samchain/econo-pairs-v1 huggingface dataset:
As he wrote in his autobiography, “When I first went to Germany I seemed to breathe a new and exhilarating atmosphere of freedom … [which] did not exist in [American universities]” (Ely, 1938). Two journeys, separated by a hundred years, reveal much about what occurred in Europe and America between them. Upon his return, Ely “undertook to draw up a project for the formation of a society to be called ‘The American Economic Association’, which should be broad enough to appeal to all the younger economists who, irrespective of their personal views, felt the stirring of the new life in economics”. His actions helped the AEA to develop into the great institution it is today. I have the privilege to work for another great institution, the Bank of England. And, as we celebrate the 150th anniversary of Ely’s birth, I thought it would be appropriate to choose as the theme of my lecture today the role that institutions play in the conduct of monetary policy. In brief, I want to argue that the core of the monetary policy problem is uncertainty about future social decisions resulting from the impossibility and the undesirability of committing our successors to any given monetary policy strategy. The impossibility stems from the observation that collective decisions cannot be enforced so that it is impossible to commit to future collective decisions; the undesirability reflects the fact that we cannot articulate all possible future states of the world.

All these regulatory developments, combined with changes to pillar II capital requirement amounts, could lead to over-calibration: each individual decision may be warranted; but their somewhat disorderly accumulation is not. And naturally, in setting these requirements, we must not jeopardise the level playing field between euro area banks and their international competitors. -  Third, consistency in the interaction between authorities, which should be improved: the case of Banco Popular in Spain, although it was resolved satisfactorily, also demonstrated the importance of swift and close cooperation between supervisory and resolution authorities, both at European and national levels. There is no denying that there is still a need to better coordinate the roles of the different European authorities – the SSM and ECB, the SRM, the Commission, and the European Banking Authority – in order to have a more clearly established “pilot in the plane” for crisis management. We still need to define the roles in order to decompartmentalise the different pillars and guarantee a continuum, which is vital to the smooth running of operations. But we must give our unequivocal support to these authorities in the performance of their duties: when the SSM, chaired by Danièle Nouy, and the ECB propose standards for the provisioning of new non-performing loans, they are operating fully within their remit to prevent future crises and ensure the convergence within the euro area that is at the heart of the Banking Union.
And at the other extreme are those who consider that the evidence available is not sufficiently conclusive as to do away with internal models, since, from their standpoint, the differences in RWAs would essentially be in response to the different levels of risk assumed under different business models. In our view at the Banco de España, risk sensitivity should continue to be at the heart of the capital framework: if a bank assumes more risk, more regulatory capital should be required of it. If this nexus were to disappear, there would then be a disconnect between the bank’s internal risk management and regulatory requirements; and perverse incentives might arise, potentially leading banks to take on greater risks than they could properly manage. That said, internal risk management models undoubtedly pose problems that need to be analysed and resolved. First, their growing complexity means there is a risk they may ultimately become black boxes accessible to only a handful of experts. Second, the elements integrated into models (such as probability of default or loss given default) are difficult to estimate, especially in certain cases characterised, for example, by the absence of sufficient data. And finally, given that the higher the risk calculated by the model, the greater the capital required, banks might be tempted to underestimate the risks in order to save on capital. To sum up, we believe it is necessary to continue to use the internal models, insofar as they provide for credible and consistent risk measurement.

A degree of humility is appropriate given the lack of experience as to how markets will respond when economic conditions eventually cause investors to anticipate exit. When asset purchases are anticipated to end or when asset sales begin to be anticipated, this will affect term premia in ways that cannot be precisely predicted in advance. That said, I do expect the repricing will prove manageable. We will seek to communicate so as to avoid generating sharp shifts in term premia and in long-term interest rates. Also, we will play close attention to ensure that financial institutions are managing their interest rate risks appropriately. The third set of costs is the impact of higher short-term rates on the Federal Reserve’s earnings and balance sheet when exit occurs. When we ultimately raise short-term interest rates, this will squeeze the Fed’s net interest margin. Also, when the Fed sells long-term assets, there is some prospect for losses on these sales depending on the level of long-term interest rates at the time when such sales occur. This means that the Fed’s earning could fall sharply or even turn negative in a given year. We look at this issue very closely to understand the risks here. The good news is that a very large proportion of our liabilities – those associated with currency outstanding – has no interest cost. This mitigates the risk of a sharp net interest margin squeeze.
As a personal reflection I can say that explaining the importance of low inflation is much easier - not least for a central bank governor - than the task of selling the advantages of a stable currency. This is particularly true as the latter task becomes increasingly pressing if the economy has been hit by problems with costs and is facing speculative attacks. Some of you may remember that for a few days in the autumn of 1992 the instrumental rate in Sweden was raised to as much as 500 per cent. In my view, this is probably one important explanation why Sweden is not a member of the ERM system - at least not at this stage. The challenge during the 1990s for the inflation targeting countries has been to build a rigorous framework around the new regime. Answers have been needed in particular to questions like the following: What rate of inflation should be targeted, what index should be used, are bands around the target necessary, the degree of transparency, etc. It has also been important to formulate a monetary policy reaction function, that is, to define the balance between inflation variability and output variability. The reason why central banks do not aim for maximum short-term stability in either inflation or output is that attaining only one of the targets would be costly.

See, for instance, “Vägen till ett stabilare Sverige” (the road to a more stable Sweden), Economic Policy Group report 1985, Center for Business and Policy Studies (SNS). A retrospective  BIS central bankers’ speeches  3  Almost at once, the question arose of what would guide monetary policy in Sweden, now that the fixed exchange rate had been abandoned. 6 By this time, some countries had already introduced inflation targets: New Zealand was the first in 1990, followed by Canada in 1991 and the United Kingdom in 1992. In January 1993 the Riksbank decided to introduce the inflation target we have now: The annual rate of increase in consumer prices shall be 2 per cent a year. 7 As we saw earlier, it is extremely important that the nominal anchor is credible. The results of academic research indicated that the conditions for attaining low inflation increased if one delegated monetary policy to an independent central bank, which focused on a clearly quantified target. This increased the element of “norm-based thinking” in monetary policy. The motives for short-term deviations from the inflation target declined, for instance, by trying to stimulate demand to gain political sympathies prior to an election. This also reduced the so-called time inconsistency problem in monetary policy, where the long-term objective of low inflation is not compatible with the short-term motives for high inflation. 8 The new Sveriges Riksbank Act meant that we have had an Executive Board with six members and greater independence from the political system since 1999.
Financial Sector Assessment Program (FSAP) calls for further strengthening of the underlining of the supervisory framework, even though unified supervision under a single supervisory agency was considered premature. Capital and money markets are small or nonexistent. At this stage of development it is necessary that the policy of regulatory institutions should focus on enhancing infrastructure and governance. -  Banking system in the region is close 100 percent privately owned, with clear dominance of foreign capital. The banking system in the region amounts from 40 percent of total assets to GDP in Macedonia to 119 percent of total assets to GDP in Croatia and is dominated by private foreign owned/joint ventures banks. The privatization of large state owned banks has been completed in all countries, except Serbia and representing approximately only 38 percent of total capital in the banking system respectively. The system is dominated by a restricted number of big European banks that have set presence across all countries in the region. Lately there is evidence of increasing interest of other banking groups as well. -  Increased financial intermediation of the recent years has lead to a rapid credit expansion. This trend reflects increasingly deep financial integration with EU Member States and supports rising trade, investment flows, and institutional  6  BIS Review 119/2007  strengthening. The expansion of the financial sector and inflows of foreign savings can strongly support real convergence.

Together with the mutually reinforcing pillars II and III, of regulatory review and market discipline, Basle II represents a formidable tool to insulate banks against inherent risks in the highly leveraged business of banking. In this process, we must be mindful of the fact that Basle II has been built on the experiences and risk parameters of developed, sophisticated economies. Through customization to suit conditions and markets in emerging economies, which have fundamentally different characteristics, the principles of Basel II should be appropriately adapted to suit such conditions. The “one size fits all” solution of Basle I will not suit the complexities of Basle II. The markets in which we operate have their own peculiarities and their own cultures. Promoting international best practice in such a culture is, indeed, a challenge which demands a fundamental change in credit cultures, attitudes, and policies. The will to change is important and in the case of banking institutions, has to be mandated, if it is to be in the best interests of the major stakeholders, the depositors. Full implementation of Basel II is, indeed, demanding for banking institutions and regulators alike. Capacity building is an imperative on both sides, as is the framework for good risk management built on risk models. The supervisory capacity to assess and validate these models must be enhanced and developed. The magnitude of the investment in technology by the banks must be justified in a business sense. We must ensure that the cost of compliance does not outweigh the benefits from Basle II.
We are in a different place with insurance: we consider that the levels of capitalisation secured under the current regime are consistent with our objectives, and therefore, unlike in the banking case, we see a low risk to those objectives in allowing firms plenty of time to adapt to the new standard. European legislators foresaw this and therefore (very sensibly in my view) included within the Directive transitional measures which allow firms significant breathing space as they adapt to the new regime. As a safeguard, the benefit from the transitional deduction from technical provisions (TDTP) is capped to make sure financial resources cannot drop below those required under the current UK regime as a result of using the transitional. The practical expression of the stance I have just described is therefore that the Bank will allow full use of transitional measures by those firms that qualify to use them, and that the transitional asset created by the TDTP will qualify as Tier 1 capital. This is consistent with the approach being taken across Europe, and I was glad to see Gabriel Bernardino’s recent comments on this topic. He said: ‘‘It is also fundamental that market analysts and investors understand that Solvency II adjustments and transitional measures are a legitimate part of the regime.

However, it would be odd indeed if a regulator (or a firm for that matter) were to change their view of conditions in the real world because of a change in regulatory regime. Clearly, despite the lofty ambitions of European legislators, the move from Solvency I to Solvency II doesn’t change how long people will live for, or the probability of a North American windstorm. So our beliefs about the nature of the risks to which insurance companies are exposed will persist as we move into the new regime. But the regime requirements are different, and we will embrace that change. People should not confuse these two things. Adapting to the new regime Solvency II introduces some important reforms to modernise the regulatory regime for insurers in the UK. But a sudden implementation of these changes by firms, and particularly on the life side given the introduction of the risk margin, is unlikely to promote either of the PRA’s objectives of safety and soundness and policyholder protection. We believe the opposite – that an orderly transition should support those objectives, because much life insurance business (and particularly those lines of business most impacted by the risk  1  2  Fuller explanation of the new Solvency II regime  BIS central bankers’ speeches  margin) is long-term in nature. This business will continue to exist – and will therefore be regulated – under the new regime, despite having been priced on a set of assumptions derived under the existing regulatory regime.
Yet much of modern physics does not, in fact, deal in great laws and unifying theories. Instead it deals in great unknowns and empiric regularities, in ragged edges and qualitative maxims (Buchanan (2014)). Advances in physics these days often come courtesy of massive empirical fishing expeditions,  3  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  3  industrial-scale searches for needles in haystacks, often using large-scale computational techniques. The large Hadron collider – in essence, a massive Monte Carlo machine - would be one prominent example of these techniques in practice. So even physics, for some the theoretical pinnacle of the natural sciences, is these days far from being a precise science. Through its evolution, the intellectual bloodline of physics and the other natural sciences has been mixed and re-mixed. What we have today is a methodological hybrid, an intellectual mongrel. This has been not just a natural evolution, but an essential one in making sense of our dappled world. From Natural to Social Sciences While Cartwright’s Dappled World aims to dispel the notion that natural science is precise science, it goes further in arguing that the self-same case can be made, just as forcefully, for the social sciences. It, too, is a haphazard patchwork of theories and hunches, operating at different levels of abstraction, often loosely held together. The economic and financial world is every bit as dappled as the natural world. And, as with the natural sciences, there is real virtue in that eclectic approach.

The dappled world Speech given by Andrew G Haldane, Chief Economist, Bank of England  GLS Shackle Biennial Memorial Lecture 10 November 2016  The views are not necessarily those of the Bank of England or the Monetary Policy Committee. I would like to thank Arthur Turrell for his help in preparing the text and Rafa Baptista, Karen Braun-Munzinger, Angelina Carvalho, Doyne Farmer, Jeremy Franklin, Marc Hinterschweiger, Andreas Joseph, Katie Low, Zijun Liu, Matthew Manning, Rajan Patel, Paul Robinson, Daniel Tang, Ryland Thomas and Arzu Uluc for their comments and contributions. 1  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  Introduction I am delighted to be giving this year’s Shackle Biennial Memorial Lecture. The past few years have witnessed a jarring financial crisis as great as any have experienced since the world wars, a crisis whose aftershocks are still being felt today. Against that dramatic backdrop, I thought I would use this occasion to reflect on the state of economics, not least in helping us make sense of such catastrophic phenomena. This topic has risen in both prominence and urgency since the financial crisis (Coyle and Haldane (2015), Battiston et al (2016)). Indeed, it would probably not be an exaggeration to say the economic and financial crisis has spawned a crisis in the economics and finance profession - and not for the first time. Much the same occurred after the Great Depression of the 1930s when economics was rethought under Keynes’ intellectual leadership (Keynes (1936)).
The Bank of England’s Credit Conditions Survey suggested that household secured lending and corporate lending rates were expected to rise further and all of this on the back of two years of flat GDP growth and three years of broadly flat credit growth to households and business in the UK. This was notwithstanding the MPC’s action on quantitative easing. FLS is designed to provide banks with medium-term funding at a more reasonable cost, with incentives that reduce the cost if banks lend more. This should improve credit creation in the economy through lowering rates on new lending, but to some degree it may also enable banks to improve their net interest margins and thus build more capital. At the same time the FLS was introduced, the Bank of England signalled its willingness to enhance its provision of liquidity insurance through the activation of the Extended Collateral Term Repo Facility. For its part, recognising the need to balance macro-prudential objectives in the way that I described earlier, the FSA has taken two steps. We have allowed banks to reduce the capital buffers they hold over the minimum Pillar One requirements in line with new lending that is consistent with the objectives of FLS, though to be clear, we do not require banks to use FLS to get this benefit.

First, when I read commentaries which go something like: “You wouldn’t believe how low Bank X’s modelled risk weights on, say, mortgages are”. I do note that the commentator can only observe the Pillar 1 capital requirement. They are not observing the judgmental overlay in in Pillar 2 which, as you can tell from the numbers I quoted, has gone up. The trouble is, this tends to suggest that Pillar 3 transparency is not working as it should do. This is all I am going to say today on models and RWAs, I will save that for another day. The second point on Pillar 2 is that, having built it up, we think that we can allow a relatively small part to be used to support the second objective of the FPC. Now, in terms of how we justify this, given the hierarchy of objectives that I described earlier, I believe that it is important to look at the interaction of resilience and lending as I set out. I think it is reasonable to conclude, and the FPC supported this action, that a reduction in the risk arising from this new lending caused by an improvement in credit conditions should help to offset the risk from lower capital buffers. In other words, if such extra lending boosts economic growth, it will enhance resilience in the financial system.
Labour productivity in entire economy Annual percentage change, seasonally-adjusted data 5  5  4  4  3  3  2  2  1  1  0  0  -1  -1 -2  -2 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11  Note: Squares are the Riksbank’s forecasts. Outcomes are quarterly data and the forecasts are annual averages. BIS Review 154/2008  Sources: Statistics Sweden and the Riksbank  11  Figure 7. Cyclical variation in GDP and number of employed Percentage deviation from trend 6  6 GDP  4  4  Employment  2  2  0  0  -2  -2  -4  -4  -6  -6 80  82  84  86  88  90  92  94  96  98  00  02  04  06  08  10  Note: Trend calculated using Hodrick-Prescott filter. Broken lines are the Riksbank’s forecasts. Sources: Statistics Sweden and the Riksbank  Figure 8.

For instance, shareholding is more widespread among Swedish households and many of the major "Swedish" multinationals – in which Swedes have invested a substantial part of their shareholdings – are very dependent, directly or indirectly, on developments in the USA. Developments in the Swedish economy in recent years have shown many similarities to developments in the USA. Rapidly rising share prices, a strong GDP growth driven by both investment and consumption and an increase in indebtedness is a description that fits both the Swedish and American economies in recent years. However, the increase in economic activity began later in Sweden and has not really had the same speed as that in the USA. Moreover, the rise in Sweden was preceded by a period where adjustments following the crisis at the beginning of the 1990s had forced down investment and consumption considerably and where both the household and corporate sectors had reduced their level of indebtedness. Saving in both of these sectors was therefore at a high level and indebtedness fairly low when growth in the Swedish economy picked up. Now that economic activity is slowing down, the private sector's indebtedness is not particularly high, from a historical perspective. Furthermore, the lower interest rates will mean that interest expenditure comprises a much smaller burden for borrowers now than previously. Although the surplus in saving in the private sector has declined gradually in recent years, it only became a slight deficit towards the end of last year.