samchain/econo-pairs-v1 huggingface dataset:
We see the Managing Director’s statement as a good basis for the Fund to move forward and appreciate the urgency with which he has sought to implement the strategy. In particular, we welcome the budgetary savings projected under the medium-term budget and the envisaged implementation of reforms in the other organizational aspects. We would only urge more careful consideration to be given before agreeing to the proposal to charge for technical assistance. Technical assistance is a key public good of the Fund and is critical to improving surveillance and the capacity to design and implement macroeconomic policy in many developing and low-income countries. As such, we should ensure that countries who need technical assistance will continue to receive it, regardless of their ability to pay. 16. We also welcome the Fund’s proposed program of work on sovereign wealth funds (SWFs). These funds play a positive role in the global financial market by adding both depth and breadth to them, allowing for the efficient distribution of funds, and lowering the cost of capital in recipient countries. The established SWFs are professionally-run, long-term investors, with little leverage. Their ability to accommodate short-term volatility has contributed to liquidity and stability during periods of market stress, as illustrated in the recent crisis. For countries that operate SWFs, they are a useful tool in managing intergenerational savings in a manner that preserves macroeconomic and external stability. They help build a buffer against future liabilities arising from population aging or other concerns.

This separation has been the critical factor behind the  BIS Review 160/2008  1  general decline in inflation that we have observed over the past decades. 1 But independence makes democratic accountability by the monetary authority all the more important. Many central banks have gone well beyond strict legal requirements in their pronouncements and communications than imposed by statutory accountability duties. The question is: Why? The reason rests on a simple though powerful insight: transparency renders monetary policy more effective. In a world in which policy-making by surprises has lost purpose, wide knowledge of the central bank’s preferences and objectives can only serve as a coordination device for private beliefs. Anchoring expectations around the objectives of policy help coordinate the reactions of economic behaviours to the macroeconomic shocks along the appropriate path of adjustment that the central bank wants the economy to follow. Many central banks have therefore started to communicate their firm commitment to a nominal anchor, through the announcement of a precise definition of price stability. In many cases, central banks have gone further and spelled out a more general monetary policy strategy, and the analytical framework that is used by policy makers to assess the risks to the achievement of the central bank’s objectives. A growing body of empirical evidence supports the assumption that transparent quantitative objectives and communication about the strategy reinforces monetary policy.
Indeed, interest on the public debt has trended downward from 4.7 percent of potential GDP in 1990 to 3.2 percent in 2007 to just 2.1 percent in 2012 as the average interest rate on Treasury securities has dropped from 9 percent to 5 percent, then to its recent level of 2½ percent. Rates obviously cannot continue to fall, though, so the cost of servicing debt is sure to increase, even if the size of the debt relative to the economy stabilizes. The canary in the mine: capital investment Capital investment is the economy’s canary in the mine because it’s often the first thing to succumb to uncertainty. Also, once undertaken, capital investment is costly to reverse. Investment has certainly been unusually sluggish in the wake of the recent recession. Going back to when our data begin, in 1947, net investment as a percent of GDP has fluctuated around a constant mean of 5.6 percent.4 It boomed in the late 1990s, reaching 8.1 percent of GDP, its highest level in over 50 years. The only higher quarter on record was the second quarter of 1950 (shortly after John Taylor and I came into this world, although I am not implying causality). Its peak during the 2001–07 expansion was an unremarkable 6.9 percent, but the subsequent plunge was unprecedented in the post-World War II data: The U.S. capital stock actually shrank during the second half of 2009.

BIS central bankers’ speeches  5  multiyear contracts is a multiyear nominal stability. A policy that “lets bygones be bygones” from year to year may not achieve this kind of stability, especially when policy options can become constrained, in the short term, by the zero bound. A policy that takes a longer-term perspective and is properly communicated and executed – so as to instill confidence that monetary policy will hew to a 2 percent inflation target rather than fixate on the run-rate of the past four quarters or the outlook for the next four – may better supply the longer-term comfort that households and businesses need to plan and budget. Such a policy would reduce the uncertainty that monetary policy as it is currently conducted spawns and would be more effective in doing its part to assist in economic expansion.8 A dime between two nickels I hope this is enough to get a conversation started. I will now turn the microphone over to John Taylor. In doing so, I am reminded of Ross Perot’s quip when he was placed between Bill Clinton and George H.W. Bush for a predebate photograph in the 1992 presidential election. Noting that Mr. Perot was substantially shorter than the other two men, a reporter asked him how he felt. His reply: “I feel like a dime between two nickels.” In contrast, compared to John Taylor, I feel like an intellectual dwarf – a mere penny sitting on the dais next to John’s $ bill brain.
The top two panels of Slide 12 compare the market-implied federal funds path for year-end 2016, 2017, and 2018 with the surveyed modal path projections, averaged across respondents.51 It is clear that the modal forecasts are much higher than market-implied rates, especially for 2017 and 2018, when the gap is larger than 100 basis points. Moreover, market-implied rates fell from December to January, while modal forecasts moved little between December and January, and fell slightly in March. The bottom left panel of Slide 12 shows the risk premium derived from a standard econometric model.52 These are negative, which is consistent with the gap between market implied rates and survey expectations. However, the premium at short maturities is about as large, if not larger, than that at long maturities – a finding that is inconsistent with the fact that the gap at short maturities is a lot smaller. Moreover, the estimated premium becomes less negative from December to January, implying that market-implied rates should, ceteris paribus, have increased, while in fact they fell. Changes in the probability distribution are, however, consistent with the changes in marketimplied rates. The bottom right hand panel shows the pdf-implied means for the three different horizons, two of which were shown before in Slide 10. These are also higher than market-implied rates, but are closer than the point forecasts, especially in January. Most importantly, they fall significantly from December to January, in line with the change in market rates. Pdf-implied means changed little between January and March.

The UK is the exception: since the mid-1990s, the country has emerged as the growth model for Europe. For Switzerland, the sluggish development in Europe is especially regrettable, as the Swiss export sector usually serves as the engine for economic recovery. All in all, Switzerland's export industry is well positioned to benefit from higher demand from abroad. Switzerland has been able to reduce its production costs per unit in the past few years, and the Swiss franc even depreciated slightly versus the euro since the launch of the single currency. As regards domestic demand, consumer sentiment remains satisfactory overall, but this should not be expected to stimulate growth decisively. While construction activity is robust, it has lost some of its momentum. Investment in equipment is still brisk, and the recent modest slowdown should not last too long. On the whole, the Swiss economy is still on its growth trajectory, but it lacks stimuli from abroad. This situation is the same as the one underlying the National Bank's interest rate decision of December 2004. Even though Switzerland is particularly affected by the lacklustre performance of the European economy, overall prospects are not gloomy. Growth in the rest of the world remains dynamic, and this is expected to benefit Europe in due course. For Switzerland, a growth rate of 1.5-2% is still realistic. With the Swiss economy thus continuing to grow below its potential, the labour market will not see any sustained improvement. BIS Review 11/2005  1
In other words, the total amount of all the currency in the country is only a comparatively small proportion of the total deposits in all the banks of the country. “What, then, happened during the last few days of February and the first few days of March? Because of undermined confidence on the part of the public, there was a general rush by a large portion of our population to turn bank deposits into currency or gold – a rush so great that the soundest banks couldn’t get enough currency to meet the demand. The reason for this was that on the spur of the moment it was, of course, impossible to sell perfectly sound assets of a bank and convert them into cash, except at panic prices far below their real value. By the afternoon of March third, a week ago last Friday, scarcely a bank in the country was open to do business. Proclamations closing them, in whole or in part, had been issued by the Governors in almost all the states. It was then that I issued the proclamation providing for the national bank holiday, and this was the first step in the Government’s reconstruction of our financial and economic fabric.”1 Roosevelt understood the recipe for a banking crisis: fractional reserve banking and an undermined confidence by the public in banks, which led to widespread runs on banks. In turn that led to panic prices on bank assets and bank closures.

If reserve losses are sterilized and the underlying cause of capital outflows is not addressed, reserves losses can be persistent. Macroprudential policy provides an additional tool that can add degrees of freedom and help soften the tradeoffs of the trilemma. Macroprudential policy can potentially temper spillovers by modulating the type of buildup of financial imbalances that contributed to the Asian crisis of 1997, countless other emerging market crisis, the global financial crisis of 2008 and the subsequent euro area crisis of 2011. Progress continues to be made in designing macroprudential policy frameworks, in definition of objectives, and in developing appropriate instruments, calibration and communication. Capital flow management can be viewed as the part of the macroprudential toolkit that operates across borders. Over the last five years, capital flow management has received increased attention, first in managing inflows and, more recently, in managing outflows.6 A consensus has emerged that capital flow management can be useful as part of a broader set of policy tools. In fact, the effectiveness of capital flow management may be limited if not appropriately supported by monetary, fiscal, exchange rate and prudential policies, or the  5  Obstfeld, Shambaugh and Taylor (2005), Goldberg (2013), Klein and Shambaugh (2015) and Obstfeld (2015). 6  G20 (2010), IMF (2012), Farhi and Werning (2014) and IMF (2015). 2  BIS central bankers’ speeches  warranted macroeconomic adjustment. Also, capital flow management practices that are transparent, temporary, and targeted seem to work best.
It would seem that the least that we as prudential supervisor can do is ask the pertinent questions and challenge banks to look beyond governance in the stricter, more standard sense. I have tried to identify the kind of questions we might ask. I am very much looking forward to hearing your views in the ensuing discussion, which I hope and trust will be lively and stimulating. I promise we will reflect seriously on any suggestions that you might have. Thank you. 1. Kirkpatrick, G. (2009), “Corporate governance lessons from the financial crisis”, OECD Journal: Financial Market Trends, 2009/1(1), pp. 61-87; Saghi-Zedek, N. and Tarazi, A., (2015), “Excess control rights, financial crisis and bank profitability and risk”, Journal of Banking & Finance, No 55, pp. 361-79. 2. See SSM supervisory statement on governance and risk appetite, ECB, June 2016. 3. Joint ESMA and EBA Guidelines on the assessment of the suitability of members of the management body and key function holders under Directive 2013/36/EU and Directive 2014/65/EU (2021). 4.

Banks’ internal governance First, let me start with internal governance. Internal governance concerns the way in which a bank is organised and the efficacy of its management bodies in conducting business and managing risk. Setting the bank’s business objectives, its appetite for risk, its internal controls, as well as allocating roles and responsibilities and setting up adequate reporting lines, are all aspects which fall under the scope of internal governance. Banks’ governance came under close scrutiny during the global financial crisis, when weaknesses in governance, such as excessive risk-taking and misconduct by board members, were identified as some of the root causes of the crisis. [1] Since then, internal governance arrangements have been strengthened to improve banks’ sound and prudent management. This also ensures that their strategies serve more than merely the short-term interests of their shareholders. Now – what does good internal governance look like? First, it provides for the necessary checks and balances. It counters excessive risk-taking and ensures that decisions are taken in a sustainable manner. In addition, a strong governance framework is one which gives board members access to good data in good time. This is a pre-condition for wellinformed decision-making. [2] Unfortunately, too many banks in the banking union still do not possess sufficiently agile IT systems to adequately aggregate data on risk appetite, risk limits and risk profiles. Weaknesses in this area are one of the main factors hindering the effectiveness of governance frameworks of these banks.
2 The target horizon and real stability considerations When the inflation target was announced in January 1993, the Riksbank also formulated a tolerated deviation interval of ± 1 percentage point. One purpose of this was to illustrate that it is not suitable or even possible for monetary policy to maintain inflation at exactly two per cent all of the time. Changes in the policy rate, known as the repo rate in the Riksbank’s case, are a blunt instrument with regard to steering inflation in the short term. It takes time before interest rate changes have an effect and monetary policy must therefore be based on forecasts of the inflation rate a couple of years ahead. In addition, there is uncertainty over how the economy functions. It is therefore impossible to parry all shocks that affect the economy and so, temporary deviations from target will arise. The tolerance interval also provides scope for temporary deviations from target that may be justified with reference to the stability of production and employment. Let us say that a shock occurs, which makes inflation deviate from target. By not aiming to restore inflation to target as quickly as possible, scope is created to dampen fluctuations in, for instance, growth and employment. However, for the inflation target to retain its credibility, the deviations cannot be permitted to become too large or to last for exceedingly long periods.

Each sector may be in financial surplus or deficit, but the surpluses and deficits must, in accounting terms, sum to zero (although in terms of available statistics they may not, because of errors and omissions); every piece of deficit is necessarily matched by a piece of surplus. Typically, one might envisage the savings surplus of the household sector being channelled through the banks and financial markets to fund a deficit in the corporate sector, arising from its capital investment and working capital needs. In this context the deficit in the corporate sector seems perfectly acceptable. Why, then, should a deficit in the public sector raise particular anxiety? Isn't the situation where the public sector has a funding need analogous to that where private sector corporate entities have such needs? Not necessarily so. A number of factors may differentiate the two situations. What are these factors and what are the special considerations which may apply in the case of the public sector deficit? •  First, when assessing the impact of different deficits one may need to look behind them, to associated developments in the real economy. For example, a financial deficit may reflect, at one extreme, spending on current consumption, and particularly on imports with no resulting benefit to domestic employment; or it may reflect, at the other extreme, investment which generates jobs and greater efficiency within the domestic economy.
It is therefore very welcome that labour market reforms have recently been implemented in several countries where rigidities were considered to be particularly onerous, such as Spain[20], Italy, Portugal and Greece, and here in Germany too, some years ago. France is still lagging behind and although a labour market reform is now being discussed, whether it is sufficiently ambitious to significantly lower the equilibrium unemployment rate remains to be seen. Although increased flexibility in labour markets will produce a better outcome in the medium term, some reforms may create losers in the short term[21]. It is only natural that such reforms are opposed by those fearing short-term personal losses, even when the reforms are eventually beneficial for society as a whole. We should take such concerns seriously. There are policies, however, that can help to mitigate or compensate for the negative short-term effects. First, labour market reforms should be sequenced carefully, in such a way that a negative short-term effect on employment is ideally felt only when the recovery is gaining momentum. This could in practice mean that employment protection is liberalised only when reforms to increase nominal wage flexibility have been carried out. This can have a quick effect on reducing unemployment even shortly after its implementation[22]. Second, active labour market policies can help to reallocate workers across sectors of the economy while an adjustment is taking place. Third, expansionary fiscal and monetary policy can also dampen the negative short-term impact of labour market reforms.

Excess liquidity during the first half of the century gave way to plummeting liquidity during the depths of the crisis. Today, despite rock-bottom global interest rates, market liquidity remains below normal levels. Risk capital is parked on the sidelines. Balance sheet repair So what explains this continuing aversion to risk? Two factors are central: balance sheet disrepair and psychological scarring. In other words, both balance sheet fundamentals and market perceptions, perhaps detached from fundamentals, appear to be weighing on risk-taking. Since the start of the crisis, balance sheets have been a good news/bad news story. The good news is that balance sheet repair is underway in many sectors and countries. The bad news is that this process appears to be far from complete, providing a continuing strong headwind to risk-taking. Consider in turn the balance sheets of banks, households, companies and governments. Pre-crisis, banks’ balance sheets were furthest out of kilter. Average leverage in the global banking system – the ratio of banks’ assets to their equity – rose to highs of over 40 (Chart 9). At the height of the boom, every $ of bank assets was financed with $ cents of debt. The global banking system was financing itself with a 98% loan-to-value mortgage. Since then, global banks have raised their equity by around $ billion and shrunk their assets by $ trillion. As a result, global banks’ leverage has halved to around 20, close to its long-run average.
The Norwegian krone does not stand out as particularly unstable. On the contrary, in countries like Sweden, the UK, Switzerland, Australia, Canada and New Zealand, the exchange rate fluctuates just as much - or more - than in Norway. There is a cost involved for businesses in hedging against fluctuations in the krone. A krone that is stable - but too strong - also entails costs in the form of low activity. Similarly, a krone that is stable but weak - is a source of high inflation. Petroleum revenues generally provide substantial, but uneven currency inflows into Norway. The currency flows might have resulted in a strong krone and large variations in the exchange rate. This tendency is countered when the annual use of petroleum revenues over the central government budget is predictable and independent of annual revenue inflows, and the remainder is invested abroad. The capital outflow through the Petroleum Fund contributes to both curbing the appreciation of the krone and maintaining its stability. BIS Review 11/2004  7  Chart 9. Trade-weighted exchange rate Index. 1992 Week 1 = 100  a. Commodity economies 145  b. Other economies 145  New Zealand  130  130  Australia  115  UK  Switzerland  115  Norway  100  100  85  85  Norway  Canada  Sweden  70  70  1992 1996 2000 2004  1992 1996 2000 2004  Sources: Bank of England and EcoWin  Norges Bank has not defined an exchange rate target.

Through spill-over, these tensions are also affecting non-financial corporations and, more broadly the financing of the economy. They also have spilled over to emerging market economies, which had until the autumn 2008 remained largely unaffected. The crisis also emerged as a crisis of securitisation. Securitisation is an old and successful technique used to refinance a range of loans. What was new about it is that it got used extensively in highly unstable financial structures. These were financing short-term illiquid and complex assets whose value proved to be uncertain and contingent upon models. The instability of such structures was largely masked. Indeed, cheap money allowed easy refinancing of poor quality debt and of assets with uncertain value. Also, favourable ratings and credit enhancements artificially boosted the quality of loans underlying structured products. The rise in defaults on such loans, first on subprime mortgages, triggered a chain of reactions whose consequences are still unfolding now. Credit protections proved illusory. Liquidity dried up much more quickly than it had appeared. Rating agencies massively, suddenly and sharply downgraded products which until then were deemed of the highest quality. The demise of the “new” securitisation chain highlights two fundamental realities. The first one is that far from being spread across the whole system, credit risk was implicitly or explicitly concentrated in the hands of specific institutions, foremost among which were the major investment banks.