samchain/econo-pairs-v1 huggingface dataset:
The safe haven effect leads to a form of Dutch disease which cannot leave the central bank indifferent. This term refers to the state of the Dutch economy following the discovery of natural gas in the North Sea in the 1980’s. This significant discovery and the boom it generated in the energy-related sectors of the economy led to an overvaluation of the Dutch currency. This, in turn, had a severe negative impact on large sectors of the real economy which did not directly benefit from the discovery. There is, however, a difference between the “Dutch disease” and the impact of the demand for a safe haven currency. In the second instance, the “disease” takes on a pernicious form as it negatively affects the economy, without the latter benefitting from the initial positive effect of a newfound natural resource. It can further be argued that safe haven flows in an environment marked by extreme uncertainty and a world-wide dearth of safe assets led to a profound disconnect between the  BIS central bankers’ speeches  7  value of the Swiss franc and the reality of the Swiss economy. The scale of this disconnect could in turn explain the extreme market volatility we have witnessed this summer. Indeed, another segment of the academic literature explains that, in such extreme market conditions, coordination problems can arise, causing so-called “stabilizing investors” to remain on the sidelines instead of entering their trades, which would normally have a stabilizing effect.

For the SNB, as Switzerland’s central bank and monetary authority, the ECB’s project raised the issue of whether the Swiss franc should be included as a settlement currency on the  9  In October 2000, the SWX-Repo was integrated into Eurex under the name Eurex-Repo. 10  Markets in Financial Instruments Derivative: This European law aims to increase competition and consumer protection in investment services. As of 1 November 2007, it replaced the Investment Services Directive. 11  SIX Group Media Release, 15 March 2011. 4  BIS central bankers’ speeches  T2S platform. Although the formal decision was solely the responsibility of the SNB, in the spirit of the “Gemeinschaftswerk” the central bank consulted all stakeholders (including the SIX Group) before reaching an informed decision. On the basis of the stakeholders’ costbenefit analysis, which highlighted the complexity of the market infrastructure challenges confronting the Swiss market, the SNB decided not to include the Swiss franc as a T2S settlement currency at this stage12. That said, though Switzerland decided to stand back from this process, T2S will nevertheless impact the Swiss market and accelerate structural reforms of Switzerland’s FMI, which will in turn affect our money market operations. After all, securities denominated in foreign currencies are accepted as collateral on the Swiss repo market. In fact, collateral denominated in euros account for about 50% of the posted securities. In the future, settlement of these securities and potentially also of the securities denominated in other eligible currencies will involve some use of the T2S infrastructure.
Developments in international equity markets and the risk of higher oil prices also contributed to strengthening the krone. Activity in the world economy picked up in autumn 2003 from a very low level. After expanding sharply for several quarters, the US economy showed slower growth in the second quarter of this year. Economic growth has picked up from a low level in the euro area. Economic growth has also gained momentum in Sweden and the UK. Strong growth in the US and China exerted upward pressure on commodity prices in 2003 and the beginning of 2004. Oil prices have risen considerably during the summer. Several central banks have raised interest rates. Interest rate increases are expected in a number of countries. Inflation is low Consumer price inflation in Norway declined sharply through 2003. A number of factors appear to have contributed to the decline. The appreciation of the krone through 2002 pushed down import price inflation. At the same time, a change in trade patterns and external economic conditions have resulted in an unexpectedly sharp fall in import prices, even when measured in terms of what Norwegian  BIS Review 53/2004  3  importers pay in foreign currency. The change in trade patterns has made a considerable contribution to the sharp decline in prices for clothing, footwear and audiovisual equipment. Rapid technological advances have also pushed down prices for audiovisual equipment. In Norway, competition has probably increased in retail trade and other service sectors in recent years.

The international division of labour is shifting, and when faced with major changes it is a disadvantage for Norwegian business and industry that costs are high. Credit growth Total credit is expanding broadly in line with growth in nominal GDP. However, the composition of credit growth has been giving mixed signals in terms of interest-rate setting over the past year. Household debt accumulation is high, while it is low in the enterprise sector. Household debt has increased sharply since 1994. The rise in the value of dwellings is one of the main factors behind growth in household debt. House prices have risen by an average of around 9 per cent over the past 10 years. High and persistent house price inflation may contribute to holding up credit growth even after prices have levelled off. Since only a portion of the housing stock is sold each year, there will for a long period be some dwellings that are sold at a higher price than when they were last sold. This contributes to sustaining credit growth at a high level. This probably reflects a structural adjustment to the deregulation of the housing and credit markets in the 1980s, after many households suffered financial distress in the wake of the relaxation. Homeowners with dwellings that have risen in value now have greater scope for taking up new mortgage-secured loans, using mortgage-equity withdrawal to finance consumption and other investments.
The fact that the variables to which monetary policy responds are assumed to be known at the time of decisions contributes to this. The conceivable objections to basing monetary policy on simple rules of this type concern their very simplicity. An economy is constantly being hit by shocks of different types. Neither firms nor households behave mechanically. It is therefore not to be expected that economic policy can be boiled down to some kind of auto-pilot. Allow me to illustrate this with a couple of examples. A first objection to basing monetary policy on a simple Taylor rule is that the rule assigns too much weight to a particular indicator of the output gap. The output gap is a central concept in macro theory and economic policy but that does not lessen its complexity. Potential output tends to vary over time. Changes in such factors as demography, technology, tax and transfer systems or other important components temporarily or permanently affect productivity growth and labour supply, with an impact in turn on potential output. Although considerable progress has been made in real business cycle theory when it comes to the importance of supply shocks, we unfortunately do not have a clear intellectual framework for the forces behind potential output’s variations in the short and medium term. Changes in the output gap are therefore difficult to pin down exactly in stable measurements. The methods used to estimate potential growth and the output gap from econometric models tend to yield conflicting results that are also unstable over time.

In addition to these objections to the simple Taylor rule it can be noted that there is a lot of evidence to the effect that instead of being stable, the equilibrium interest rate in the equation varies with the potential growth rate. This is a view that can be traced back to the Swedish political economist Kurt Wicksell’s notion of a “natural interest rate”. A monetary policy based on forecasts I should now like to present some reflections on the forecast-based monetary policy we undertake at the Riksbank. First of all, an inflation targeting policy based on forecasts has several basic characteristics in common with the other alternatives I have been discussing. (This, however, does not apply to the alternative of basing policy solely on CPI outcomes.) One common denominator is the fundamental philosophy and aim of safeguarding the value of money. Monetary policy strives for price stability as a way of providing a nominal anchor for the economy. Another similarity is the medium-term perspective rather than short-term activism. This in turn calls for a forward-looking perspective when the instrumental rate is set. A further resemblance is that in the Riksbank’s strategy, monetary policy reacts systematically, though neither automatically nor mechanically; this helps households and firms to base their expectations of inflation on a monetary policy that is predictable. We have followed our rule of action relatively closely, as is evident from Diagram 1. 4  BIS Review 24/2002  1.
Since the signing of the Toledo Pact and its subsequent renewal, various legislative amendments – which may generally be seen as in the right direction – have been made. Examples include the (still incomplete) separation of the sources of financing of the Social Security system, the unification of the contribution bases, the creation of the Reserve Fund and the progressive simplification of the different contribution schemes, among others. However, among the Pact’s recommendations are other measures worthy of discussion, since they may considerably impact the system’s sustainability. At this stage we should ask ourselves which pension system reforms merit assessment. The range of possibilities is an extensive one, and a decision on which reforms should be made requires not only an expert assessment but a political one too. Resolving the system's problems may involve changes in the parameters of revenue or expenditure, but choosing the right or the most reasonable mix requires considerable political assessment. Yet some combinations may be preferable to others from the standpoint of economic efficiency in that they may generate greater incentives, for instance, to join the labour market. In this respect, what is important from a technical viewpoint is to maintain a high degree of proportionality between benefits received and contributions paid, a point that has been underscored from the outset in the Toledo Pact recommendations. Regarding the various options available, I shall refer to some already deployed by European countries and which, therefore, have been tested to some extent.

But clearly that is not true of the global economy as whole. Of course we have a great deal of experience in the EU of establishing common rules and policies. We know it is a painstaking process among 27 countries. But on finance and the economy we need to go wider than the EU and wider than the G7 to engage the new economies which account for so much of world growth. That is why it was so important and welcome that the recent meeting in Washington was of the G20 rather than the G7. Alongside the IMF it is going to play a key role in global macroeconomic coordination. 2. Better ground rules for cross-border financial crises  The failure of Lehman Brothers has confirmed that cross-border failures of large and complex firms are just as damaging and difficult to manage as we had feared. We need to ensure that proper contingency plans are prepared between the authorities most concerned for failures not just within the EU, where a lot of work is in hand, but on a global basis. As a start I hope we can establish a robust and predictable framework of rules and conventions that ensure that home authorities will co-ordinate a cross-border response better. The Financial Stability Forum is working on these urgently. This is not easy. In particular emergencies there are often different national interests at stake and the sheer pressure of events can limit cross-border consultation.
If you were looking for clues on the feasibility and desirability of such an endeavour, consider the way in which scientists have gone about understanding and simulating another complex, adaptive system which affects everyone’s everyday lives – the weather. Weather systems are the archetypical complex, adaptive system, the very origin of the concept of chaos.39 Yet despite their chaotic properties, our understanding of weather systems, globally and locally, has improved dramatically over recent decades. Errors in forecasting the weather have halved in a generation, a remarkable improvement. The reason for that improvement is not because of a great leap forward in  weather theory; it is because of improvements in micro-level weather facts. Meteorologists piece together their models of weather systems from very high resolution readings. It is this improvement in data resolution that has held the key to improvements in weather forecasting. These readings come from a range of meteorological agencies, as well as from private companies and citizens. These data can be pooled and stitched to give a global map. Weather data is crowd-sourced,  Wikipedia-style, and then centrally stitched, a micro-to-macro approach. 39  Lorenz (1963). 29  All speeches are available online at www.bankofengland.co.uk/speeches  29  As these data are collected in close to real-time, weather simulations are available in close to real-time. This also allows us to study weather systems at a wide variety of resolutions – globally, nationally, regionally, down to the local village. This not only helps people better understand the environment facing them.

The gap between richest and poorest region is around 150%. For wealth per household, the North-South divide is also large, with a gap between richest and poorest of 130%. These are striking differences. But are they unusual compared either with the past or other countries? 6  All speeches are available online at www.bankofengland.co.uk/speeches  6  Chart 2: Cartogram of UK income per head  Sources: Eurostat and Bank calculations. Notes: Purchasing power standard (PPS) per inhabitant for NUTS 1 regions. 7  All speeches are available online at www.bankofengland.co.uk/speeches  7  Chart 3: Cartogram of Great Britain wealth per household  Sources: ONS Wealth and Assets Survey and Bank calculations. Notes: Data refer to 2014-16 for NUTS 1 regions, re-sized and coloured by median household wealth. No equivalent data available for Northern Ireland. 8  All speeches are available online at www.bankofengland.co.uk/speeches  8  On the first of those, Chart 4 plots the distribution of income per head across UK regions on three dates: 1997, 2007 and 2016. All of the distributions are centred on mean levels of income in 2016. This suggests a modest increase in the degree of regional income dispersion over time. The 2016 distribution has somewhat fatter tails, lower and upper, than in earlier periods.12  Chart 4: Distribution of UK income per head over time (mean-aligned)  Sources: ONS and Bank calculations. Notes: Chart shows regional gross disposable income for different time periods at current basic prices, centred around the 2016 mean.
In my opinion, a good checklist for a policy-maker on monetary policy issues is what Donald L. Kohn at the Federal Reserve has put forward on several occasions. He considers that three conditions I mentioned earlier must be met before central banks “lean against the wind”. And these are the three arguments I mentioned earlier. The first condition is that it must be possible to identify a bubble sufficiently early and with sufficient certainty. Secondly, the assessment must be that there is a good chance that a slightly higher interest rate will really slow down the untenable developments. Finally, one must count on being able to gain “enough” by preventing a bubble in relation to what a tighter monetary policy might cost in the short term. I believe that most people will agree that these are sound conditions to use as a foundation. However, the views regarding when the conditions are actually met can vary. Professor Kohn’s first condition probably entails the greatest difficulty. Although we are constantly developing our forecasting methods and models and they are becoming increasingly sophisticated, I do not expect that we will be able to reach a stage in the foreseeable future where we can be entirely sure that something we assess as an incipient bubble actually is a bubble. This is largely due to the nature of things, or rather the nature of the bubble.

So, in brief – if the policy rate is not the only and best weapon, what else do we have available in our arsenal? And which authority should have its finger on the trigger? One of the problems the crisis has brought to light is that there was too little focus on overall risks that could threaten the financial system as a whole – systemic risks. In many parts of the world they are now working on introducing a framework aimed at preventing such risks. This could contribute to preventing imbalances that would have consequences “merely” from a monetary policy perspective, even if this is not the explicit aim. One means of preventing an exaggerated upturn in house prices and lending, for instance, is to cut the permitted loan-to-value ratio – how much it is possible to borrow in relation to the market value of the underlying collateral. Another means may be to introduce an amortisation requirement. Two weeks ago, Finansinspektionen (the Swedish financial supervisory authority) presented a proposal for a recommended ceiling for the loan-to-value ratio for housing of 85 per cent of the property’s market value. Division of responsibility and other problems I asked earlier who should have their finger on the trigger. It is not entirely clear who should have the power of authority to introduce the type of measure I just mentioned. There may be good reasons to delegate this to the central bank, at least with regard to measures that affect the macro economy and are not aimed at individual banks.
Chart 1 plots 4  the turnover share of the largest 100 UK businesses since 1998 (i.e. concentration ratio). This ticks up in the lead-up to the financial crisis, although this pick-up is more modest than in the US, from 20% to around 5  28%. Concentration has flattened-off in the period since the crisis, however, in line with other European countries. Turning to measures of concentration within the financial services industry, the international pattern is somewhat more uniform. Chart 2 plots the largest five banks’ share of total banking assets in the US, euro area and the UK. Levels of banking concentration started fairly high, averaging around 30%. They drifted further upwards in the run-up to the crisis, although this drift was again fairly modest. Since the crisis, however, measures of banking concentration have flat-lined and, in the UK, have fallen slightly. Concentration indices have their limitations, though, and need not always be associated with market power. Some firms may be able to exercise market power in setting prices even without having a large share of a market if, for example, there is brand loyalty. And in a world of differentiated products, concentration measures such as HHIs or concentration ratios no longer correlate closely with market power (Bresnahan (1989)). With non-homogenous goods and non-Cournot competition, a better measure of market power is often provided by firms’ mark-ups – the ratio of their price to their marginal cost (De Loecker and Eeckhout (2018)).

Retain flexibility  Of course one can never know exactly what the future holds. So when the time does come to raise Bank Rate, it will be important to retain the flexibility to change course if needs be, either by tightening policy more quickly than originally envisaged or by being prepared to loosen again. Were it required to respond to unforeseen events, the MPC would have two tools at its immediate disposal: Bank Rate and QE. Past experience gives us a good dataset from which to gain an understanding of how changes in policy rates transmit to the economy. Based on a rich literature of international estimates over the period since inflation targeting began, the peak impact on inflation is generally estimated to occur with a lag of between 18 and 24 months, although it begins to  5  See Shafik (2015) and Broadbent (2015) for more on this issue. 6  Though should proposed legislation pass, the number of MPC meetings per year will reduce from 12 to 8, in line with the recommendations of the Warsh Review (Warsh, 2014)  7  The market curve represents the mean of the priced distribution of interest rates. Consideration of risks can cause this whole distribution to move relative to true expectations. Risks can also affect the shape of the distribution, though Dison and Elliot (2015) found that the shape of the distribution is currently being heavily influenced by the proximity of Bank Rate to the effective lower bound.
But despite inflation being above target, monetary policy remains highly stimulatory. Interest rates are close to zero and we’ve injected a huge sum of money into the economy via quantitative easing. This uncomfortable juxtaposition of high inflation and loose policy has led some people to put two and two together and make five. The MPC has gone soft on inflation, they claim. It has taken its eye off the ball. I understand why some people think this. But it is simply not true. The deep recession that we have all just endured has led to a degree of spare capacity opening up in our economy. That’s evident in the increase in unemployment we have suffered. It’s also evident in the relatively low levels of productivity within firms. There is a very real question as to exactly how much spare capacity there is and what impact that’s likely to have on costs and prices. Even so, it seems clear to me that there is some degree of spare capacity and that this is likely to damp inflationary pressures. This is most apparent in the labour market, where annual private sector earnings growth has averaged below 1½% since the start of the recession, around a third of its rate in the preceding five years. But this downward drag on headline inflation has been offset by a sequence of large shocks – to energy and other commodity prices, to VAT, and to the value of sterling – which have  9  6  Borio (2010).

In the United States, for example, the 2010 deficit ratio stood at more than 10% of GDP and the latest IMF projections suggest only a relatively limited decline to around 8% of GDP in 2012. US debt reached around 95% of GDP in 2010 and would further increase to around 105% of GDP in 2012. Japan and the UK ran similarly high deficits. In the case of Japan, the deficit ratio amounted to around 9% of GDP in 2010 and, after an increase in 2011, would return to around this level in 2012. In the UK, according to the latest European Commission forecast the deficit ratio would decline from 10.3% in 2010 to around 8 % in 2012. Against this background, what are the reasons for the particularly severe disruptions in some euro area sovereign debt markets and the related contagion effects, which are undermining financial stability in the euro area as a whole? To approach this question it is helpful to take a closer look at the specificities of the euro area institutional setup. The combination of a single monetary policy and strongly decentralised fiscal policies constitutes a specific feature of the euro area. The weak European governance has not been able to remove incentives for national fiscal policymakers to allow the emergence of fiscal imbalances in the form of running excessive deficits at the cost of other participating Member States. The Stability and Growth Pact (SGP) was established to address such coordination problems.