samchain/econo-pairs-v1 huggingface dataset:
At some point when the economy has clearly overcome the remaining impediments from the largest economic and financial downturn since the Great Depression, the odds of inflation rising noticeably above target could become palpable. But such a breakout is just not at all very likely today. Indeed, many Fed critics have been voicing this concern since 2009, and it hasn’t even come close to happening. What if inflation just ran moderately above target for some time? Well, I see the costs of this outcome as clearly being much smaller than the costs of falling back into the ZLB. First, I believe the U.S. economy could weather the modest increases in interest rates that would be needed to keep inflation in check. Such rate increases would be manageable for the real economy; this is particularly true if industry and labor markets have already made the most difficult reallocations of jobs and overcome other factors so that productive resources are more efficiently and fully employed. Second, as I’ve noted many times in the past, a symmetric inflation target means we should be averaging 2 percent inflation over time. We’ve averaged well under that 2 percent mark for the past six and a half years. With a symmetric inflation target, one could imagine moderately-above-target inflation for a limited period of time as simply the flip side of our recent inflation experience – and hardly an event that would impose great costs on the economy. The murky state of inflation expectations is another factor that enters my risk management considerations.

But the decision about when to begin to  13  See, for example, Hansen and Sargent (2008). BIS central bankers’ speeches  5  raise rates shouldn’t be made prematurely. Rather, the decision for policy liftoff has to be made for the right reasons – that is, it should be dictated by economic conditions. I have said many times that I agree with Minneapolis Fed President Narayana Kocherlakota: Policy at all times must be goal-oriented. 14 Our experiences since the crisis began and current economic conditions are highly unusual. The FOMC should not simply set its policy instruments by mechanically aligning them with historical norms if those norms are not relevant harbingers for the attainment of both of our dual mandate goals. Rather, our policy instruments should be set to achieve our ultimate goals as efficaciously as possible given current and prospective economic conditions, all the while with an eye on managing against important risks to the outlook. What does that mean now? I believe that the biggest risk we face today is prematurely engineering restrictive monetary conditions. In this scenario, the FOMC could misjudge the presence and magnitude of economic impediments and misread the recent progress we have made as evidence of sounder economic trends. If we were to presume prematurely that the U.S. economy has returned to a more “business as usual” position and reduce monetary accommodation too soon, we could find ourselves in the very uncomfortable position of falling back into the ZLB environment.
We have other models in which the probability of such distress may be related to various characteristics of banks, such as whether they are comfortably within thresholds for capital adequacy – the argument being that as they get closer to the threshold, depositors become less confident about the stability of each other’s behaviour. 26 And we have models in which bank capital is affected by macroeconomic developments; and models in which, through financial accelerator-like mechanisms, impaired bank capital affects the supply of credit, 27 and so potentially macroeconomic variables. But we don’t yet have models in which the determinants of the probability of banking system distress are influenced by the macro environment; and in which such distress can, really, occur and affect the macro environment. That seems to call for somehow embedding gametheoretic strategic interactions within dynamic macro models. 28  23  See Allen, F, and Gale, D, (2007) “Understanding Financial Crises”, Oxford University Press. 24  Commenting on a recent paper by Michael Woodford, Charles Goodhart (pointed out that the model incorporated credit risk premia but not default. Everyone is hoping that Woodford picks up the challenge. (See Goodhard, C, comments on “Credit Frictions and Optimal Monetary Policy” by Curdia and Woodford (2008). These were given at the 7th BIS Annual Conference. 25  See Diamond DW, Dybvig PH, (1983) “Bank runs, deposit insurance, and liquidity” Journal of Political Economy 91, pp401-19.

Here I think of some of the prudential measures that could help cool down asset prices, which is a case in point of how monetary and supervisory policies can be intertwined. Indeed, central banking policies need regular evaluation as its effectiveness could be undermined by the evolving financial landscape. In sum, we need to continually evaluate the effectiveness of our policy tools, in particular, the potency of monetary policy transmission mechanism in the changing financial environment. My third point is that good central bank governance is also essential. To maintain its credibility, any central bank should strive to be independent, accountable and transparent. I don’t need to touch on all three pillars of good central bank governance, but on transparency I should add that effective public communication is key to achieving our policy goals. This is especially important for monetary policy since effective public communication can play a crucial role in anchoring expectations in both sunny days and during the storm. Fourth and finally, regional cooperation in the areas of surveillance and financing should be further fostered. Regional surveillance can help contribute to financial stability by strengthening the policy framework at the national level. Cooperative financing arrangements at the regional level designed to supplement resources provided by the IMF can also enhance effectiveness in crisis prevention and resolution. Here I see great strides being made in these cooperative efforts in the region, including swap mechanisms that have been developed and are being expanded.
Furthermore, the Spanish State is committed to ending next year with a deficit of 6%, more than 5 percentage points lower than in 2009. 4  BIS Review 161/2010  As for the quality of bank balance sheets, it is well known that non-performing loans have increased in recent years, and also that lending to the construction and real estate development sector was excessive. However, the stress tests have shown not only that banks have the capacity to absorb potential losses arising from extreme and highly unlikely scenarios, but also that most balance sheets comprise healthy assets in the various consumption and investment segments of the Spanish economy. Despite these fundamental differences, the climate of uncertainty makes it advisable to reaffirm the adjustments promised by the authorities and to demonstrate to the international community that each major goal will be scrupulously met. I would like to point out four actions which I consider essential within this framework: –  First, it is necessary to continue to restructure bank assets and full information should be provided in this connection. In the last three years, credit institutions have made notable efforts to recognise the impairment of assets on their balance sheets. This impairment recognition, effected through profit and loss accounts, amounts to more than € billion. To this figure should be added the possible use of a further € billion built up as a “general provision” since the introduction of countercyclical provisioning in 2000, and another € billion provisioned with a charge to equity in the mergers.

During the upturn, a growing share of the rise in lending was met by banks turning to the international wholesale markets. Savings banks, for example, which traditionally based their liabilities on attracting retail deposits, increasingly and irreversibly used foreign funding sources. It should be underlined that the banks tapped this source of funding in a relatively prudent manner. Thus, most of these liabilities mature at medium and long term. Nevertheless, this greater reliance on the international markets has made institutions more vulnerable to a financial crisis which, as I have said, is marked by increased risk aversion and by the suspicion aroused by highly leveraged firms. The impact of these tensions on assets, liabilities and structure has been more significant at savings banks or, to be more accurate, at some of them. They built up more imbalances because their decision-making mechanisms made them more sluggish when the time came to react and because their corporate model did not allow them to readily raise high-quality external capital and reduced the discipline imposed by the market on management. 2  BIS Review 161/2010  Measures adopted to restructure the Spanish banking system The larger imbalances at savings banks, together with the limitations inherent in their model, explain why the reforms centre on this segment in particular. The changes have consisted of pressing them to restructure and amending their legal framework. The Fund for the Orderly Restructuring of the Banking Sector (“FROB” by its Spanish acronym) came into operation in September 2009.
One possible solution I think is that of making all contracts on AFET U.S. dollar denominated. This way, the arbitrageurs are not exposed to any foreign exchange risk and they can manage their positions across markets with ease. Of all the commodities listed on SICOM, only one contract namely ribbed smoked rubber sheet no. 1 is Singapore dollar-denominated and coincidentally, it is also the least liquid contract on the SICOM. All other contracts are denominated in U.S. dollar. Moreover, commodity prices in the world are generally quoted in U.S. dollar, therefore, corporate buyers and sellers are already aware of their costs and revenues in terms of U.S. dollar. If we aim to establish futures price of, for instance, white rice on the AFET as a benchmark, it is logical for this reference price to be denominated in an international currency such as the U.S. dollar. That way, the price quotations would purely reflect all relevant information relating to demand and supply conditions of the products and are not influenced by exchange rate fluctuations. Some may express concern, however, that by eliminating foreign exchange risk for foreign arbitrageurs, we in turn, expose our local producers and end-users to the very same risk. I feel, on the contrary, that local buyers and sellers are already accustomed to commodity prices being quoted in U.S. dollar in the world market and manage the risk in a proficient manner.

These price control schemes coupled with the price support projects outlined above mean that the market mechanism is not well-functioning. Distorted prices in the spot market may have also discouraged foreign players from participating actively in our futures markets. A freely traded spot market is a necessary condition for a successful futures market. Ladies and Gentlemen, I would urge the board of directors of AFET and AFTC, the Ministry of Commerce, the government, all members of AFET and key players in our main agricultural products to be totally committed to making AFET a highly successful futures market - an exemplar to our neighbours and one where global trading is benchmarked. We need to be strategic, prioritising our products and evaluating needs of different participating groups. I pledge my full support to this cause. I have spent a great deal of time talking about the AFET, I would now like to briefly touch on its siblingTFEX. TFEX is launching its very first product SET50 futures in the next few months and from the road shows to date, I hear that it has been very well-received. As the next step, the Stock Exchange Commissioner and the Bank of Thailand are currently working on launching the much-anticipated bond futures or interest rate futures. I hope that once Thai financial market has been complemented by these interest rate futures, our players will be able to make much progress in the area of risk management, financial product innovation and trading.
The chart is based on the same approach as in the previous slide. It is easy to see that periods of poor stock market performance correspond to an appreciation of the Swiss franc, and vice versa. When equities lose value, this generally occurs in an environment of increased uncertainty in the economy and on the financial markets. In such situations, demand for the Swiss franc is particularly strong due to its character as a safe haven. The value of our equity positions is then subjected to a double loss, first the price loss and second the appreciation of the Swiss franc against the foreign currencies in which the equities are denominated. So the diversification effect of our equity investments is diminished, to some extent, by this currency effect. We cannot safeguard ourselves by hedging an appreciation in the Swiss franc because this would be tantamount to selling foreign exchange reserves against Swiss francs, and an investment decision could thus have a monetary policy effect. This example shows how monetary policy considerations limit investment policy’s room for manoeuvre. A certain diversification effect can also exist between equities and gold. In times when uncertainty is high, the gold price often increases, while equity prices come under pressure. The opposite can occur when uncertainty decreases significantly. This was particularly evident last year, when the gold price underwent a significant correction after climbing for many years. Of course we cannot rely on this kind of diversification effect always holding. However, when it does, it is very welcome.

The shorter the residual term, the more liquid the investment appeared to be. Consequently, until well into the 1990s, the SNB’s foreign exchange reserves consisted almost exclusively of government paper with very short terms. 2  BIS central bankers’ speeches  With time, the concept of liquidity has changed. For a long time now, we have been defining liquidity according to the potential for a rapid sale with the minimum possible impact on the market, rather than as a function of the terms of our bonds. In this case, minimum impact on the market means that, essentially, we wish to avoid significant price movements. In order to guarantee this, we hold a substantial portion of the currency reserves in liquid government bonds, in the most important global currencies. Together with our deposits at other central banks, these investments presently account for some three-quarters of our foreign exchange reserves. You can see the current breakdown of our foreign exchange reserves on the lefthand side of slide 3. For the criterion of security, the focus is on limiting market and credit risk. In this case, the decisive role is played by diversification across different currencies and instruments. We engage in currency diversification by holding our foreign exchange reserves in the currencies of all large advanced economies; the highest percentages are accounted for by the euro (48%) and the US dollar (27%), as you can see from the chart on the right-hand side of slide 3. Looking at the individual currencies, diversification occurs via the different investment instruments.
Economic performance The economic numbers that came out in the past few months seem to convey a clear message, and this is that the economy has, since the second quarter of this year, been slowly but steadily recovering from the painful recession, which had lasted for about eighteen months. The growth rate of GDP moved back to positive territory in the second quarter of this year, having been in negative territory, year on year, for six quarters. The unemployment rate has peaked. Asset prices have recovered. Retail sales have picked up. Tourist arrivals have increased. Exports have started to grow again, with the external trade account at the same time moving into surplus. The fall in consumer prices, adjusting for the effects of the generally welcome rebate of rates and lowering of rentals, has stabilised. Monetary conditions have remained stable, although we could do with lower interest rates. The overall quality of bank assets, and the mortgage portfolio in particular, has improved. On the fiscal side, although I am not privy to any information that has not been made public, I have the fullest confidence in the skills of the Financial Secretary in his management of the public finances. As the economy recovers, the fiscal position should quickly move back into overall balance. An 18-month period of sharp recession and painful adjustments is, of course, very tough for everyone.

Then there are the standing invitations from us to other central banks in the region to have their real-time gross settlement (RTGS) payment systems, when constructed, linked up with our own. And if such linkages are also established among themselves then we will have a robust network of RTGS payment systems to facilitate the safe transfer of money in this region. We also have another standing invitation to others to have debt clearing systems similarly linked up to form what we would like to call the Asiaclear, to facilitate investment flows across markets in this region. This will also help the development of a regional debt market. We shall persevere with these efforts. * This could be a reformed IMF or a BIS with enhanced roles. Or it could be a new World Finance Organisation (WFO), mirroring the WTO. BIS Review 120/1999  6  Domestic responses On the domestic front, we all, in the first place, have to put our own house in order, if indeed there are shortcomings in economic policies generally, or monetary and financial policies in particular. But one lesson from the financial crisis is that, even if you are white as snow, you are still vulnerable to the vagaries of international finance, and will continue to be so, if they are not satisfactorily addressed soon at the international or regional levels. This vulnerability makes the authorities, particularly those of small open markets, uneasy, as the task of maintaining monetary and financial stability has become a very onerous one.
Although the way in which they steer their individual money markets differs, ultimately they provide just the amount of liquidity that is necessary to maintain the key monetary policy rate at the targeted level. The SNB reacted rapidly, and was the very first central bank to provide additional liquidity, which it did on 9 August, by means of fine-tuning measures. In the course of the following days, we continued to provide the banking system with generous supplies of funds as part of our regular auction procedure. In this way, we succeeded in rapidly defusing tensions on the call money market. Since then, we have carrying out fine-tuning measures on a consistent basis, in order to dampen sharp fluctuations in the call money rate in either direction. This has allowed us to stabilise the very short-term Swiss franc money market. However, we were unable to prevent risk premiums in interbank business from rising, since this is largely independent of our measures. As can be seen in graph 2, the three-month Swiss franc Libor had risen to 2.90% by mid-September 2007, which was substantially above the level targeted by us. By international standards, however, the increase in Libor was minimal. Our monetary policy decision of 13 September was aimed at further calming the Swiss franc money market, by bringing the three-month Libor back down to around 2.75%. With this in mind, we made funds available to banks for a term of three months. We did this from the day of the monetary policy assessment onwards.

This led to the third exacerbating factor: Instead of helping the situation, off-balance sheet investment vehicles established by the banks made it far worse. Suddenly, these investment companies could no longer refinance themselves in the market and the banks were therefore forced to inject their own liquidity. Initially, the liquidity bottleneck manifested itself in the US dollar money market, above all. On the one hand, this was due to the fact that sub-prime losses and refinancing needs mainly affected US dollar positions. On the other, it was because liquidity hoarding also occurred chiefly in US dollars. US dollar liquidity was particularly tight for European banks. Thus  BIS Review 150/2007  1  tensions spread rapidly from the dollar money market to the euro money market, but also to the Swiss franc money market. The extent of the upheaval on these three money markets can be seen in graph 1 which shows the path of risk premiums, using three-month funds as an example. Before the crisis, these risk premiums were almost negligible. They now amount to between 50 and 100 basis points, depending on the currency. The graph also shows that, so far, the crisis has moved forward in two waves. After normalising to some extent in October, the situation became increasingly tense from mid-November onwards, after more bank losses had been reported. Stabilisation by central banks The turbulence on the money market is challenging central banks.
Does SEK 2 800 in loss-absorbing capital provide sufficient resilience for a loan of SEK 1 million? My answer is no, it does not. The market’s requirements are also often higher today. I welcome the international discussion on a general increase in the capital requirements once the crisis is over. More capital is needed. I also think it is positive that the quantity requirements governing the capital in the capital base and the regulations governing hybrid capital will be tightened up and harmonised. Better capital is also needed. Ultimately, resilience is measured by common risk-bearing share capital. The discussion now underway in the international arena also concerns whether the banks’ resilience can be strengthened by having regulations that require the banks to build up capital buffers when times are good that they can then use when times are bad. To a certain extent, the build-up of capital buffers may also counteract the procyclical tendencies of the financial system by means, for example, of new regulations that increase the price of lending when times are good and reduce it when times are bad. Another method that is similar in principle is to allow the banks to make provisions for expected losses in economic upturns. The banks would thus build up a buffer against bad times in their accounting. In this context, the international discussion centres around which method – capital buffers or provisions – is most appropriate. Using capital has the advantage that it provides greater transparency and is more difficult to manipulate than provisions.

If things go wrong, the benefits of investing will be very low, and the present value of the project will be negative. Hence, had the firm known that things were going to go wrong, it would have preferred not to invest. If the passing of time helps to know with more certainty whether things will go right or wrong, the firm may find it convenient to wait and see. Waiting permits it to keep the choice between investing and not investing open, which is not the case when the investment has already been made. Thus the investment can be analyzed with the theory of options. The firm must balance the cost of postponing the investment with the benefit of learning more about the situation and making a better informed decision. Then, the larger the uncertainty, the greater the benefit of waiting. This same logic can be applied to a consumer that must decide on the purchase of a durable good, but is uncertain about his future income. If the probability of losing his job increases, it may be advisable to wait before making the decision. Although this analysis is very simple intuitively, it is not easy to formalize. A consumer can sell his car or an electronic device if he loses his income, but it will be at a cost. The higher this cost, the more irreversible the decision becomes.