samchain/econo-pairs-v1 huggingface dataset:
The Riksbank is the only instance that has the express task of trying to ensure that the inflation target is met. Of course, the Riksbank also has the task of “promoting a safe and efficient payment system”, which should be interpreted as acting to ensure the financial system is stable and functions smoothly. But, as I have already pointed out, the latter is a task that the Riksbank shares with the Government, Finansinspektionen and the Swedish National Debt Office. Finansinspektionen has the responsibility for the macroprudential policy tools, which comprise the first line of defence with regard to counteracting the emergence of financial imbalances. As I have just mentioned, there is an international discussion on whether monetary policy may need to support macroprudential policy in certain situations. But I have also argued that one condition for this is that there is firmly-established confidence in the inflation target. It is this confidence that creates the scope for monetary policy to take other issues into consideration. Confidence in the Riksbank’s inflation target has long been fairly firmly rooted. But what has happened in recent years is that inflation has fallen to very low levels, instead of beginning to  6  BIS central bankers’ speeches  rise towards the target as the Riksbank and other analysts have expected. The period with an inflation rate below the target has thus gradually become longer and longer. Parallel to this development, the long-term inflation expectations among economic agents have fallen.

But adjusting the level of the inflation target to the structural underlying trends that for the moment are influencing the economy does not seem like a good idea. A related and equally important circumstance is that even if globalisation and digitisation can subdue inflation, this does not mean that they determine inflation – and transform the central banks into passive onlookers, without any opportunity to influence inflation over time. In practice, the central bank has the possibility to try to estimate how much digitisation and globalisation will dampen inflation and to compensate for this. This is what central banks with an inflation target do now. It is not always an easy task, I will admit, as knowledge of the quantitative effects of digitisation and globalisation is so far fairly limited. This also means that a monetary policy that tries to compensate for the effects of these trends on inflation will not always be right, but will sometimes compensate too much and sometimes too little. However, digitisation and globalisation are not different in this aspect from other factors that affect the economy and that the central bank must try to take into account. My point is that structural trends that put downward pressure on inflation during a period of time do not necessarily mean that actual inflation will be permanently lower than the national authorities intend it to be on average.
25 The supply of credit increases, at the same time as interest rates are  24  For an overview of how complementary monetary policy functions, see De Graeve, F. and Lindé, J., “Effects of unconventional monetary policy: theory and evidence”, Economic Review 2015:1, Sveriges Riksbank or the article “The Riksbank’s complementary monetary policy measures”, Monetary Policy Report, February 2015, Sveriges Riksbank. 25  Some studies of the effects of complementary monetary policy in other countries include, for instance, Weale, M. and Wieladek, T. “What are the macroeconomic effects of asset Purchases”, External MPC Unit Discussion Paper No. 42, 2014, Bank of England, Gertler, M. and Karadi, P. “QE 1 vs. 2 vs. 3. . . : A Framework for Analyzing Large-Scale Asset Purchases as a Monetary Policy Tool”, International Journal of Central Banking,  10  BIS central bankers’ speeches  pushed down and the exchange rate weakens – aggregate demand in the economy increases. When the economy is stimulated, inflation gradually rises, as companies can charge higher prices and the lower unemployment pushes up wages. A weaker exchange rate also leads directly to higher inflation, as prices of imported consumer goods rise faster. Let me give an example of how the increase in the Riksbank’s balance sheet in the form of government bond purchases can spread throughout the economy. When we buy government bonds, those who sell them receive liquid funds in the form of their bank account balance instead of the bonds they previously held.

22  See, for instance, the IMF, WEO October 2014. 8  BIS central bankers’ speeches  1970s, real interest rates were also close to zero or negative in many countries, but at that time inflation was high. A practical example that is close to hand of how the conditions for monetary policy in Sweden are affected by international developments is that the ECB has chosen to conduct a very expansionary monetary policy in the euro area. In the slightly longer term, it is good for the Swedish economy that the ECB’s policy stimulates growth and inflation in the euro area, as this contributes to higher exports and higher imported inflation in Sweden. In the short term, however, problems may arise if the krona strengthens so that inflationary pressures risk being lower in a situation where inflation is already too low and has been so over a long period of time. As I demonstrated earlier in the simple model, a lower international interest rate risks having a restraining effect on Sweden in the short term via the exchange rate, if we keep our interest rate at a relatively higher level. Current monetary policy reflects earlier lessons This brings me to current monetary policy. As I have argued, monetary policy has changed over time and has been adapted to the new situations that have arisen. And that’s how it’s been this time too. I would say that current monetary policy has learnt many lessons from earlier episodes.
But I think that the situation on the Swedish housing market is still very uncertain. Weaker developments than in our forecast pose a significant risk to the Swedish economy. Those components of domestic demand that would be negatively affected first of all would be housing investment and household consumption. But as I am here at the Swedish Property Federation today, I would also like to mention that the weaker developments on the housing market since last autumn have not escaped housing developers. You can read more about this in an article in our Financial Stability Report, published in November. 16 An important conclusion we can draw from developments in recent years is that housing developers have burdened households with substantial risks during the building process. In  16  See “The new production of housing and financial stability”, article in Financial Stability Report 2018:2. 12 [13]  the prevailing market situation, these risks have come to the fore, causing households’ interest to wane, especially when move-in dates to new homes are far-off in the future. This will require modified business models in order to rekindle the interest of prospective house-buyers in newly built homes. My assessment is also that newly built homes are currently far too expensive for many groups. Cheaper new builds and better turnover in the housing stock could help untangle this knot. There are of course many uncertainty factors not only surrounding future economic developments, but also surrounding inflation.

As regards economic developments abroad there are three obvious uncertainty factors that we have considered in conjunction with the most recent monetary policy decisions. The first concerns the effects of the United Kingdom’s withdrawal from the EU – Brexit. As you know, people in the UK voted to leave the EU in a referendum back in June 2016, so this risk has indeed been with us for some time now. And the recent course of events has increased the uncertainty still further. The second risk these past twelve months concerns the trade conflict between the United States and China. Developments seem to have subdued export orders abroad. And recently, growth looks to have slowed in China, which has otherwise provided traction for global growth over a long period. The third risk concerns Italian fiscal policy. The discussion between the EU and the Italian Government about the Italian budget has periodically created unease on the financial markets, even though the most recent course of events is providing some breathing space. As regards the domestic economy, the Riksbank has long since warned about developments on the Swedish housing market, which is the most important domestic factor that could trigger poorer economic development than in our forecast. After having risen sharply over a long period of time, housing prices started to fall quite rapidly last autumn. During the course of 2018, prices have recovered slightly, and our forecast is for them to continue to rise at a modest rate in the coming years.
Thus, loans do not only benefit the company concerned, but also contribute to raising an entire economy’s productivity, growth potential and prosperity. 5 Households, too, can harness future income for present-day benefits. The obvious example is a mortgage to buy a house. Let’s take a specific case. A young family – we’ll call them the Miller family – is expecting a child and so will soon need larger living quarters. They have found their dream house, but the money they have saved so far is not sufficient for them to buy it. Thanks to the possibility of taking out a mortgage, the Millers can nonetheless purchase the house of their choice and move in without further delay. The family will from then on be using part of their income to repay the loan, thereby reaping present benefit from their future earnings. In other words, they are putting their income to use at a time when they derive the greatest advantage from it, and in doing so they enhance their prosperity. 6 Finally, borrowing can also make perfect sense for a government. Fiscal income and expenditure are not always in balance. During a recession, for instance, a state’s income declines, whereas expenditure increases due to the activation of various countercyclical measures such as the provision of unemployment benefit. The result is a fiscal deficit. Governments can cover the deficit either by temporarily raising taxes or by reducing their spending. Neither of these measures are helpful in a recession. On the contrary, they would merely aggravate the recession.

Financial institutions, together with their staff, were at the frontline of this mobilisation: banks by distributing EUR 130 billion of state-guaranteed loans – a record in Europe, and keep up the commitment – but also insurers – and this has been less frequently mentioned – with numerous payouts on claims not covered in policies. Your teams have demonstrated remarkable operational agility. This resilience also stems from the efforts of banks and insurers who went into the crisis on a firm financial footing, with large French banking groups having almost doubled their own funds since 2008 to 15%, and insurers’ capital requirement coverage averaging 239% at end-September 2020. But although we don’t currently need to worry about their financial soundness, we still need to remain vigilant: there is still a high degree of uncertainty, which calls for the maintenance of our fiscal support measures and an accommodative monetary policy. I won’t talk about the latter today as we are in the “quiet period” before the meeting of the Governing Council on 20 and 21 January. Page 2 of 4  II. The challenges for 2021 After a few more difficult months at the start of the year, 2021 should see the end of the pandemic and the beginning of the reconstruction. And in the financial industry itself, we will need to capitalise on 2020’s resilience to meet four challenges that I shall sum up using the four cardinal points of the compass. 1/ The first, of course, is Brexit, so in the North.
Renewed public comments about a possible “soft restructuring” or “reprofiling” of the Greek debt in April this year produced an immediate spike of the spreads on Greek bonds, with strong contagion effects to other euro area countries (see Chart 1). To sum up, private sector involvement, if pursued imprudently, i.e. automatically rather than as the last resort:   does not help save taxpayers’ money; indeed, it may cost them more money;    favours short-term speculation over long-term investment, which is certainly undesirable;    discourages and even delays any new investments in a country implementing an adjustment programme. 8  4  See FT, 24 April 2011. BIS central bankers’ speeches  Given that such a system – of preventive PSI – does not exist elsewhere in any other parts of the world, the euro area would be seen by investors as handicapping itself and it would feel the effects of discrimination. The euro area, in terms of both sovereign and private investments, would become less attractive. The financial system in particular would be highly exposed to sovereign restructuring. It would also put the euro area at odds with the rest of the international community. Given the damage that such a system would inflict on other investors and countries, the other shareholders may be discouraged from supporting IMF programmes in the euro area. This is how a good idea can turn into bad practice. Continuing to pursue it suggests strong masochistic tendencies. How should the problem be solved?

What she wants now is an explanation for how and why we have come to this pass, and she wants to know how to translate that explanation into recommendations”. When I read this sentence (maybe in part because of the “she” used by Professor Dasgupta), I recognized myself. I am not an ecological expert, I am just “a concerned citizen” who does her best to understand what is happening and what I could do in my current position. So please allow me, as a non-expert, to adventure myself into three lines of thought today: -  (i) what scientist tell us about the current situation of the biosphere;  -  (ii) what this means for central bankers and supervisors;  -  (iii) and what may be required to address the situation. The situation is challenging, to say the least. Urgent action is needed. 1  Page 2 sur 12 1. Welcome to the Anthropocene: from climate change to biodiversity loss,  and  toward  a  comprehensive  assessment  of  our  interconnected ecological crises The scientific evidence tells us that while a lot of focus has been on climate change in recent years, it is only the “tip of the iceberg”, to quote a famous study by Will Steffen and co-authors.ii Other risks exist that are not only higher than climate change but also interact with it.
This has given the providers of capital the disclosures they need – specifically how banks manage risks and make profits – in a format that the banks can readily supply. That shows that private industry can improve disclosure and build market discipline without the need for detailed or costly regulatory interventions. 27  A non-exhaustive list of some of the more prominent initiatives in this space includes the Carbon Standards Disclosure Board, Integrated Reporting, the Carbon Disclosure Project, and the UN Principles for Responsible Investment. 28  See www.pwc.co.uk/assets/pdf/low-carbon-economy-index-2014.pdf  10  BIS central bankers’ speeches  Like the EDTF, a CDTF could be comprised of private providers of capital, major issuers, accounting firms and rating agencies. Complementing static disclosures Static disclosure is a necessary first step. There are two ways its impact could be amplified. First, governments, potentially sparked by COP21, could complement disclosure by giving guidance on possible carbon price paths. Such a carbon price corridor involves an indicative minimum and maximum price for carbon, calibrated to reflect both price and non-price policy actions, and increasing over time until the price converges towards the level required to offset fully the externality. 29 Even if the initial indicative price is set far below the “true” cost of carbon, the price signal itself holds great power. It would link climate exposures to a monetary value and provide a perspective on the potential impacts of future policy changes on asset values and business models.

When an AI trading algorithm went amok and caused the failure of US hedge fund Smart Money, AI traders across America, Europe, and Asia went into a massive risk-off mode, causing turbulence not only in equities but also fixed income, commodity, and currency markets. Herd behaviour has always been a characteristic of financial markets. But herds of robots have proven to be far more deadly than herds of humans. The International Organisation of Securities Commissions (IOSCO) has since mandated that exchanges have in place mechanisms to manage extreme volatility. And securities regulators have themselves started to use AI – to provide early warning of potentially disruptive AI-based trading patterns and trigger appropriate circuit-breakers. But more generally, the increased use of AI by financial institutions has created the risk of “black boxes” in decision-making. Boards and senior management of financial institutions are struggling to validate AI-based models which use continuous learning and adaptation as distinct from fixed parameters and 6/9  BIS central bankers' speeches  historical back-testing. The application of AI in financial services has also created issues of financial exclusion which regulators cannot ignore. Regulators have begun to detect cases where AI-based decision-making has led to systematic exclusion of certain demographics.
A major aim of regulatory reform should thus be to ensure that trust does not dissipate so rapidly and completely again. In order to do this, we need to increase capital requirements, both in terms of the quality of capital and the amount of capital. After all, capital provides protection against bad outcomes. Increasing the quality and amount of capital will increase the resilience of individual banks. In addition, strengthening the ability of banks to absorb losses mitigates the risk of contagion – therefore more and better capital will also strengthen the resilience of the system. In my view, the important part of capital is loss-absorbing common equity. In addition, other forms of capital are needed to protect the state. If a bank defaults, capital typically evaporates very quickly. I have seen many examples of banks that have defaulted because they did not meet the capital adequacy rules. In my experience, when bank managers say that they have a problem, they often claim to have – say – 6 per cent regulatory capital, rather than the required 8 per cent. When the authorities eventually and realistically assess the assets, capital is often negative and the state has to bail out the bank. Thus, capital should be of good quality to protect the bank on a going concern basis, but also to protect the state in the event of a default.

Concerns for bank-to-bank contagion due to interconnectedness resulted in a loss of confidence for the entire banking system. In 2008, bad events continued to unfold. In the summer of 2008, the US government was forced to rescue Fannie Mae and Freddie Mac. The relatively slow build-up of the crisis abruptly came to an end when Lehman collapsed on September 15. Confidence simply disappeared and liquidity evaporated. Several banks got into severe difficulties: Merrill Lynch, Hypo Real Estate, Bradford & Bingley, Fortis, Dexia and the Icelandic banks: Landsbanki, Glitnir and Kaupthing, to mention a few. A melt-down of the financial system was prevented by a massive intervention by central banks and governments worldwide. A loss of confidence is the driver of a liquidity crunch, but the lemon problem, as first noted by George Akerlof in 1970, explains the mechanics of a market breakdown. A lemon is an asset of bad quality, originally referring to poor quality cars. In short, the lemon problem arises when sellers know whether or not their asset is a lemon, but potential buyers cannot tell the difference. The risk of purchasing a lemon will lower the price buyers are willing to pay for any asset and, because market prices are depressed, owners of non-lemon assets will be unwilling to put them up for sale. In normal times, banks can obtain short-term finance by borrowing on the interbank market and by selling assets.
To make things worse, the “originate-to-repo” transactions that took off when the turmoil started in July 2007 have often little in common with the “originate-to-distribute” assets that  2  BIS Review 84/2010  were marketed before mid-2007. Thus, the “originate-to-repo” securities do not aim at being attractive to investors, but serve a different purpose, namely to generate collateral buffers with the central bank. So, the significantly large volumes of retained issuance are effective indicators of the scale of the continuing dislocation of the ABS market and the vanishing of private markets. However, it should be obvious to everyone that the issuance of ABS only to serve as collateral with central banks cannot be a sustainable strategy for the ABS market. In normal times central bank operations are intrinsically of a short-term nature and of a limited size, and are designed to implement the stance of monetary policy. By contrast, ABS transactions backed by residential and commercial property loans have much longer maturities and must cover a very sizeable market. In other words, in normal times central banks tend to have a very limited involvement in financial intermediation and only private investors have the capacity and the need to offer long-term funding to originators. What are the more recent trends? Some developments in the last few months may be interpreted as showing tentative signs of a recovery as new ABS issues were distributed and placed with private investors .

Nevertheless, even abstracting from the impact of the adverse developments in the financial markets, the securitisation markets themselves have not satisfactorily developed in the last years, both in terms of broadening the investors’ base and of achieving stable issuance volumes. In both 2008 and 2009, the share of new issuances distributed in the market accounted for 1 or 2 percent of all new issuance. This is of course in sharp contrast with the percentages observed in the years preceding the crisis. For instance, in late 2006 and the first half of 2007 1 or 2 percent was the share of retained (as opposed to distributed) issuance. Since securitisation techniques were nevertheless still used substantially in 2007 and 2008 despite the lack of market participants being able or willing to absorb the newly-issued securities, most of this paper ended up being used as collateral with central banks. In the case of the euro area, this process started off indeed already in 2007 and increased more significantly in 2008 when ABS constituted 28 percent of all assets being used as collateral with the Eurosystem. This share decreased moderately to 23 percent in 2009. These developments reflect an important switch in the business model of securitisation, from the “originate-to-distribute” model up to the summer of 2007 to some form of “originate-to-repo” model.