samchain/econo-pairs-v1 huggingface dataset:
By affecting the transmission mechanism, financial innovation is also a challenge for the conduct of monetary policy  A good knowledge of the mechanisms through which monetary policy affects the economy is of crucial importance for central banks. Financial innovation affects these mechanisms both by altering the channels through which monetary policy operates and by changing the overall impact of monetary policy decisions. But the magnitude of the changes and the precise effect due to financial innovation at a time when other factors such as globalisation are at work are not well known. At the present juncture research shows that financial innovation tends to strengthen the interest and exchange rate channels whereas it appears to weaken the credit channel. -  Financial innovation certainly contributes to stronger wealth effects and thus probably also to strengthen interest rate channel 7 . This can be explained as follows : •  Financial innovation fosters faster dissemination of information and its more rapid incorporation into financial market prices. This is of course particularly true for monetary policy decisions and can therefore increase the effectiveness of monetary policy, particularly via the interest rate channel 8 . •  Financial innovation contributes to an increased holding of financial assets by lowering transaction costs and facilitating arbitrage, hedging, funding and investment strategies. •  Financial innovation often relies on stronger leverage, increasing the effect of interest rate change by the central bank.

It is clearly the case of the last few years with the rapid development of credit derivatives, securitization, hedge funds and private banking that has led to a situation where most credit risk are no longer in the form of loans, held to maturity on the balance sheets of banks, but where much of the credit risk is now held by nonbank financial institutions that can take on substantial leverage. It has occured in Europe in the context of a major financial innovation, the introduction of the Euro, and poses new challenges for central bankers: it makes monetary analysis more complex, modifies the monetary policy transmission mechanisms and, in some cases, may endanger financial stability. 1  Weber, 2006; Rajan and Zingales, 1998  2  Dynan, Elmendorf and Sichel, 2006  3  Cecchetti, Flores-Lagunes and Krause, 2006  4  Campbell and Horovitz, 2005  5  IMF, 2006  BIS Review 42/2007  1  1. Financial innovation is a challenge for the interpretation of developments in the monetary aggregates and for the best use of our second pillar  It is clearly not a surprise, at a time of burgeoning financial innovation to observe signs of instability in money demand. New products and new intermediaries tend to blur the distinction between monetary and non-monetary assets and to modify the financial behaviour of economic agents.
A Scotsman founded the Bank of England, and it took another to reform it. Next year we celebrate the tercentenary of the Act of Union, an Act strongly supported by Adam Smith. And we now have a successful and prosperous union between our two countries with a common monetary institution which embodies the ideas not only of Adam Smith and his great friend David Hume, but also of the key principles that should govern institutional design. From the division of labour in the pin factory to the need for our mutual “sympathy” to be embodied in carefully designed institutions, Smith’s writing is remarkable by its comprehensive and eclectic examination of ideas and facts. So it is appropriate that tonight here in Kirkcaldy, where Adam Smith found contentment in study and reflection, I can announce that tomorrow the Bank of England will  19  There is some evidence that committees make, on average, better decisions than individuals. See King (2002), Blinder and Morgan (2000) and Lombardelli, Proudman and Talbot (2005). 6  BIS Review 102/2006  reveal its new £ note. And the figure celebrated on the new note will, of course, be Adam Smith the first economist and the first Scotsman to appear on a Bank of England note. From next spring, when visitors to our country look carefully at their new £ notes, they will be able to see an engraving showing the division of labour in pin manufacturing with the words “and the great increase in the quantity of work that results”.

Viner, J (1927), “Adam Smith and Laissez Faire”, Journal of Political Economy, 35 No.2, 198-232. 20  McLean (2006). 21  Viner, J. 1927, p232. BIS Review 102/2006  7
These trends are being further supported by enhanced linkages in the payment systems to facilitate the intermediation of funds in the region. The economic transformation of Malaysia will move us to the next level of development. Malaysia has been a middle income country for almost three decades, having benefited considerably from rapid industrialisation and integration with the global economy. Moving into the next stage of economic development, the domestic economy will change to a productive structure that is more innovation-driven and knowledge-intensive, with the services sector assuming an increasingly dominant role in the economy. In this next decade, the services sector is expected to account for about two thirds of the economy, with growth focused on higher value added activities. To support and drive this transformation, a new blueprint for the financial services sector is being developed by Bank Negara Malaysia. The blueprint will chart the next phase of the evolution of the financial sector, with the aim of positioning the financial sector, including Islamic finance, not only to become a catalyst to the transformation process, but also having the flexibility to respond to the key trends that are emerging. In essence, we need to evolve a financial system that best serves Malaysians in this new environment. As the global financial services industry going forward strives to regain thrust and confidence, the starting point in Asia is to build on the solid foundations put in place during the decade following the Asian financial crisis.

Lorenzo Bini Smaghi: From Tuscany’s 19th century currency, the fiorino, to the euro – dialogue on international finance Speech by Mr Lorenzo Bini Smaghi, Member of the Executive Board of the European Central Bank, in the Sala Luca Giordano at the Palazzo Medici Riccardi, Florence, 15 May 2008. *  *  *  I’m very pleased to come back to Florence to consider a highly topical subject linked to the effects of the financial turmoil on the world economy. To understand the current economic situation and the current short to medium-term prospects we need to take a step back and consider the imbalances that were building up on our continent until mid-2007, imbalances that were evidently unsustainable and that underlie the corrections we are going through. We have to distinguish three main imbalances. In chronological order, the first one concerns international payments. Over the years, the United States has accumulated huge deficits on its current account which have grown out of a lack of domestic savings. The US economy was essentially growing by borrowing from the rest of the world. In 2007 the US current account deficit amounted to over 6% of its GDP. For years the problem of the sustainability of America’s external imbalance has been emphasised, especially in Europe, which feared the risk of a disorderly unwinding with destabilising effects on the financial markets.
Particularly strong reasons are required for setting a repo rate over a long period of time that is considerably lower than what can be regarded as a long-term average. Monetary policy can sometimes be used to stimulate the economy and sometimes be used to tighten the economy, but not to permanently stimulate the economy by means of a low interest rate. Long periods with a very low interest rate can namely lead to financial imbalances. They can, for example, lead to a rapid expansion of credit which in the long term may lead to some households being unable to afford to meet the interest and amortization payments on their mortgages. The households’ interest rate expectations are retrospective and long-term expectations are reduced by the low interest rates that have prevailed for a number of years. Problems arise when interest rates then rise. But this is not just about households and mortgages. As I said in the first part of the speech, a too-expansionary monetary policy can also contribute to other kinds of financial imbalances. I therefore usually also look at what the Taylor rule mentioned above would entail for the repo rate level. The Taylor rule indicates, as I said earlier, that the repo rate should have been higher than it actually was before the crisis, which I think is reasonable. The Taylor rule also indicates that the repo rate should have been reduced more or less as quickly and as much as we actually did when the crisis hit.

Bandid Nijathaworn: Thailand’s banking and economic outlook Keynote address by Dr Bandid Nijathaworn, Deputy Governor of the Bank of Thailand, at the Australian-Thai Chamber Luncheon, Bangkok, 3 April 2009. *  *  *  Let me first thank AustCham Thailand, especially President Andrew Durieux, for the invitation to speak at today’s luncheon. It has been almost four years since I last spoke at an AustCham event, so, it is a pleasure to be back. Today I will speak on Thailand’s banking and economic outlook, a subject which I am sure will be of interest to all of you. In keeping with what a good luncheon speaker should do, I will keep my remarks short and to the point, so that we will have plenty of time for desserts and for questions and answers. This week is undoubtedly an important week for the global economy, as leaders and finance ministers of the world’s twenty most important economies gather in London to map out a strategy that aims to comprehensively address the current global financial crisis. Up to now, policies to tackle the crisis have been left largely to the individual economies in response to the problems that arise. But as the crisis has mutated into a major global problem, a coordinated policy response at a global level is clearly needed to ensure a synchronized recovery in all the key parts of the global economy. Without coordinated and comprehensive policy response, a synchronized recovery will not take place.
UK headline inflation over that period was of course affected by externally generated disinflation pressure from the sudden and very substantial drop in energy prices. But over that period, the average of a range of measures of domestically-generated inflation in the UK fell from around 2% to ½% at the end of 2014 – it has since recovered but only to nearly 1½% which is considerably below its pre-crisis average of 2½%. Over the same period, pay increases averaged around 2% – despite the fastest drop in unemployment in 40 years. Output growth picked up briefly to over 3% but has now fallen back to nearer 2%. And a small output gap probably persisted over the period. The MPC’s 2% inflation target is for UK CPI as a whole not for domestically generated inflation. But if we want to get a cross-check on where monetary policy was relative to where the natural rate might have been over this period, we can observe that monetary policy was not able to get domestically generated inflation to the inflation target over the policy horizon. In other words, far from being exceptionally loose, policy with hindsight may even have been a little tight. If this is right and the natural rate is currently slightly negative, how can that low level be explained? The great shocks that hit the economy after the crisis have surely dissipated. What are the headwinds now pushing the natural rate down? There are I think three interesting candidate explanations for this.

3  For example, estimates from term structure models such as those discussed in Meldrum, A and Roberts-Sklar, M (2014), ‘Long-run  priors for term structure models’, Bank of England Working Paper 575. 3  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  3  The lower demand for investment accounts for nearly two-fifths of the reduction. An ongoing decline in the price of investment goods, less public investment and systematically higher credit spreads account for the reduction in desired investment. And, alongside these changes in the levels of the supply of saving and the demand for investment, there has also been a change in the underlying return on investment. Expectations of a lower rate of real global growth accounted for another fifth of the reduction in the trend real rate of interest. 4  Three caveats are important at this point. The first is that the Bank work estimated the reduction in the global average trend real rate and the impact of changes in the level of global savings and investment. To the extent that global capital markets are not perfectly integrated and that there is an element of home bias in the financial allocation of savings, changes in the national supply of savings and demand for investment matter too. For example, developments in UK demographics would suggest less of a reduction in the trend real rate here than seen globally. But overall, the evidence suggests a very significant proportion of the movement in UK trend rates reflects developments elsewhere.
I am glad to say that my colleagues Ben Broadbent and Martin Weale are now working with Bank staff on just that. While we cannot yet tell whether a clear message will emerge, it is the kind of work that is needed when the real economy is undergoing a degree of structural change. Policy The uneven and unavoidably difficult path for rebalancing in the real economy makes it harder than usual to read the signals of cyclical conditions. But, by the same token, our monetary accommodation can help to ease the costs to firms and households of adjusting. By smoothing the path of aggregate demand, the impact on capital resources and on human livelihoods can be limited somewhat. In the Committee’s latest forecasts, the central projection is for inflation to be under the 2% target in two-to-three year’s time. But it also has inflation rising back towards target through that period as monetary stimulus gradually helps the economy to achieve escape velocity, reducing slack in firms and the labour market. Given the ferocity of the shocks that have already hit the economy, and the pervasive uncertainty that persists about global economic and financial conditions, these are circumstances where taking longer than usual to reachieve the 2% target is warranted. It will help to mitigate the risks of the economy’s supply capacity being impaired. But that is to look ahead to the most likely path of inflation in a year or two.

In my book, this is not only bad for the needed cyclical recovery in aggregate demand. I suspect that it will impede the rebalancing of the economy’s productive capacity. Firms wishing to enter or expand export markets, or compete against importers, often need credit. Finance is the oil that lubricates the allocation – and so, in current circumstances, reallocation – of capital in our economy. This is manifestly affecting SMEs. My hunch is that housing market conditions are a factor too. As long as anyone can remember, a crucial element of SME finance has been the capacity of entrepreneurs to pledge their home at the outset of a loan or, contingently, if and when their business hits choppy waters. Uncertainties about the path of house prices do not make that a comfortable backdrop for lenders in current conditions. 2  BIS central bankers’ speeches  Rebalancing will affect labour market conditions too. Perhaps the greatest surprise to the MPC over the past few years has been subdued productivity growth. One could think of this as firms maintaining employment at higher levels than would have been predicted given the fall in the level of output. Labour hoarding. That squares with business managers explaining that they worry about “structural” skill shortages and so are loathe to lose employees who they will need when their markets recover. But it does not really square with surveys of business conditions reporting that firms say they are carrying relatively little spare capacity. We have scratched our heads about this.
Barbro Wickman-Parak: Economic analysis requires a cool head – my view of developments in Sweden and abroad Speech by Ms Barbro Wickman-Parak, Deputy Governor of the Sveriges Riksbank, at a meeting, Luleå, 15 May 2012. *  *  *  I would like to thank Magnus Wiberg at the Monetary Policy Department of the Riksbank for help with writing this speech. When we at the Riksbank decided on the repo rate almost exactly one month ago, I was one of the majority who wanted to hold the repo rate unchanged at 1.5 per cent and to keep the repo-rate path set at the February meeting. With regard to developments abroad, I pointed out that there was every reason to express caution with regard to international economic activity in the coming period. I also pointed out that we should continue to expect fairly sudden and dramatic changes on the financial markets. At the time of the April meeting we had seen the financial unease accelerate after a period of stabilisation at the beginning of the year. The focus was on concerns regarding Spain. Now the outcome of the elections in Greece has sent even larger shockwaves through the global financial markets, and this leads to other debt-ridden countries, such as Spain, being hit by greater unease. Let me say right now that neither I nor anyone else can know with any degree of certainty what this will entail.

At least in not such a big way, I guess we will always have cycles and bubbles but hopefully the last one will have taught us something for a long time and be the biggest collapses we will have for at least two or three decades. 5  BIS Review 29/2000
The point is that paths derived from different interest rate assumptions make it possible to some degree to quantify and weigh up various monetary policy options against each other. So, to sum up it is easy to see that the monetary policy communication can be made easier in various ways if the forecast horizon is extended. The new methods that have been developed can also facilitate the creation of alternative scenarios to more clearly understand and communicate the considerations facing the Bank. Conducting monetary policy I should like to conclude by mentioning a third perspective. This does not concern methodology for forecasting, or how monetary policy is communicated, but how policy is actually conducted. From time to time the view is expressed in the general debate that monetary policy should be conducted in a more “pragmatic” manner, more like the Federal Reserve in the United States. It is not always easy to understand exactly what this entails, but one thought appears to be that the Riksbank has in some way bound itself too tightly to the framework that we and many other inflation-targeting countries abide by. Even though, when looking back over the past ten years of monetary policy, I cannot see any situation where we have been curbed by our analytical framework and thereby made some tangible error in our policy, I believe this issue is worth discussing.

The ideas and experiences shared could then be contextualised to the prevailing local conditions to enhance financial inclusion. This proposal was welcomed by the members and resulted in the first Financial Inclusion Advisers programme conducted in Lusaka, Zambia in April 2009. The success of this inaugural programme hosted led us to this second programme hosted here in Malaysia with the support of JICA. JICA has long been involved in capacity building in  BIS Review 4/2010  1  the African continent, and we look forward to collaborating in the future in this area of building more inclusive financial systems. The Malaysian experience on the financial inclusion agenda In Malaysia, the commitment to the financial inclusion agenda is reflected in the new Central Bank of Malaysia Act 2009 which incorporates financial inclusion as an objective of the Central Bank. With the enactment of the Act in November of 2009, the Central Bank has imbedded in the legislation the financial inclusion agenda to ensure that future generation of central bankers will continue to direct efforts to building an inclusive financial system. Additionally, the Central Bank in the process of formulating a new blue print for the financial sector for the next decade. This blueprint would also ensure the development of a more inclusive financial system. The results of the financial inclusion measures thus far have shown positive results.
In fact, we can have world-class policies, but if we don’t have a culture where people feel comfortable bringing their whole selves to work, rules alone won’t get us to where we need to be. This is true of every element of diversity and inclusion. In a culture where taking extended leave damages your career prospects, a generous parental leave policy won’t make up for that. In a culture where people don’t feel that their voices are welcome, few will speak up. In a culture that fails to embrace differences, we won’t reap the benefits of diversity. 1/3  BIS central bankers' speeches  The data are clear. Nearly half of LGBT people are closeted at work, and the top reason LGBT workers don’t report negative comments they hear about LGBT employees is they don’t believe that anything will be done about it.3 This gets to the heart of why the “inclusion” piece of diversity and inclusion is essential, and a personal priority. Obviously, there’s a moral imperative for diversity, and numerous studies have shown the benefits to both productivity and the bottom line.4 But for me, it’s my experiences as both an academic and a policymaker that have made inclusion so important. Economics is a profession that has a glaring diversity issue. As economists, we have not done enough to create a diverse profession or an inclusive culture. When I’m sitting in a room and see a bunch of people who look and sound the same, I know it’s a problem.

But, given that it is 50 years since Stonewall, it’s clear we have more catching up to do. And this is where we owe OPEN Finance a great debt of gratitude. OPEN Finance gives us the tools we need to assess how we’re doing, and where we need to make progress. With the support of OPEN Finance, and the dedication of the Open Network at the New York Fed, we’ve introduced a number of new policies and measures that drive our efforts to make the Bank the open and inclusive employer we aspire to be. I’d personally like to thank David Ignell and Gil Carroll, presidents of our Open Network, for their work moving us forward. These efforts are important because they send a message to LGBT employees and the organization as a whole about our values and culture. I’d like to share one specific example. We recently created the option to add gender pronouns to our official e-mail signatures. This is a part of an organization-wide effort to raise awareness around the use of pronouns. On its own, it may seem like a small change, but it sends a loud message that part of respecting one another is using the correct pronouns. This effort has been well received, and a big part of that is because it’s created spaces for conversations that just weren’t happening before. But policies can only go so far.