samchain/econo-pairs-v1 huggingface dataset:
Banque de France / Deutsche Bundesbank conference Paris, 21 June 2018  Speech by François Villeroy de Galhau, Governor of the Banque de France  “Monetary policy making under uncertainty”  Press contact: Mark Deen (mark.deen@banque-france.fr). Page 1 sur 5 Ladies and Gentlemen, Good morning and welcome to Paris for the 6th joint conference organised by the Deutsche Bundesbank and the Banque de France. I would like to thank the organisers Emmanuel Fahri, Emanuel Moench and Benoit Mojon for assembling such an interesting set of papers. I will return to the topic of the conference later. I would like to use my opening remarks this morning to discuss a highly topical challenge for monetary policy: how to enhance confidence and how to respond to policy-induced uncertainty. We obviously live in an increasingly uncertain world. The lack of predictability of US trade policy – or worse, its protectionism - and the lack of clarity about Brexit risks reversing many of the gains of a globally integrated economy. The euro area itself is seeing a return of uncertainty. Winston Churchill once famously said: “true genius resides in the capacity for evaluation of uncertain, hazardous and conflicting information”. Obviously we, Central Bankers, do not claim to be geniuses, but our duty as policy makers, is to deal with this uncertainty, while sticking to our mandate. I. How to enhance confidence? I don’t need to repeat today the important decisions we announced at our recent Governing Council meeting in Riga.

Theoretical models often assume the existence of a central bank reaction function. A well-known reaction function can be a powerful tool in stabilizing output and inflation because yield curves can adjust in anticipation of future policy in line with the evolving outlook for the economy. To return to my football theme, Mervyn King referred to this as the Maradona theory of interest rates. But credible reaction functions don’t fall from the sky and need to be earned by communicating and acting consistently through time. We are and will remain predictable for our stakeholders. Through its forward guidance, the Governing Council has also indicated its intention to move gradually and in accordance with the data. Faced with uncertainty about the strength of the transmission mechanism, we should be guided by pragmatism - the level of inflation relative to the medium-term objective and gradualism. The final C is for clarity. Central bankers should try to spell out what they will and won’t do as much as possible. On the first part, we were clear in Riga; on the second part, let me stress that we cannot fully compensate for the uncertainty created by other policy-makers; nor can we fully offset their effects. We have shown in the past few years that monetary policy is flexible, and we have been willing to use every instrument within our mandate to respond to too low inflation.
In a rather arbitrary exercise I have looked at the return from investing in 7-10 year government bonds in different countries from mid-1986 (selected only because it was the starting point of the particular data set) to the present. The assumption is that the non-dollar currencies were purchased out of US dollars at the outset and changed back at the end, so that the comparison is on a US dollar basis. It emerges that the average annual return for the period was nearly 12% for Australia, 11% UK, 10.5% Japan, 10% Canada, 8% Germany and 6.5% Switzerland - with the US itself at 8%. How many of you would have got this right ex ante? I hesitate to try to draw any profound conclusions from this, other than that, with US inflation averaging about 3%, there was clearly a reasonable real return to be had everywhere. You did not have to be greedy to survive. The argument of the monetarist school that - to put it in a slightly condensed form - monetary factors do not have a lasting effect on real developments, was especially fashionable during the 1970s when governments were criticised for conceding to inflation in the mistaken belief that they could thereby sustain or stimulate activity. Subsequent experience has proved, if anything, that the optimal monetary stance is, quite simply, a continuing steady one, and that variance on either side - whether too tight or too loose and after allowing for any real shocks - may incur lasting economic losses.

First, Spain faces the challenge of reducing the unemployment rate and the temporary employment ratio, which have been persistently high in recent decades. In particular, the unemployment rate of the Spanish economy was, on average, 15.9% over the 2000-2019 period, as against 9.3% in the euro area. Also the share of temporary employment was 28.3% over the same period in Spain, but only 15.4% in the euro area. Young people (those under the age of 24) have been particularly affected by this instability, with their rate of unemployment (32.5%) and their share of temporary employment (69.5%) standing well above the euro area average in 2019 (15.6% and 52.4%, respectively). Reducing this high employment instability is key, especially for young workers, given its adverse economic effects in many spheres. For example, employment instability affects the 3  accumulation of workers’ human capital and can thus have very persistent effects on their working lives. Furthermore, it also increases uncertainty over the future income path of the affected workers. This not only has consequences for spending decisions, but also for emotional well-being, the formation of new households and the birth rate. In this context, one of the main objectives of the labour market reform enacted in 2022 in Spain is precisely to combat the high proportion of temporary employment. And indeed, since the approval of this legislation, permanent hiring has quickened significantly and temporary hires have slowed, with permanent contracts increased most among permanent seasonal workers and permanent part-time workers.
As a creature of the G10, the Committee could originally lay claim to coverage of most of the world’s truly internationally active banks. But as banks and financial markets became increasingly integrated across national borders, this claim to be the standard setter for all internationally active banks became more and more difficult to justify. During the 1990s and 2000s, the Committee made good use of its Core Principles Liaison Group to seek advice from members outside the G10. The CPLG’s contribution was highly  2  BIS central bankers’ speeches  constructive when Basel II was developed, for example. But as the size and importance of jurisdictions “outside the tent” grew, even this arrangement became increasingly untenable. And so, in 2009, the Committee essentially stepped up from a G10 to a G20 foundation as it sought a truly coordinated response to the global financial crisis. Indeed, we now have more than 40 organisations representing 27 member jurisdictions around the table. As a result, the Committee’s coverage of global banking assets has gone from about 60% to 90%. This much greater inclusiveness lends, in turn, greater legitimacy and credibility to the Committee’s standards, as they are now set by a process that is truly reflective of international markets. The fourth key influence is a more recent one – the shift in thinking from a micro- to a macroprudential perspective. For much of its life, the Committee focused primarily on microprudential issues.

This reaction seems to reflect the incentive of managers and shareholders to  23  Indeed, in the context of the recent turmoil, while the annual growth in undrawn credit lines, following an increase up to mid-July 2007, has been on a declining trend and moved into negative territory in the course of 2008, the annual growth in the draw-downs of credit lines has been increasing up to the third quarter of 2008. 24  This is based on information derived from the Eurosystem’s Bank Lending Survey. favour remuneration on equity and human capital, rather than long-term investment. This is not in line with the macroeconomic objectives. This is why we insist that the profits made in these months by the banking sector – which were obtained thanks to the interventions by the policy authorities to keep the system going, and thus ultimately by the taxpayers – should be used to increase the capital rather than to reward the banks’ managers and shareholders. This applies not only to banks that have received direct assistance through guarantees and public capital injections, but also to the indirect benefits obtained as a result of low interest rates. 5. Conclusion  The pre-crisis period was marked by unsustainable credit policies by the banks and, more generally, by the financial system. These policies were encouraged by inadequate supervision and slack prudential regulation, and also by the excessive influence the financial system had on regulatory mechanisms. This caused the biggest crisis of the post-war period.
The assessment was thus that there are several factors pointing towards a favourable development in the global economy going forward, but there still remain some causes for concern. The funding crisis in Greece has still not been resolved, and the situation in Russia and Ukraine is also creating continued uncertainty. Rising global inflation in the years ahead Internationally, inflation has fallen in recent years and is under the inflation target in many countries, see Figure 2. The falling oil price over the past year has contributed to this downward trend. However, the effects of the falling oil price on inflation are expected to gradually decline. Unemployment is also falling in many parts of the world and this trend is expected to continue in the years ahead. This contributes to a higher rate of wage increase and rising demand for goods and services. International inflation can therefore be expected to rise in the coming years. Recovery in the rest of the world contributing to a broad upturn in Sweden Sweden is a small, open economy and therefore dependent on what happens in the rest of the world. The weak international demand following the financial crisis has thus led to weak development for Swedish exports. But a continued recovery abroad will benefit Swedish exports and growth going forward. Domestic demand is expected to continue growing relatively fast, partly due to relatively strong private consumption. The rising wealth level in the household sector and the low interest rates create scope for relatively high growth in consumption.

With regard to the euro area as a whole, optimism among households and companies has been somewhat subdued in recent months, probably as a result of the crisis in Greece. However, the most recent survey in July indicates that optimism among companies is rising again, which may be due to the third loan programme for Greece appearing to be within reach. GDP growth in the euro area in the second quarter, compared with the same quarter last year, was 1.2 per cent according to our forecast. US developments still looking good We see continued signs of good economic growth in the United States. GDP rose by just over two per cent in the second quarter, compared with the same quarter last year, see Figure 7, entirely in line with our forecast. Household consumption remains strong. Exports also rose significantly in the second quarter despite the dollar appreciating for a period of time. The housing market is continuing to recover and this creates an increasing number of jobs. Unemployment fell to its lowest level since 2008. The US Federal Reserve signalled at the end of July that it still has plans to raise its policy rate this year. The labour market is expected to be able to develop better than was previously believed an only a “few” further improvements are needed before monetary policy may need to be tightened. However, although most signs are pointing in the right direction in the US economy, the recent statistics on wage developments have been at relatively low rates of increase.
My fourth bit of advice is to continue to build your human capital. That means seeking out jobs and opportunities that give you new experiences and skills. Keep up with your mentors and continue to cultivate relationships and build your network. Education isn’t just about college course work, it should be a lifelong experience. If your employer asks you do something new – don’t shy away from it. Instead, think of it as a wonderful deal: Your employer is going to pay you to deepen your skills and knowledge base. You will be paid to become more valuable. For me, the ability to build my human capital has happened – in spades – several times. The first occurred here at New College and at Berkeley for graduate school. Here I learned to really read critically and how to write – the one literature course that I mentioned earlier notwithstanding. The second was the opportunity early on in my career to become involved in macroeconomic forecasting and policy analysis. Up to that point, I had been a regulatory economist. I had only taken one course in macroeconomics in graduate school and it was the only course on which I received a “B” grade – I had not revealed any great affinity for that subject. At first, the work was stressful. When people asked me questions, I wasn’t sure whether I was supposed to know the answers or not. At first, I felt quite ignorant, but eventually that passed.

Besides these measures, aimed at getting the credit market to function more efficiently, the Riksbank has taken more conventional monetary policy measures. The repo rate has been lowered during the autumn by a total of one percentage point – starting with 0.5 percentage points on 8 October in a joint action with the Federal Reserve, the Bank of England, the ECB, the Swiss National Bank and the Bank of Canada, followed by another 0.5 percentage points on 22 October. The purpose of these interest rate cuts was to mitigate the ongoing financial crisis’ effects on output and employment in Sweden while continuing to target 2 per cent inflation. With the autumn’s serious disruptions to financial markets, however, we probably should not expect that policy rate adjustments will have the usual effects. The adjustments have not affected market interest rates in the same way as they do under normal circumstances. 9  ”Policy rate setting and the monetary policy steering system”, speech by Riksbank Governor Stefan Ingves at Handelsbank, 28 April 2008. BIS Review 153/2008  7  Conclusion Let me now conclude. Major changes are in progress in the securities markets and in the financial infrastructure. The systems for securities transactions in the Swedish financial infrastructure are becoming increasingly integrated with systems abroad. This places new demands on cross-border cooperation. Two problems to do with the infrastructure have, moreover, come to the fore this autumn: counterparty risks and insufficient market transparency.
Exit strategies In line with other countries, the Norwegian authorities implement extensive measures to improve banks’ access to liquidity and longer term funding after the Lehman Brothers failure. This contributed to improved funding conditions for Norwegian banks. As the situation in financial markets returns to normal, the measures will be wound down. Recently, we have seen an improvement in money and credit markets. We have therefore started reducing the use of unconventional measures. In recent months, liquidity has not been supplied through currency swap lines or liquidity in foreign currency. Loans at long maturities have not been provided since February – several of the loans have now matured. As markets are now returning to normal, liquidity supply will be adjusted so that money market rates reflect the key policy rate. We want the banks to redistribute liquidity in the interbank market. The underlying structural liquidity in the banking system, i.e. liquidity excluding Norges Bank’s liquidity provision, has been negative in recent years. Structural liquidity is influenced by ingoing and outgoing payments via the government’s account in Norges Bank and is projected to increase ahead, primarily because the government can partly finance increased lending to state banks, payments from the Government Bond Fund and the State Finance Fund and share subscriptions by drawing on their large deposits in Norges Bank. The banking system’s demand for central bank loans will then decrease considerably.

In the field, this is referred to as measures that increase the risk of moral hazard. 10  In bad times, the capital adequacy requirement is reduced to 1.5 times the international minimum requirement. See Swiss Federal Banking Commission (2008): “SFBC and large banks agree to set higher capital adequacy targets and introduce a leverage ratio”, press release 4 December. 11  See Myners, Paul (2009): “Developing a New Financial Architecture: Lessons Learned from the Crises”, speech at the Financial Times Global Finance Forum, 18 September, HM Treasury. The same theme is also dealt with in Bair, Sheila (2009): “Remarks by FDIC Chairman Sheila Bair to the International Institute of Finance, Istanbul”, FDIC, 4 October. 10  BIS Review 131/2009  I can provide an example. A creditor may for example assume that big banks are in practice “insured” by the authorities, which will also be reflected in rating agencies’ assessments. Banks considered systemically important receive a higher rating. As a result, funding costs for these banks are lower, allowing them to increase leverage and expand even further. Reducing the procyclicality of bank behaviour Both international studies and Norges Bank studies indicate that the current capital adequacy rules, Basel II, amplify the procyclical effects arising from bank behaviour. 12 During an expansion, bank earnings are high. Ample supply of capital leads to high credit growth. In a  12  See Andersen, H. (2009), “Norwegian Banks in a Recession: Procyclical Implications of Basel II”, Working paper 2009/4, Norges Bank , and Kashyap, A.K.
In associated guidelines, a number of such services are identified including:   Taking, managing and transferring deposits;    Providing flexible payment mechanisms such as debit cards;    Making loans or other investments; and    Offering financial advice or other business services. FISIM is estimated for loans and deposits only. The calculation is based on the difference between the effective rates of interest (payable and receivable) and a “reference” rate of interest, multiplied by the stock of outstanding balances. According to SNA guidelines, “this reference rate represents the pure cost of borrowing funds – that is, a rate from which the risk premium has been eliminated to the greatest extent possible, and that does not include any intermediation services”. 2 For example, a £ loan with a 9% interest receivable and a 4% reference rate gives current price FISIM on the loan = £ x (9%–4%) = £ And for a £ deposit with a 3% interest payable and a 4% reference rate, this gives current price FISIM on the deposit = £ x (4%–3%) = £ Overall, estimated current price FISIM accounts for a significant share of gross output of the banking sector (Chart 7). Estimating a real measure of FISIM is fraught with both conceptual and computational difficulties. In the earlier example of the second-hand car dealer, statisticians can use the number of cars sold as an indicator of the volume of gross output. But the conceptual equivalent for financial intermediation is not clear.

In effect, all retail payment services are charged at a zero up-front fee,  12  BIS Review 95/2010  except large-value payment transfers through CHAPS 6 (which are typically charged at around £ This charging schedule is not well aligned with marginal costs. It encourages bundling of payment services and the charging of latent or hidden fees on other transactions services – for example, overdraft fees. Explicit charging for retail financial services would increase transparency and reduce the scope for distortions in the use of these services. High returns on treasury management services also present something of a puzzle. These include transactions, information and custodial services to clients. None of these activities are especially expertise-intensive and the market for these services ought in principle to be contestable internationally. (b)  “High risk/high return” business activities  The higher risk activities associated with finance, such as commercial and investment banking, do not on the face of it appear to yield as high returns on equity. Nonetheless these returns, at around 20%, are above levels in the non-financial sector. Investment banking activities are, in risk terms, a mixed bag. They comprise fairly low-risk activities, such as (merger and acquisition) M&A advisory work, with higher-risk activities such as securities underwriting and proprietary trading. To complicate matters, banks’ annual accounts data do not differentiate simply between these activities – for example, between market-making and proprietary trading activities in fixed income, currency and commodities (FICC) and equities. Chart 37 provides a revenue breakdown of US investment banks’ activities.
Greater collaboration will be important to create greater synergy of expertise in applied research and development in Islamic finance. Initiatives by industry associations collaborating with local and international research institutes and academia to seek for new global research findings and breakthroughs will enhance the potential for increased product development activities. This Colloquium that is organised by ISRA following the success of the inaugural Colloquium last year, to discuss the new research findings for the various segments of the Islamic financial industry with the expectation that it will contribute to opening new horizons for the future development of Islamic finance. On this note, let me wish you a productive and successful Colloquium. I would also like to congratulate ISRA on the launching of its new Islamic Financial Knowledge Repository. BIS central bankers’ speeches  3

Philipp Hildebrand: Global economic prospects and key challenges for monetary policy Summary of a speech by Mr Philipp Hildebrand, Member of the Governing Board of the Swiss National Bank, at the Money Market Event, Zurich, 23 March 2006. The complete speech can be found in German on the Swiss National Bank’s website (www.snb.ch)  *  *  *  Summary Current economic developments are basically in line with the SNB’s expectations. Global economic activity is robust and the outlook is bright. The SNB expects broad-based growth of over 2% for 2006 and a moderate rate of inflation of approximately 1%. In addition to the usual economic risks, monetary policy today is faced with three key challenges. First, the effects of globalisation on inflation must be anticipated. Second, the way in which the interaction between globalisation and an ample supply of liquidity affects the price development of several assets needs to be analysed. The SNB's monetary policy concept enables it to take a long-term view and to recognise possible distortions early on. Third, identifying the neutral interest rate has become more difficult in today's environment. Many factors tend to support a lower neutral interest rate, while others would support a higher neutral rate. Against this background, the SNB will continue the gradual normalisation of its monetary policy. The scale and timing of this normalisation process will depend on further economic developments. Owing to a favourable inflation trend and well-anchored inflation expectations, we are in a position to cautiously approach a neutral interest rate level.