samchain/econo-pairs-v1 huggingface dataset:
The key topic within this block is the interaction and mutual influence of these two components of the Bank of Russia’s set of tools used to address the task of maintaining price stability and financial stability. Finally, work stream 6. New challenges to monetary policy. Within this block, we will analyse such long-term trends in economic development and finance as the introduction of digital currencies, innovations in the financial market, and climate and demographic changes. We will also estimate how these issues might impact the implementation of central banks’ monetary policies in the future. We have already started our analysis within all these work streams. The results of the Review will be discussed until the end of 2022 Q1. Following the discussion, we will compile a summary report in 2022 Q2 and publish it on the Bank of Russia website together with analytical notes addressing individual issues. The summary report will present the Bank of Russia’s opinion on the topics reviewed and proposals regarding a possible adjustment of the parameters of the Bank of Russia’s monetary policy. The report will then be discussed with the public and the professional community. We are going to sum up the results by the middle of 2022. It would be possible to conclude whether we need to adjust our policy following the Review only after we complete the analysis and the extensive discussion of its findings.

The focus here is on maturity transformation and affordability risk in mortgage lending. In the short term, this may allow banks to increase their profitability, but the flip side is that this also makes them more vulnerable to interest rate shocks and corrections on the mortgage and residential real estate markets. Domestically focused banks would be particularly exposed to a major interest rate shock. As we explain in our Financial Stability Report, in the event of a normalisation of interest rates, banks would initially benefit from the restoration of the liability margin. However, a major interest rate shock would cause net interest income to fall significantly at many banks, potentially resulting in losses. The greater a bank’s maturity transformation is, the higher these losses will be. Even if the current low interest rate period were to continue and interest rates were only to rise very gradually, the possibility of a major interest rate shock should not be ruled out. Experience has shown that interest rate corrections can sometimes be sudden and sharp. It should also be borne in mind that interest rates on the money and capital markets are currently more than 300 basis points lower than at the beginning of 2008. In other words,  2  BIS central bankers’ speeches  even if interest rates were to return to levels previously considered normal, this would still constitute a major correction.
The models I have described here are key support tools. But a model will never be able to tell us exactly how the interest rate should be set. The ultimate assessment is, as mentioned, a result of Norges Bank’s professional judgement and will also capture considerations that are not sufficiently taken into account by our models. As such, the models are only a tool. But, a model such as NEMO is a useful tool for analysing developments and in interest rate setting. It helps us interpret and understand the dynamics of the Norwegian economy and can help us to achieve consistency in our monetary policy response pattern. The chart shows our forecasts for inflation and the output gap in the June Report (2/11). The output gap was assumed to increase somewhat further ahead, with the downturn in the wake of the financial crisis being followed by a mild upturn. The low level of inflation would then gradually move up to target. The interest rate path presented in June indicated that the interest rate would gradually be raised towards a normal level in the next years. This was conditional on the economic outlook we presented at that time. Our forecasts provide an expression of what we consider to be the baseline path. But the forecasts are uncertain, as illustrated by the fan chart. Our interest rate forecast is not an unconditional promise, but signals how we will set the interest rate if developments in the Norwegian economy are in line with our projections.

Old-style central bank balance-sheet expansion coupled to ever higher risk-taking, operations that were considered unthinkable until a decade ago, have become almost a 1/4  BIS central bankers' speeches  mainstream instruments. The pandemic has tested the resilience of the Albanian economy and of our banking system. It has put an immense social and financial strain on households and businesses and has forced the authorities to act swiftly to address the health crisis and to introduce major policy initiatives in order to contain its impact. The Bank of Albania has used a wide range of policies to support financial activity and aggregate demand. We reduced the policy rate to a historical low of 0.5% and increased the amount of liquidity injected into the system. These actions were aimed at reducing the debt servicing costs across the economy and at supporting continued financial intermediation. In addition, in close consultation with the banking industry, we applied targeted – though temporary – regulatory reliefs, designed to encourage both the temporary deferral of loan installments and the consensual restructuring of loans for borrowers in difficulties, but with sound business prospects. Finally, we took both macro and micro prudential measures in order to strengthen the banks’ balance sheets and preserve their lending capacity. On the fiscal side, the Albanian government delivered fiscal accommodation through: Allocating additional funds to support the health sector; Increasing social transfers to compensate for the households’ loss of income; Offering temporary tax relief to businesses and introducing sovereign credit guarantee schemes to improve their access to finance.
These efforts, however, need to be balanced by efforts to enhance the capacity of countries not only to manage the risks and vulnerabilities, but also to sustain their own capacity to support growth and development. Capacity building involves helping countries to help themselves. It requires enhancing the institutional capacity of the country. Support in putting in place the necessary institutional structures, arrangements and systems would increase the potential for the sustainability of the development process. Strengthening these foundations are vital to the deregulation and liberalisation process. They represent the pre-conditions to any reform agenda. In this regard, capital account liberalisation needs to be managed in accordance with the country's own institutional capabilities and implementation capacity. Supporting financial infrastructures, sound and strong financial institutions, developed financial markets, and a more market-driven environment are key to the success of the liberalisation process. On the support for the low-income and poorer countries, the uneven progress made in meeting the Millennium Development Goals is of deep concern. The debt relief proposal of the G-8 to assist the Heavily Indebted Poor Countries (HIPC) is a welcome step. Debt cancellation, however, addresses the symptoms and not the cause of poverty. Experience has shown only a few countries have graduated from the debt relief programme under the HIPC Initiative. Many still continue to be burdened with unsustainable levels of debt. It is important to recognise that the task of assisting the lower-income countries does not stop short at providing financial assistance.

It is now urgent to make concrete progress on substance, and to move up a gear, by triggering four accelerators of the Economic Union: - A macro accelerator: the French President, Mr. Macron, in his speech about Europe ten days ago at the Sorbonne, started by talking about the “coordination of economic policies”. In this widely-discussed speech, I believe that this was not sufficiently remarked upon. In my opinion – as an independent central banker – we should aim to achieve a genuine collective economic strategy; a mutual commitment between the Member States of the euro area, for more reforms in countries where they are required, and more fiscal support in countries with leeway for this. This collective strategy could be prepared and adopted as of 2018. It could be supplemented by the creation of a common stabilisation fund, aimed at supporting, through lending, Member States facing asymmetric shocks. This could be part of a European Monetary Fund, provided that its scope of action is extended beyond the current European Stability Mechanism. - A micro accelerator: i.e. a Financing Union for Investment and Innovation. The aim is to mobilise the EUR 350 billion savings surplus of the euro area, notably to shore up equity which is the key to an innovation economy, and also to foster synergies, thanks to an integrated steering mechanism, between the Juncker investment Plan, the Capital Markets Union and Banking Union. Here too, progress could be rapid.
Of course, this is not to say that financial sector weaknesses are not important, or sufficiently recognised. The broad Comprehensive Assessment that we have started reflects precisely the importance of balance-sheet repair. My point is rather that while the on-going deleveraging in the banking sector certainly plays an important role in the inadequate current levels of credit supply to the real economy, factors related to the demand side may play an even more important role. The weak demand outlook combined with the slack in industrial capacity is the most important explanation for the drop in private investment since the crisis, and the most relevant limiting factor for future investment. In addition, the protracted period of low inflation and consequent low nominal growth will increase the burden of the debt overhang of households and governments, further complicating the recovery process. The separation of banks from sovereigns As I mentioned before, the goal of separating the fortune of banks from that of the sovereigns and vice-versa through direct European recapitalisation of weak banks via the European Stability Mechanism (ESM) was present in the embryo of what later became the Banking Union project. Somewhat ironically, however, this widening of the focus caused the initial objective to become obscured. The question of European direct recapitalisation – for which a framework has still not been published– ceased to be the main focus of attention. In the view of many commentators, the SRM became the expected instrument to achieve the separation between banks and sovereigns.

But I think this is a somewhat misleading view as I will explain later. The SSM and the SRM, both components of the Banking Union thus contribute to reducing the negative feed-back loop between banks and sovereigns. One important objective of the SSM Regulation is to improve the quality of supervision and to ensure strong homogenous supervisory standards across the euro area. The essential contribution that European supervision can give to the separation of banks and sovereigns is the build-up of trust in the robustness of banks as stand-alone entities, so that enhanced confidence by their peers can help normalise interbank markets and overcome financial fragmentation. The establishment of the SRM also addresses the problem of breaking the bank-sovereign nexus because the orderly resolution of banks, even large ones, helps to avoid costly rescues by sovereigns that may endanger their own finances. In practice, however, the SSM and SRM may not be sufficient to completely sever the ties between sovereigns and their domestic banks. The effect of SSM and harmonised supervision on trust among banks may be more limited than expected, while the SRM, important for organising orderly resolutions, is limited in the amount of resources it can contribute to recapitalisations. The Bank Recovering and Resolution Directive (BRRD) is in my view the most crucial regulatory change in Europe in relation to breaking the bank-sovereign nexus. It represents a true paradigm change, ending the culture of bail-out and ushering in a culture of bail-in.
Debt and taxes also affect incentives. Set too high, they may dissuade people from working and investing. These effects are often captured in a relationship called the Laffer curve. Higher tax rates may boost tax revenues, but only up to a point. After that point, the tax take could actually fall due to the disincentive effects of higher tax. 2 In that event, both the taxpayer and the tax collector are worse off. The same applies to debt. There is a debt Laffer curve. If a debt overhang is sufficiently severe, the interest burden weakens debtor incentives to repay. In the event borrowers and lenders find themselves on the wrong side of the debt Laffer curve, both are worse off. 3 Non-economists sometimes have a different word for an overhang. Conveniently, this is found by simply transposing the syllables. What we face today may be called a debt overhang, but what it will feel like is a debt hangover. Like a hangover, it will slow activity in the period ahead. If it is severe enough, it may diminish incentives to work and invest. Too wild a financial party risks borrowers finding themselves on the wrong side of the Laffer curve the morning after. The McKinsey Global Institute has recently looked at the debt accumulated by ten developed economies over the past decade, including the UK and US. 4 Since 2000, gross debt in these ten economies has increased by around $ trillion, a rise of 60%.

12  For some of the earliest evidence, see Lintner, J (1956), “Distribution of incomes of corporations among dividends, retained earnings and taxes”, American Economic Review, 97–113. 13  Bank of England Financial Stability Report (op.cit.). 6  BIS Review 10/2010  recently become one of the first firms to do so in 2010. Surveys of households suggest some of the windfall of lower interest costs is being used to repay debt. Opportunistic repayment or refinancing is the financial stability equivalent of repairing the roof while the sun is shining and it is important it continues. The second lesson comes from past debt crises, in particular among developing countries. If a borrower has a large debt overhang, there is a case for restructuring the claim from debt into equity – a debt-for-equity swap. 14 In some cases, such swaps are no more than recognition that an impaired debt is, in substance, an equity claim. But more than that, debtfor-equity swaps can potentially benefit both lender and borrowers by airlifting a debtor to the safer side of the debt Laffer curve. 15 A number of global banks have begun putting such a strategy into practice. Around a hundred debt exchanges were carried out by global banks during 2009, typically converting debt instruments into equity or retiring debt below face value, so reducing leverage in the financial sector. That these swaps were voluntary and market-based is evidence of their benefit to both lender and borrower. Debt-for-equity swaps could be used to tackle the debt overhang in other sectors.
It is these episodes of looser supply that most concern policy makers, including the Bank’s Financial Policy Committee, and they do seem more prevalent at times of rapid growth in credit. The mortgage boom of the late 1980s in the UK was accompanied by much higher loan-to-values and other signs of easier credit supply than anything in the past 20 years. There is evidence more generally that rapid growth in corporate debt tends to coincide with deteriorations in the quality of credit. The recent surge in leveraged lending to companies, including those in the UK, may be one such episode. 5  All speeches are available online at www.bankofengland.co.uk/speeches  5  In what follows I’ll go through these points in a little more detail. I’ll make some remarks about the particular characteristics of student and car loans. I’ll explain how aggregate mortgage debt evolves over time and why the most reasonable forecast over the next few years is for relatively subdued rates of growth. (That’s why, barring a rise in interest rates well beyond what’s priced in the yield curve, interest payments on mortgages are likely to remain below the pre-crisis average). There’s then some stuff on the recent surge in leveraged lending to companies. The silver lining here is that UK banks look to be relatively uninvolved in this activity. Most of the investors seem to be non-UK institutions and the channels that so disastrously amplified defaults on US mortgages, during the financial crisis, are now much reduced.

For example, if one of the costs of debt is that it encourages the pursuit of risky ventures by managers, you’d expect to find less of it in fast growing firms and more in mature companies where the opportunities for further growth are more limited. This is what you do find: high-leverage companies tend to be larger, older and have less volatile earnings. They also tend to have more tangible assets, on which debt can be secured, and are less R&D intensive. All this is in line with theory. 14  All speeches are available online at www.bankofengland.co.uk/speeches  14  But theory does much less well explaining why debt grows or falls within particular firms, or indeed across the whole economy, over time.9 One possible reason why the economic fundamentals can’t explain these swings is they they’re often less justified by those fundamentals, and instead driven by swings in sentiment among the suppliers of finance. Empirically, periods of rapid growth in corporate debt in the US have tended to coincide with deteriorations in credit quality and other signs of easing supply.10 Protections for lenders tend to decline, debt issuance skews towards riskier borrowers and, despite this, lending spreads often contract. It’s clear that we’ve seen many of the same things in the recent growth of “leveraged loans”. These are loans issued to already-indebted companies, which are often then packaged up and sold (as “Collateralised Loan Obligations” (CLOs)) to institutional investors.
The focus of monetary policy, at least in the 25 years prior to the crisis, had been on controlling the short-term safe rate of interest. Crisisinduced monetary interventions widened that focus significantly. By pursuing QE and forward guidance, central banks began to exercise influence beyond overnight rates of interest. And for those central banks that engaged in credit easing, this influence extended further, from safe to risky rates of return across a broad spectrum of assets. These were giant steps. A second aspect of the reinvention was macro-prudential regulation. Inflation-targeting was necessary but, by itself, insufficient to curb the financial cycle. The response of governments has been to grant central banks new powers, focused on the needs of the financial system as a whole and towards the needs of the nonfinancial economy, as much as the financial sector. That is what the “macro” in macro-prudential meant. Macro-prudential policy is gaining ground every bit as quickly as central bank independence did in the 1990s. It has quite radical implications. Pre-crisis credit cycles were allowed to operate largely unconstrained. Macro-prudential policy overturns that orthodoxy, with policy instead leaning against the credit cycle to moderate its fluctuations, both during the upswing and the downswing. It, too, is a big step forward. A third aspect of the reinvention is in the operations of central banks. During the crisis, central banks flexed their balance sheets as never before.

End of the “Great Moderation” This brave new world looked set to continue indefinitely during the early years of this century. Inflation was low and output stable, the so-called “great moderation”. The Holy Grail of growth without risk seemed to have been discovered. Yet moderation was sowing the seeds of its own destruction, dulling the risk senses of central banks, regulators and market participants. In this vacuum, financial risk-taking rose to Himalayan heights. The global financial crisis of 2008 brought that decisively to an end. The financial system and economy tumbled from their Himalayan peaks. Great moderation gave way to “great recession”, the sharpest and longest-lasting since the 1930s. Central banks quickly 2  BIS central bankers’ speeches  acknowledged their pre-crisis blind spot – ballooning debt among both banks and non-banks. And, not for the first time in their history, they reinvented themselves. On the monetary policy front, extraordinary times resulted in extraordinary monetary measures. Interest rates globally were lowered to levels previously never seen, accompanied in some major advanced countries by purchases of government securities – so-called quantitative easing (QE). In some countries, central banks in addition purchased private sector assets, such as mortgage-backed securities and corporate bonds – so-called “credit easing”. Others, including the Federal Reserve and Bank of England, issued forward guidance to help clarify their future policy intentions and thereby shape the yield curve. This was terra incognita for central banks.
Could these reinvestments exceed € billion next year, could they be closer to € billion, for example? The reinvestments are quite mechanical. They derive from past investment policy. As you know, we are committed to being very transparent. We are publishing the reinvestments 12 months in advance so you will have the numbers when they come. 2/4  BIS central bankers' speeches  There is some flexibility when it comes to reinvestments. Can the ECB and some national central banks reinvest a government bond into a corporate bond, or viceversa? That is not something we’ve discussed. That will be a technical discussion. What I don’t expect is any departure from the principle of capital key investment of government bonds, which has been a key principle at the heart of our public sector purchase programme. There are reports about some kind of “operation twist” from the ECB about buying longterm bonds. Is this happening? As I said, that’s not something we’ve discussed. That’s something you’re planning to discuss? That’s something that’s on the table? We will discuss the reinvestment policy; that will be a technical discussion. I don’t think it’s a major aspect of our monetary policy. With Brexit it seems like we’ve had a major step; on Friday night, after 12 hours of discussions, Theresa May managed to get some kind of blueprint. Do you see this as good news or bad news? The ECB is not part of the negotiations.

The empirical literature on the Chilean case provides evidence of a negative correlation between the pass-through coefficient of nominal depreciations to inflation and the credibility of the Central Bank. Said credibility is fundamental to allowing the real exchange rate to contribute in the adjustments of the economy. As for recent developments, the evidence shows that more autonomous central banks have implemented more aggressive monetary expansions (Figure 3). Conclusions Twenty years into the era of autonomy of the Central Bank of Chile, we can say that it has succeeded and it is consolidated. There remain challenges ahead. The evolution of the economy in the past few years has raised issues that need to be further analyzed to improve the policy framework. An objective look at reality – acknowledging the personal conflicts of interests I have in acting as an independent referee – shows that our country’s current monetary policy has succeeded as never before. The business cycle has been smoothed and low inflation has been consolidated. Inflationary expectations have stabilized and it is possible to implement a truly countercyclical monetary policy. Of great support has been the accountable and predictable fiscal policy. The successes in the conduct of monetary policy owe to the work of many people. Many from outside the Bank have stressed the importance of its autonomy and its macroeconomic achievements, and have also made strong contributions to improving the conduct of monetary policy. This enables the consolidation of the institution. Many from within the Central Bank have contributed decisively as well.