samchain/econo-pairs-v1 huggingface dataset:
This is a basic tenet of economics, yet to judge from the public debate it still seems to be misunderstood. Various attempts have been made to estimate the NAIRU for Sweden. If this could be done with some certainty, it would obviously be of interest. Insights into when a reduction of unemployment risks boosting inflation would be a useful guide for monetary policy. The matter is unfortunately not that simple, mainly because equilibrium unemployment is something that cannot be observed directly. Registered and structural unemployment Per cent 10  10 Registered unemployment  9  9  8  8  7  7 6  6 Structural unemployment  5  5  4  4  3  3  2  2  1  1 0  0 1990  1991  1992  1993  1994  1995  1996  1997  1998  1999  Source: The Riksbank  Assessing the level of the NAIRU for Sweden is presumably particularly difficult at present. We still do not know all that much about the long-term consequences of all that has happened in the past decade. After fluctuating around a low level for decades, possibly with a slight upward trend, with the crisis in the early 1990s, unemployment shot up in just a few years. Moreover, policy has been realigned and focused successfully on low inflation. This is likely to influence wage formation and hence the NAIRU.

1999 and 2000 forecast 10  80  Government debt  75 70  5  65 60 0  55 50 45  -5  40 35  Budget balance  -10  30 25 20  -15 90  91  92  93  94  95  96  97  98  99  00  Source: National Institute of Economic Reasearch  In the June Inflation Report we noted that as a result of measures proposed in the Budget Bill, during 1999 and possibly also in 2000 fiscal policy would probably be more restrictive than the Riksbank had assumed earlier but would still become successively more expansionary. The restrictive economic effect of fiscal policy was accordingly judged to be less marked than in the period 1994 – 97. Our scenario assumed, however, that there would be no further tax cuts next year. We foresee a government financial surplus somewhat above 2 per cent of GDP but have thus assumed that it will be used to repay government debt. In 2001, on the other hand, we assume that any surplus in excess of 2 per cent of GDP will be transferred to households. The Swedish debate about tax cuts and increased spending has become more intense as the government budget moved out of the red and is expected to show continued and growing surpluses in the years ahead. That is hardly surprising. We had exactly the same debate in the 1980s as soon as the budget deficits had been eliminated.
Ladies and Gentlemen, The final part of my talk concerns the developmental role of central banks. When it comes to financial stability, this is an often overlooked and underappreciated role. Looking back at history however, one finds a number of financial crises were associated with flawed or ill-timed financial liberalization. Thus the path set forward for the financial sector by central banks may lead to destruction as well as prosperity. The Thai financial crisis in 1997 was a case in point. Although it was an inconsistent macroeconomic policy mix that precipitated the crisis, it was the decision back in the 1970s to allow structurally risky finance companies to operate alongside with commercial banks and the creation of the Bangkok International Banking Facilities in the hope to transform Bangkok into Asia fourth financial center after Tokyo, Hong Kong and Singapore that made the financial sector vulnerable with overloaded risks. Thus, when we started anew with our Financial Sector Master Plan to guide future developments of the Thai financial sector in 2004, the two structural weaknesses were the first two to be eliminated. Fast forward to today, all eyes are now on ASEAN financial integration under the AEC Blueprint to create a semi-integrated financial market by 2020. The ASEAN financial integration framework comprises four areas, namely financial services, payments and settlements systems, capital account, and capital markets. It is noted that the target date is beyond 2015 for the AEC.

Maintaining “too low for too long” interest rate policy leads to excessive risk taking that can sink the economy. This risk-taking channel of monetary policy now features prominently in the mainstream economic literature. Today, virtually all central banks are taking financial stability considerations seriously in their monetary policy deliberation. Talk of risks to financial stability has now been mentioned frequently in several central banks’ monetary policy statements. The takeaway from this is  BIS central bankers’ speeches  1  that once their economies get back to normal, central banks in developed economies will consciously avoid keeping the policy rate too low for too long. Financial institutions must therefore prepare for a higher interest rate environment as well as volatility during the transition period. The recent emerging markets turmoil provides a fresh example of the latter, even though the current stage of QE tapering is just the tip of an iceberg of what is coming. Let me move on to re-regulation. The pre-crisis mantra was to let deregulated financial markets take care of themselves. Alan Greenspan, the former Fed Chairman who pushed to have derivatives remain unregulated, expressed that he was in “shocked disbelief” to see what happened. In addition, a number of observers, including Nobel Prize winning economist Joseph Stiglitz, believe that the repeal of the Glass-Steagall Act in 1999, which allowed commercial banks to engage in investment banking activities, was among the major factors behind the crisis.
This, combined with a business model in which the loans were packaged, turned into securities and sold on the market, meant that the incentive for lenders to correctly assess and subsequently monitor the risks was very low, since they did not retain the risks of the loan. Not only were the advantages associated with a model of this kind – which allows the risk assumed by the institutions to be managed with greater flexibility – not correctly harnessed, but the model eventually gave rise to transactions in which institutions had no incentive to select borrowers correctly. They became mere intermediaries for the credit granted by the system, mere commission earners, interested solely in the volume of operations. Many institutions also made mistakes in their management systems, such as their staff remuneration arrangements. The remuneration of the managers of many institutions was linked to short-term profits, without any consideration of the levels of risk being assumed to obtain them. Other banks, especially in central and northern Europe, made mistakes not so much in their lending as in their securities investments, using very unrealistic, or unjustifiably optimistic, risk assessments. In a context of abundant liquidity at the international level, many financial institutions sought higher profits by investing in this type of complex instrument associated with the subprime segment as a mechanism to compensate for the fact that lending margins were narrower than in the past, relying excessively on the assessment of their credit quality by rating agencies.

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An important advantage of this option would be to eliminate the procyclicality of the micro-prudential liquidity regulation in its current formulation; a disadvantage would be an added layer of complexity.” (Tobias Adrian and Markus Brunnermeier) According to Carosio, another solution would be the one proposed by Perotti, Enrico and Javier Suarez (2009) “to levy charges on banks funding maturity, a proxy for systemic liquidity risk” and the one proposed by Tobias Adrian and Markus Brunnermeier, “to tie levies to measures of systemic risk” or the one proposed by Nicoletti Alltimari, Sergio and Salleo (2010), “to devise market instrument that make liquidity available on a contingent basis, when a systemic trigger is activated”. Undoubtedly, these issues require additional analysis and work. In the area of the microprudential regulation, the Basel Committee, as we all know, in December last year proposed an impressive collection of reforms aimed at increasing the resilience of the individual financial institutions in case of panic and stress. Without elaboration, I would only mention the following: First, increasing the quality and the quantity of the capital; Second, increasing the capital charges on the basis of the trading portfolio; Third, introducing of a leverage ratio for the financial institutions. Fourth, improvement of risk management and disclosures, as the crisis has revealed the weaknesses of the so-called “improved” risk management techniques on the basis of the internal risk models. Fifth, special attention should be paid to the so-called counter party credit risk from OTC derivatives.

Central banks can benefit from, and rely on, extended access to supervisory information and intelligence, especially on systemically relevant intermediaries, in order to better assess risks and vulnerabilities of the financial system as a whole (A. Orphanides, May 2010). It is not necessary to say, because it is obvious, that I share the same opinion. IV. policy. The crisis also showed that there is no financial stability by pursuing profligate fiscal  The latest developments in Europe whetted this issue. The decisions of the governments, as one of the basic economic actors, have enormous influence on the aggregate demand. Therefore, the fiscal policy has key role as a shock absorber, contributing to the maintenance of the financial stability. However, we witness that many governments are ignorant to that. Why it is so, is not hard to guess, but watching this “sobering” in Europe, it is obvious that the crisis helped to firm up the following perspectives: 1) The fiscal policy should be countercyclical. It should have cyclically adjusted balanced budget rules adopted; 2) The fiscal policy must not be a source of shocks. If looking over the fiscal deficits in certain countries, it can be perceived that, there, it is far from that;  BIS Review 90/2010  7  That is why the old ideas for the need of establishing independent fiscal agencies and minimal framework which will guarantee independence to the statistical agencies competent for the national accounts, resurrected. It is impressive what Germany commenced.
France is not unique in this respect as several European countries have already implemented macroprudential measures. Yet we should not overestimate their effectiveness. In my view, monetary policy cannot close its eyes to financial stability, as suggested by those purists who favour a strict “principle of separation”. Instead, I favour a form of intelligent coordination, and that will be one of the challenges for our next strategic review. Monetary policy must remain accommodative but it also has to be more attentive. The necessary follow-up with fiscal and structural policies The second limitation is again a humble truth. As we have seen, monetary policy has gone beyond the call of duty. But it is not – now less than ever – omnipotent, and it cannot perform miracles. Monetary policy has no influence  Page 13 of 14  over the structural changes that are behind the exceptionally low level of the natural interest rate. To fix the euro area’s investment dearth – both in the private and public sector – relative to its savings surplus, structural growth policies are needed that boost innovation and productivity. It also means making more appropriate and differentiated use of fiscal policies. In this regard, the euro area is underusing its fiscal space: its public debt (84%) and deficit (0.9%) are lower than those of the United States (106% and 5.6%) or Japan (238% and 3% in 2019). Source: IMF  Fiscal policy, especially in those European countries with a surplus, needs to be exploited more actively and selectively.

Second, should regulators be proactive in leading the agenda of change or keep an active watching brief and intervene only 2/6  BIS central bankers' speeches  when necessary? Third, how do we balance between oversight and developmental objectives? And the fourth, what are the right set of guiding principles? I would like to turn to these questions for the second half of my speech. Importantly, I believe that regulators have to play a driving role to foster an enabling environment for an efficient and vibrant payment landscape, whilst actively managing the associated risks. Innovation should be industryled. Regulators should instead focus on building the right preconditions for the payment systems to develop in a resilient and progressive manner. In this regard, I would like to share four key focus areas for the payments regulatory agenda moving forward: First, to preserve trust to safeguard the resilience and integrity of payment systems; Second, to apply proportionate regulation to effectively manage risk, whilst not stifling innovation; Third, to enable connectivity through collaboration towards greater standardisation and interoperability; and Fourth, to promote efficiency and innovation through greater competition. Preserving trust Let me start with the first focus area of preserving trust. Trust is at the heart of any effective payment system. Consumers, businesses and governments must be able to trust that a payment made is final, that it reaches the intended beneficiary, and that the value transferred is accurate. Without these elements, a payment system or service cannot serve its purpose.
But the present magnitude of the U.S. external imbalance seems difficult to reconcile with plausible estimates of future productivity and potential output growth. The demographic shifts underway in the major economies seem to have contributed to an increase in demand for longer-dated fixed income assets to fund growing pension liabilities, and these shifts have been reinforced by actual and anticipated changes in the regulations that affect pension fund managers. These changes may have operated to push up the price and lower the yield on longer maturity bonds, but the effect of these changes seems likely to be small in comparison to the changes in the behavior of forward interest rates. The rise in the current account surplus that is the counterpart to the U.S. deficit has focused much attention on the rise in measured savings relative to investment that has emerged in many economies. But the implications of this are ambiguous. If the rise in so-called excess savings principally reflected  2  BIS Review 18/2006  concern about future economic opportunities and weak investment demand, then this might imply a decline in future real interest rates. But the pessimism implied by this view is hard to reconcile with the relatively robust pattern of investment growth, particularly in those countries with some of the larger external surpluses. It is hard to reconcile with the fact that growth in aggregate demand globally has been reasonably strong through this recent period of relatively low forward interest rates.

One of the major questions in the current environment is whether foreign investors will continue to finance the current account deficit given the current uncertainties about the conjuncture. If not, there will be important consequences for the US and world economies. A powerful lesson from recent problems in Japan and East Asia has been the debilitating impact of weak balance sheet structures. The need by both borrowers and lenders to put overstretched balance sheets on a sustainable footing reduces the potential of expansionary monetary policy to restore investor confidence and so can lead to a deeper and more prolonged downturn in domestic demand and economic activity. The issue in that case for the rest of the world would be where an increase in domestic demand in their own countries would come from to fill the gap left by the weaker domestic demand in the US. So it should come as no surprise that, in the latest issue of the Bank of England's Financial Stability Review published in December, the strength of the dollar over the last few years, the size of the US current account deficit and its counterpart in the personal and corporate sector deficits were identified as amongst the most significant issues in the global conjuncture. A reversal of foreign inflows, leading to a correction in both the dollar and US domestic asset prices, would have an impact far wider than the US.
The strategy is now published as soon as it is adopted and prior to the relevant strategy period. The interest rate affects the economy with a lag The objective of monetary policy is low and stable inflation. The instrument is the interest rate. The interest rates influences inflation with a lag and with varying intensity. As interest rates fall, household and local government consumption and investment will tend to accelerate. Higher demand leads to higher output and employment. Wage growth may pick up. Higher wage growth combined with higher profit margins will result in higher inflation. Lower interest rates will normally lead to a depreciation of the krone. Imported goods will then become more expensive and inflation will accelerate. Expectations play a key role in price and wage formation, and they are influenced by the interest rate. Expectations concerning future inflation and economic stability have considerable impact, not least in the foreign exchange market. More stable inflation Current inflation is low, but our recent history shows that without a nominal anchor inflation becomes high and variable with substantial effects on output and employment. In the 1970s and 1980s, average annual inflation in Norway was over eight per cent. The fixed exchange rate regime, which was introduced in 1986, reinstated monetary policy as an instrument of economic policy in Norway and laid the foundation for lower inflation and more stable economic developments. Like other small, open commodity economies, Norway also experienced that it was not possible to maintain a stable exchange rate as a nominal anchor.

Inflation targeting was therefore introduced in 2001. High and variable inflation usually accompanies instability in output and employment. But inflation should not be too low over time either. This is partly because the structure of the economy evolves over time. Demand for labour with different qualifications changes. Restructuring requires changes in real wages and relative wages. Nominal wages do not readily fall. With some measure of inflation, real wages and relative wages can be changed without reducing nominal wages. Some degree of inflation will oil the economic machinery. In periods, it will be appropriate to stimulate the economy with low, or even negative, real interest rates. If inflation becomes entrenched at a very low level, the interest rate will be less effective as an instrument because it cannot be set below zero. If the economy is again exposed to unexpected negative disturbances, we will have little scope for manoeuvre. Stability in output and employment In the long term, output and employment are determined by the supply of labour, capital and technology and by the ability to adapt. Monetary policy can contribute to smoothing fluctuations in output and employment. Norges Bank weighs stable inflation against stable output and employment. 2  BIS Review 53/2004  The output gap is a measure of the difference between the actual level of output and potential output. Potential output, which is the level of output that is consistent with inflation over time, is not directly observable and must be estimated.
In doing so I have posed a question. Is the Global Regulatory System fit for purpose in the 21st Century? We could all save time if I answered ‘yes’ or ‘no’ and sat down. But I will indulge myself with a few reflections, based on eight years as a regulator, before I give you my considered response. The Asian crisis and its aftermath In the immediate aftermath of the Asian financial crises of 1997-98, there were widespread calls for a fundamental reform of the international financial architecture. It was argued that the traumas of Korea, Indonesia and Thailand, pointed to fundamental weaknesses in the international financial system. These were countries with relatively sound fiscal positions, enjoying rapid economic growth, yet when a crisis of confidence hit, their financial systems collapsed with alarming speed. This experience, which took the international financial institutions by surprise, appeared to demonstrate both that the IMF’s financial surveillance was inadequate, and that its crisis management tools were similarly lacking. Though it is also appropriate to point out that the markets did not see the crisis coming either. There are those like Jeffrey Sachs and, from a different perspective, Joe Stiglitz, who have used this failure to mount a major assault on the policies and practices of the Fund over many years. These disputes rumble on, as Stigiltz’s ill-tempered ad hominem attack on Stanley Fischer (in Globalization and Its Discontents) demonstrated. Personality-driven disputes are entertaining for the press.

In Norway, the lead-up was similar with rising house prices, accelerating credit and consumption growth and lower saving. Interest rate setting managed to stabilise developments somewhat. Economic policy was perhaps more successful in Norway and the government had larger buffers. But the soft landing in the Norwegian economy so far is also attributable to a good measure of luck, not least as oil prices rapidly rebounded after falling from USD150 per barrel to 35. Stricter requirements for systemically important banks The bankruptcy of the US investment bank Lehman Brothers rapidly led to a general crisis of confidence in the financial system. Central banks and government authorities implemented extensive measures to mitigate the impact of the crisis. At a meeting in Washington on 10 October 2008, the G7 countries stated that they would protect their systemically important institutions. 9 This was a decisive measure. 8  See Van den Noord, Paul (2005): “Tax Incentives and House Price Volatility in the Euro Area: Theory and Evidence”, Économie Internationale 101, pp.29-45. This study shows that house price volatility is higher in countries where tax regimes favour owner-occupied housing. See also IMF (2004): World Economic Outlook, September, p.81. The article shows that house price volatility is higher in countries with predominantly adjustable-rate mortgages. 9  IMF (2008): “Communiqué of the International Monetary and Financial Committee of the Board of Governors of the International Monetary Fund”, 11 October.