on firms’ preparedness for recovery and resolution planning. Another positive step was recently made in the area of financial contracts – wherein 18 global firms recently agreed to sign a new ISDA Resolution Stay Protocol. The Protocol will provide for a stay of certain early termination rights triggered by resolution proceedings. The stay is intended to give jurisdictions time to orchestrate an orderly resolution of a troubled institution. It will be important that firms adhere to the protocol and amend ISDA Master Agreements consistent with the terms of the protocol. Firms should carry out a similar effort with respect to other types of financial contracts not covered through the protocol.
As witnessed in Japan, protracted and large-scale balance sheet adjustments can weaken economic activity over a protracted period of time. Repairing the financial sector was an important element in improving the Japanese economy. The lesson for the euro area appears to be clear: the overhaul of the financial architecture – including the establishment of a procedure for resolving failing banks – needs to be accomplished in its entirety; selective mending will not be enough. In my view, we should make use of the momentum offered by the crisis to turn these challenges into opportunities – opportunities to put our economies on a sounder footing. To underscore why I think that we need to address today’s challenges in a comprehensive manner and why institutions are crucial in achieving this, I will first briefly review the build-up and adjustment of financial imbalances both in Japan and in Europe. Then I will elaborate on how to manage the deleveraging process and the institutional changes to be implemented, before touching upon the role monetary policy has to play. Imbalances in Japan and the euro area The Japanese experience provides important lessons as it demonstrates the difficulties of emerging from a “balance sheet recession”.1 With the euro area still battling the impact of the financial crisis, an important question is: how does the current euro area economy compare with the dynamics in Japan during the 1990s?2  1  Termed by Richard Koo in Koo, R., The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession, Wiley, 2009.

While the ratio of financial sector liabilities to GDP has broadly stabilised, euro area large and complex banking groups have steadily increased the median core Tier 1 ratio from 8.3% in 2009 to above 11% in 2013.7 To strengthen their capital position banks have issued equity, converted hybrids, received capital injections and raised the levels of retained earnings. The stronger capital positions also mean that the relative share of debt in financing is reduced and substituted by more equity, which should provide a better buffer against economic shocks. After all, debt is a relatively inflexible form of financing as it requires repayments on time and in full. But the stronger capital positions have also meant that banks have been shedding assets, a process which depresses credit growth and puts a drag on the economy. In addition, as households and non-financial corporations also reduce their indebtedness, they are demanding less financing from banks. Taken together, we can expect that bloated balance sheets will contract further. It is important that this deleveraging process occurs in an orderly manner by balancing the adjustment of assets and liabilities. Most of all, unnecessary fire sales generating detrimental falls in asset prices and credit rationing for productive investments need to be avoided. Throughout the crisis, the ECB has demonstrated its ability to actively mitigate these effects by ensuring abundant funding to the banking sector through its liquidity operations.
From the mid-1980s, during and after the credit bubble, it was recognised that a substantial revision of economic policy would be necessary and that the problems created by inflation had to be taken seriously. The exchange rate was chosen as the nominal anchor. Deteriorating competitiveness due to high wage growth would no longer be remedied by means of devaluations. Instead, imbalances in the labour market would be addressed by means of a counter-cyclical policy. Substantial emphasis was placed on the importance of wage formation for developments in employment. Only when wage growth dropped below the level of our trading partners did unemployment begin to fall and the manufacturing sector began to pick up. Thus, the fixed exchange rate policy was not introduced in order to strengthen the internationally exposed business sector. On the contrary, it was a breach in the approach whereby monetary policy and “exchange rate policy” had been oriented towards safeguarding these sectors. The fixed exchange rate was an intermediate target for achieving low and stable inflation. The exchange rate remained stable up to the autumn of 1986, partly because wage growth was low and aggregate demand did not fuel pressures in the economy. Gradually, the krone began to show wider fluctuations. The experience of the last half of the 1990s demonstrated that monetary policy cannot fine-tune the exchange rate. Developments in international financial markets led to more pronounced fluctuations. High petroleum revenues, fiscal slippage and expectations of increased use of petroleum revenues also contributed to this. Wage growth increased.

The high level of wage  1  See box in Inflation Report 2000/4: Effects of an interest rate change. 2  See box in Inflation Report 2002/2: How does the krone exchange rate influence the CPI. growth fuelled expectations of continued high interest rates in Norway relative to other countries and appears to have contributed to the appreciation of the krone. The unexpected high level of wage growth required a tight monetary stance. Norges Bank increased its key rate last summer. The interest rate differential against trading partners widened and the krone appreciated. This appreciation also reflected other factors, such as uncertainty in stock markets and higher demand for NOK-denominated assets, which were perceived as a safe investment in an otherwise turbulent period. In the long run, wages must be commensurate with the value added that is generated by workers. Real wage growth is thus determined over time by developments in labour productivity in all sectors of the economy. If historical productivity growth trends persist, the long-term rate of growth in labour costs that is compatible with the inflation target is 4½%. The outcome of the wage settlements we have observed in recent years is not consistent with this. If monetary policy is to have an impact, it is important that wage growth responds to labour market tightness. Since the mid-1980s, wage growth has been markedly higher in Norway than among trading partners.
Energy price inflation will also be considerable lower ahead. In August, the enterprises in Norges Bank’s regional network noted that there had been a shift in sentiment in the Norwegian economy. An extra round of calls to some contacts in October indicated that the outlook had worsened since August. The latest reports from enterprises in Region East indicate that demand has declined since summer, with a further drop in September and October. Customers are responding to tighter lending conditions by postponing projects. The changes have occurred rapidly, and there is now considerable uncertainty among our contacts in this region with regard to developments over the next six months. The majority of the enterprises report that they will reduce investment. Many are considering workforce reductions as an alternative if the situation does not change in the New Year. The majority also envisage lower wage and price inflation ahead. In the past year, unemployment has been as low as in the mid-1980s. Seasonally adjusted registered unemployment was 1.8 per cent in October. The enterprises in Norges Bank’s regional network are expecting some reduction in the workforce ahead. There has been a slight increase in layoffs. Going forward, enterprises will probably adjust the workforce to lower output growth and reduce the use of overtime. After a long period of high housing investment and rising prices, activity in the housing market is now slowing. Tighter credit conditions are amplifying the fall in house prices.

That is because the rise of international free trade – and the stability that comes with it – has historically depended on the backing of a global hegemon. This was evident during the British Empire in the 19th century, as it was with American support in the wake of the Cold War. [3] However, major economies – led by the United States and China – are now increasingly using trade to limit the ambitions of geopolitical rivals. That could fragment world trade with potentially huge costs. The IMF estimates that severe trade fragmentation may cost global output roughly 7% in the long term – an amount similar to the annual output of Japan and Germany combined. [4] These geopolitical winds are reshaping the second feature of this new map: supply. We are seeing strategic considerations becoming increasingly important in where suppliers are located. The US Inflation Reduction Act, for example, is deliberately aimed at “reshoring” production and reducing the country’s reliance on strategic imports like batteries. [5] China is also seeking to reduce its own dependence on the rest of the world. And some surveys suggest that even firms in “non-strategic” sectors are increasingly likely to regionalise their supply chains. [6] This in turn is leading to the third key feature: the growing importance of security. With the security of supply for critical inputs no longer guaranteed, we are likely to see a new “scramble for resources”.