samchain/econo-pairs-v1 huggingface dataset:
The euro is based on a credible, stability-oriented monetary policy  a)  I would like to point out that, from a technical point of view, the launch of the euro on financial markets, on 1 January 1999, has been an indisputable success, and that the Eurosystem, made up of the ECB and the National Central Banks of the euro area, has fully achieved the objectives assigned to it in the following areas:  b)  –  operational efficiency, highlighted by the precise adjustment of banking liquidity and effective steering of short-term interest rates;  –  the security provided by the procedures and systems implemented, both for the execution of interbank transactions, and vis-à-vis large-value payments. The interbank market became integrated in early January 1999, right from the start of Monetary Union, thanks to the setting up of the Target system for the real-time transfer of largevalue payments throughout the euro area and in other EU countries. –  and, finally, the smooth functioning of the Eurosystem, which is an integrated organisation in which the decision-making centre works in constant contact with the national central banks on the implementation of operations. Together with many other factors, this technical and operational success has contributed to the high level of credibility of the single monetary policy which is based, in particular, on the independence of the European Central Bank and national central banks, and on the store of confidence inherited from the latter. Moreover, contrary to popular belief, European Monetary Union did not start from scratch.

To-day some kind of herd behaviour drives a lot of observers and actors in the opposite direction: overwhelming pessimism as regards the present situation and the economic future. Both attitudes are equally totally inappropriate. It is up to the Central Banks to remain moderate in their judgments, pragmatic and lucid in the various circumstances and to offer an anchor not only for monetary and financial stability but also for stability of judgment. -third, fostering confidence is a major contribution of the Eurosystem to the prosperity of the European economy. Confidence is a very precious ingredient in the present European conjuncture, as recently emphasized by the European Council in Ghent : confidence in the euro, in price stability, in its ability to be a highly reliable instrument for savings, in its medium and long term solidity. Confidence of the consumers in price stability underpins growth through dynamic household consumption – which is today a major motor of economic growth. Confidence of the savers underpins growth through a favourable financial environment. Thank you very much for your attention. BIS Review 96/2001  7
Low interest rates, for example, can contribute to the build-up of financial imbalances via the so-called “risk-taking” channel.6 Simply put, very low interest rates may create incentives for banks to take on more risks. Recent research has provided empirical evidence compatible with such a notion. It has been documented,7 for example, how market based measures of bank’s risks as perceived by financial market participants tend to react positively to increases in interest rates, so that a lower interest rate leads investors to perceive banks as less risky. By the same token, several papers8 have shown that credit standards are correlated with the level of interest rates: lower interest rates, in particular, imply lower credit standards, including to customers who are perceived as representing a  6  See Borio and Zhu (2008). 7  See Altunbas et al. (2010). 8  See Jimenez et al., (2008), Ioannidou et al. (2008), and Ciccarelli et al. (2009). BIS central bankers’ speeches  5  higher credit risk. On the theoretical side, research done at the Banque de France9 has shown that, when the regulatory environment is not transparent, a decrease in the level of real interest rate increases banks’ risk-taking behavior. A time-honored principle of finance is that, ceteris paribus, the only way to increase the expected rate of return is to take more risk, and the result of such search for yield is therefore that banks will increase their risk exposure.

It should finally be noted that contrarian views are probably easier to arouse in a decisionmaking process that does not rest on a single unified analytical framework, such as one that would be used, for instance, to produce the central bank’s inflation projections. In this respect, the ECB’s monetary policy strategy, which aims to pass some robustness checks by making use of various theoretical and empirical approaches, may already provide the Governing Council with a relatively broad spectrum of views about risks to price stability. III. Conclusion  Let me now conclude. The financial crisis has exposed several shortcomings in the monetary policy frameworks of the pre-crisis era, and more generally in their intellectual foundations. Not only does maintenance of output and inflation stability not automatically deliver financial stability, but on the contrary, the very same monetary policy which successfully keeps output and inflation stable in the short run may well lead to the build-up of financial imbalances and asset price bubbles which threaten macroeconomic stability at longer horizons. Further, commitment to “mopping up” such bubbles by means of aggressive interest rate cuts implemented after their bursting has proved to be most unwise. Moreover, the recent experience demonstrated that such a strategy may well be unable to shield the economy from the costs deriving from the bursting of the bubble, costs which in many cases may simply be staggering. Also, the sheer size of the macroeconomic shock associated with the bursting of the bubble may be sufficient to plunge the economy to the zero lower bound.
Conventional judgment is a safe haven for bankers and regulators alike. It is not easy to persuade people, especially those who are earning vast sums as a result, that what looks successful in the short run is actually highly risky in the long run. As in monetary policy, it is unlikely that prudential supervision can be implemented as a set of rules to be applied mechanically. Nevertheless, to rely solely on the discretionary judgment of individual bankers and regulators is asking too much of human capabilities. This suggests that the principle of constrained discretion, applied so successfully in monetary policy, needs to be applied to banking regulation. That is not to say that a similar institutional apparatus would be appropriate, but we need to build into the system some simple and robust impediments to excessive risk-taking that can be monitored. And we must ensure that an institutional memory is maintained so that the lessons from the crisis are not forgotten and those impediments to excessive risk-taking are not swept away once memories of the crisis recede. The design of those impediments should be based on an explicit identification of the market failures that regulation can hope to correct. Such market failures seem to relate to two dimensions of banking – the “cross-section” and the “time-series” aspects of behaviour. The former reflects the extreme interconnectedness of banks. Each individual institution can appear relatively safe while the links between them mean that the system as a whole is vulnerable.

In the panic of 1906, the founder of what is now the Bank of America displayed his gold reserves on the street and offered to convert deposits into gold, creating confidence in his bank at a time when many others failed. Forty years ago, the clearing banks in London held around 30% of their assets in short-term liquid instruments. Today that liquid assets ratio is about 1%. For the major UK banks, almost 25% of customer loans are now funded by short-term borrowing in wholesale markets. At the turn of the new century it was close to zero. This was the distinctive feature of the contemporary British model of banking. Distinctive it may have been; sensible it was not. HBoS and RBS paid the price as the availability of this funding dried up, and not one of the building societies that de-mutualised in the 1980s and 1990s in order to expand beyond the constraints of their deposit base has survived as an independent entity. Banks have changed. They have encouraged the expansion of proprietary trading, the funding of long-term assets in short-term wholesale markets, a rapid expansion of balance sheets and a marked rise in leverage. Commercial banks followed the path of investment banks. Balance sheet size and high leverage were seen as the key to obtaining funds at lowest cost. The total assets held by the world’s largest banks roughly doubled in the five years to the end of 2008, and leverage in UK banks rose on average by two-thirds.
Or carburettor would have been blocked. The mechanic would hypothesise all possible reasons for the failure of the engine. Third, experiments are designed to test each hypothesis made. The mechanic may open the fuel tank to see whether there is fuel. If there is no fuel, he will try to start the engine having filled the tank with fuel. If there is fuel in the tank, then he would examine the second hypothesis, that is, whether there is a blockage in the tube that distributes fuel to the engine. If there is a blockage, he will clean it and try to start the engine. If there is no blockage, then he would experiment the third hypothesis, namely, the working of the electrical system. In this manner, he would experiment all the hypotheses he has made one by one and make relevant conclusions. Fourth, the results of the experiments are analysed in order to ascertain whether the hypothesis is proved. Or else, when several hypotheses have been made, to ascertain which hypothesis has been proved. Fifth, making final conclusions out of the observed results of the experiments. A disciplined motorcycle mechanic would follow these steps involved in the scientific method and attend to the required repair of the fault in the motorcycle. In this sense, a sideway motorcycle mechanic is not different from a trained scientist, since both follow the scientific method in reaching conclusions.

In fact, during those early days, some of those countries were able to freely utilize the labour and resources of the countries that were colonized by them, and benefit immensely by the fruits of the foreign lands and natural resources. They had to adhere to very few laws and regulations relating to education, training, health or labour practices, or standards on working conditions. There were no environmental laws or treaties, and the environment was often the first casualty in their quest of accumulating wealth. Capital accumulated by illegal means or criminal activity was used freely without any restriction. 2  BIS Review 29/2008  But, today the situation is completely different. Today, emerging countries are acting in a much more responsible manner in driving their economies forward. In fact, the present day emerging economies are achieving their attractive levels of growth, while adhering to, and respecting international conventions on copyright, anti-money laundering and terrorist financing, environmental, labour, human rights, safety, health, etc., etc. This situation is sometimes forgotten by some of the economic and political analysts, particularly from advanced nations and therefore it may not be too inappropriate to remind the world of this state of affairs, on and off. All in all, from the point of view of individual developing countries, the most important economic need at present is to maintain the high economic growth momentum that they are currently achieving, in a sustainable manner.
All of this evidence points in one direction: the global monetary system operates in a similar fashion to all other tightly-knit networks – it is robust yet at the same time fragile. It is driven by potent – increasingly potent – spillover effects and common global factors. In short, global finance can only be understood and managed as a system. Characteristics of the global financial network The next obvious question is what mechanisms are in place to underpin the resilience of this tightly-woven web? Let me highlight some key characteristics of the global financial network which are useful in assessing its robustness. And let’s start with the good news. One positive trend in the international flow of funds is their changing composition. Table 1 breaks down these flows of funds into their foreign direct investment (FDI), portfolio and debt components, for advanced and emerging markets, over the periods 1980–1994 and 1995–2012. Two features stand out. First, the declining share of debt-based finance and second, as the counterpart to this, the rising share of portfolio and in particular FDI investment. For example, since 1995 the dominant source of emerging market capital has switched dramatically from debt-based finance towards FDI. Equity and FDI together now account for two-thirds of emerging market financing. That is significant from a stability perspective. Empirical evidence strongly suggests that FDI and, to a lesser extent, equity is a far more stable source of external financing than bank debt (Kose et al (2009)).

This shows the results of a simulation of a hypothetical financial network of firms. These have differing levels of financial strength, measured on the x-axis. Think of this as a country’s level of official reserves or a bank’s level of liquid assets. On the z-axis is a measure of network interconnectivity – the scale of cross-border assets or interbank exposures. Finally, on the y-axis is a measure of systemic risk – the incidence of default across the network, whether of countries or banks. As the network becomes better integrated, for a given degree of financial strength, systemic risk remains low. We operate in a zone of systemic stability. That is because the network is operating as a shock-absorber, a network insurance device scattering risk to the four corners. So it was pre-crisis. But for a large-enough shock to financial strength, the system fundamentally changes shape. The network flips to a zone of systemic instability. That is because it is now operating as a shock-transmitter, a network incendiary device – and the greater the degree of integration, the sharper this knife-edge. So it was during the crisis. This is the robust-yet-fragile property of connected webs. The global financial crisis provided no better example. The flat earth that was the Great Moderation gave way to the fragile planet that was the Great Recession. Risk-sharing gave way to risk spreading, risk distribution to risk contagion. This was by no means an isolated incident.
With due respect for all the forecasting difficulties at present, the Riksbank counts on demand in the industrialised countries turning upwards during the second half of next year. GDP growth in the OECD area is calculated to be 1 per cent this year, followed by 1,5 per cent in 2002. Under present circumstances the uncertainty around our main scenario is, of course, considerable. BIS Review 86/2001  3  We count on GDP growth in Sweden in the coming years being lower than we assumed earlier. The combined economic effect of interest rates and the exchange rate is therefor stimulatory. As the Committee is no doubt well aware, in the years ahead both increased transfers and tax cuts will also contribute to a rapid increase in household disposable income. Given a gradual recovery in the rest of the world, this appreciable overall stimulus from economic policy will lead to a gradual upturn in Sweden’s economy. GDP growth is expected to be 1.3 per cent this year, followed in 2002 and 2003 by rates of 2.2 and 2.8 per cent, respectively. The lower GDP growth — particularly this year — compared with our earlier assessment implies lower resource utilisation. At the same time, the recovery towards the end of the forecast period means that resource utilisation will then be rising again. Monetary policy is currently formulated on the basis of an assessment of inflation excluding transitory effects from indirect taxes, subsidies and house mortgage interest expenditure (UND1X).

For emerging economies, capital flow volatility is a fact of life and something that policy makers have to deal with; and we have to acknowledge that the size and volatility of capital flows will only intensify. While the transmission of global shocks to the domestic economy through the real economy channel – that is through trade and investment – is something that we have been dealing with for decades, policy makers today are confronted with the increasingly dominant channel of 1/3  BIS central bankers' speeches  transmission of shocks through the financial markets, at least in the immediate term. All of us have experienced how spillovers from external developments that were manifested through capital flow volatility have adversely affected domestic financial markets, asset prices, liquidity conditions and importantly, exchange rates. All these challenges make for a complicated policy environment for ASEAN central banks. Gone are the days when keeping our own house in order is enough. Sure, good fundamentals matter as they have no substitute. They are, however, no longer sufficient. As Keynes rightly pointed out a long time ago, “the market can stay irrational longer than you can remain solvent.” Often, we have seen how external developments that are beyond our control, such as the unprecedented quantitative easing by the advanced economies and the subsequent Taper Tantrum, triggered periods of large inflows followed by sharp reversals in emerging economies with severe consequences. For small open economies, these flows can easily overwhelm the domestic financial markets and lead to build-up of vulnerabilities in the economy.
40  Recently, the Bank hosted a conference to mark 20 years of operational independence in monetary policy. 41  Central bank independence is also part of a social contract with the public. The conference made clear that there is nothing inviolable about that contract. Like any social contract, central bank independence needs to be adapted and improved in response to shifting social norms and economic circumstance. Correcting the Deficits  Engaging wider society is part of the process through which central banks can renew and strengthen that social contract, in the face of new social norms and changed economic circumstance. How might that best be achieved? Let me discuss three areas where the Bank of England has made progress recently and is seeking to make further progress in the period ahead: communication; conversation; and education. (a) Communication  When I first arrived at the Bank of England, I was told I would need to learn a new language. It was not one I had come across previously. There was no book from which to learn, nor any recorded tapes. It seemed to involve quite a bit of Latin, which put those of us from a state school at an instant disadvantage. You didn’t have to wear a top hat and a tailcoat when writing it, but it helped. The language was called “Bankese”. Despite its obscurity, the semantic principles of Bankese were easy to detect. The language was ruthlessly consistent in tone and content, for fear of giving mixed messages.

In the U.S. financial crisis of 2007–09, there were no widespread bank runs: in general depositors did not line up at their bank and request their deposits, even for banks that were widely reported to be in poor financial condition. This is likely the case because of the widespread understanding of U.S. federally insured deposit insurance, which protects depositors’ funds up to the current limit of $ and the presence of the discount window, by which banks can increase their cash holdings to meet withdrawal demands without having to sell assets at panic prices.12 However, the financial crisis of 2007–09 manifested another type of run on banks as well as non-banks, a run on the short-term, non-deposit debt issued by the intermediaries. This is a point made clearly by Gary Gorton (2012). These runs weren’t clearly and easily visible to the public, and this fact impeded the quick understanding of the severity and potential consequences of the run that was underway. I’ve outlined two strains of thought that provide models for us to understand the mechanisms that amplify what might initially be small shocks into large and dangerous events for the economy: the procyclical leverage of financial intermediaries and their sensitivity to measures of financial risk, such as volatility, and the potential for private intermediaries to issue moneylike instruments.
These complementary indicators are: house price imbalances, current account balance, change in credit relative to GDP (credit intensity) and the private sector debt burden. And as an additional important indicator, we are planning to incorporate the output gap, under the assumption that the position of the economy in the business cycle must also play a role in the activation of this tool. The usefulness of using different indicators is especially important in cases like ours, in which the Basel gap does not work well because of the shorter average duration of credit cycles in Spain. Given the time lag implementation in the CCyB, we also carefully monitor the forcasted values of the indicators. Admittedly, accepting the role of macroprudential policies as an additional set of macrostabilising tools increases the potential interactions with other macroeconomic policies. Indeed, the interaction between monetary and macroprudential policies is particularly relevant in a monetary union such as Europe’s and makes a strong case that justifies the introduction of national macroprudential policies. This is because, in a monetary union, monetary policy is defined on the basis of the state of the economy in the Union as a whole and, in some circumstances, it might lead to financial conditions that are too loose for certain country conditions and, therefore, can generate pockets of financial risk in some countries. Activating domestic macroprudential policy by those national authorities in such circumstances will help precisely avoid the emergence of systemic crises.

He is, then, not only an expert in banking and financial sector regulation and supervision, but has also had to take decisions on monetary and fiscal policy. And if this were not enough, the value of international experience in the IMF and in the various international committees he has presided make him a person especially sensitive to the commercial and financial interrelations between the different economies. In sum, we are fortunate to have with us today a policy-maker whose wide-ranging experience in different areas of the economy is second to none. Agustín, many thanks once again for accepting our invitation. The floor is yours. 11/11