samchain/econo-pairs-v1 huggingface dataset:
Caleb M Fundanga: The MDG-consistent monetary policies Talking notes by Dr Caleb M Fundanga, Governor of the Bank of Zambia, at the official opening of the UNDP organised workshop on Macroeconomic Analysis and Modelling in Support of Millenium Development Goals-Based Planning, Lusaka, 29 October 2007. *  *  *  Introduction First and foremost, I would like to thank the UNDP through the Resident Representative, Mr Aeneas C. Chuma, for inviting me to say a few remarks at the opening of this important international workshop on “Macroeconomic Analysis and Modelling in support of Millennium Development Goal (MDG)-Based Planning”. Let me also welcome you all, especially those who have traveled from other countries to come and attend this workshop. I understand that the aim of this workshop is to strengthen the foundation laid for MDGBased planning processes in Africa on the issues of pro-poor polices and macroeconomic modelling and to explain what an MDG-Consistent Medium-Term Expenditure Framework (MTEF) is all about. The workshop is also intended to sensitise and enhance your knowledge of pro-poor policies in the context of MDG-Based planning and strengthen understanding and skills in MDG-Consistent Macroeconomic Modelling and MTEF.

Although developments in bank credit continue to reflect the lagged relationship with the business cycle, credit risk and the ongoing adjustment of financial and non-financial sector balance sheets, the monetary policy measures in place since June 2014 are increasingly filtering through to support borrowing conditions for firms and households and thereby credit flows across the euro area. To sum up, a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirmed the need to preserve the very substantial amount of monetary support that is necessary in order to secure a return of inflation rates towards levels that are below, but close to, 2% without undue delay. Monetary policy is focused on maintaining price stability over the medium term and its accommodative stance supports economic activity. As emphasised repeatedly by the Governing Council, and as strongly echoed in both European and international policy discussions, in order to reap the full benefits from our monetary policy measures, other policy areas must contribute much more decisively, both at the national and at the European level. The implementation of structural reforms needs to be substantially stepped up to reduce structural unemployment and boost potential output growth in the euro area. Structural reforms are necessary in all euro area countries. The focus should be on actions to raise productivity and improve the business environment, including the provision of an adequate public infrastructure, which are vital to increase investment and boost job creation.
2  BIS Review 83/2010  During the crisis, and notably after the collapse of Lehman, money market spreads in the euro area surged to unprecedented levels. When I say “money market spreads”, I mean the spreads of unsecured money market rates as well as certain repo rates (over OIS rates). Indeed, repo rate spreads depend on the quality of the underlying collateral. For example, single-A private paper repo spreads showed a pattern similar to the spreads of unsecured money market rates in late 2008 and early 2009. However, triple-A government bond repos appeared to be relatively unaffected by the worsening crisis, at least in Europe. In addition, collateral haircuts, which in many cases were very low before the crisis, increased and varied greatly across asset classes and types of borrowing institution. Of course, money market spreads were generally wider for transactions with longer maturities and significant parts of the term money market dried up completely. Again, we see the power of collateral in today’s financial world. The presence or absence of collateral in money market transactions, and the quality of the collateral used to secure these transactions determine whether the very first step of the transmission mechanism works. The collateral influences the scale of market spreads over and above the overnight rate at which the central bank lends to banks. And money market spreads play an important role in the smooth transmission of monetary policy to the broad economy.

Central banks have provided exceptional support in exceptional circumstances. Now, they need to apply the Lucas critique to their own actions. They need to try and work out what the implications of their actions will be for financial markets in the future. Unless new regulations and a material extension of oversight to the new world of financial intermediation – which the crisis has exposed – are applied in earnest, central bank activism risks fuelling moral hazard in the long run. Provided that financial regulation covers the full breadth and width of financial intermediation, then the new world will likely be one in which the transmission of monetary policy will be stronger, not weaker. Risk aversion will call for more collateralisation. The move away from unsecured to collateralised lending could make overall lending more sensitive to fluctuations in the value of collateral. As monetary policy influences the terms on which these trades are made, its effectiveness will increase. Sovereign debts instruments are likely to continue playing an important role as collateral – both in private lending and in central bank refinancing operations. Central banks should be flexible enough to adapt their instruments to changes to the financial environment. But they  BIS Review 83/2010  7  have to remain inflexible in their overall strategy. In a changing financial environment the only way to maintain credibility is to safeguard the ultimate objective, which is price stability. Thank you for your attention. 8  BIS Review 83/2010
This approach was reflected in the Open Letter procedure, which was an explicit part of the 1997 arrangements. This recognised that the MPC would not attempt to bring inflation back to the target immediately following a large shock, but required the Governor to write a letter to the Chancellor if, as a result, inflation deviated from the (then) 2.5% target by more than one percentage point. As Ed Balls commented in a lecture in 2001 4 :  2  “Inflation Targeting: A new framework for monetary policy?”, Ben Bernanke and Frederic Mishkin, Journal of Economic Perspectives, 1997. 3  “Constrained Discretion and Monetary Policy”, remarks by Ben Bernanke before the Money Marketeers of NY University, New York, February 2003. 4  “Delivering Economic Stability”, Oxford Business Alumni Annual Lecture by Ed Balls, June 2001. 2  BIS Review 20/2007  “Some have assumed it [the requirement to write an open letter] exists for the Chancellor to discipline the MPC if inflation goes outside the target range. In fact the opposite is true…… In the face of a supply-shock, such as a big jump in the oil price, which pushed inflation way off target, the MPC could only get inflation back to 2.5 per cent quickly through a draconian interest rate response – at the expense of stability, growth and jobs. Any sensible monetary policymaker would want a more measured and stability-oriented strategy to get inflation back to target.

Significant advances are being made. The institutional framework has adjusted to the new world reality. Emerging economies, now fully take their part and role in the constellation of Committees which, in Basel, work on defining core principle of financial regulation. The largest sit as full members of the Financial Stability Board, and its steering Committee. Finally, a landmark agreement on IMF reform reached at the last G20 meeting has fully recognized their role and place in the new financial environment. I am therefore confident that we can – and will – make progress in tackling the difficult issues we face and build a better and safer world financial system. BIS Review 160/2010  3
I also think that in this context it is useful to look at the international debate. Although the general view is that macroprudential instruments are normally preferable for counteracting this type of imbalance, there is also a lively debate on what role the policy rate should play.15 In this debate, it is not assumed that the policy rate is entirely ineffective and insignificant, and "the jury is still out". A dubious counterfactual experiment I would like to give an example from the Swedish debate, where I believe one has taken the potential of monetary policy to influence expectations too lightly. As I mentioned earlier, it has been claimed that up to 60,000 more people would have had jobs if the Riksbank had conducted a different monetary policy after the crisis and kept the repo rate at the level of 0.25 per cent to which it was cut in July 2009.16 When the Riksbank began to raise the repo rate in the middle of 2010, the situation was such that the Swedish economy had recovered surprisingly quickly from the crisis. Growth was record high, about 6 per cent in annualised terms in the first quarter, and basically all leading indicators of economic activity were pointing upwards. Household lending, which had increased at double figures in terms of annual changes prior to the crisis, had begun to slow down, but the increase in credit was still 9 per cent, far above the increase in disposable income.

This is unfortunate, as the situation in Sweden, as I noted earlier, is actually slightly more sensitive than that in many other countries, where housing prices have already fallen and households have begun to amortise their debts to a more significant extent. Well in line with the international discussion One thing I think it is important to emphasise – and which is not always clear in the Swedish debate – is that the Riksbank's aim to give consideration to the risks arising from household debt and the housing market is well in line with the international view that has emerged in the wake of the financial crisis. The Riksbank's way of reasoning, and the policy we have conducted, are thus not unusual or strange, but are characteristic for the present time. 21  The Swedish National Debt Office (2013) writes, for instance, in its consultation response that with the solution they advocate, "it would not be possible to justify any macroprudential policy measures if the conclusion was that the risks inherent in current household debt were primarily a demand-related problem (rather than a problem for the banking system)." (p. 2). BIS central bankers’ speeches  9  There is even reason to claim that the Riksbank was one of the first central banks to highlight this type of risk.
Even in the very difficult moments in Croatia’s history during periods of international political isolation, we managed to have a very honest and professional relationship, which today I respect even more than I did then. For me the highlight in our relationship happened last year when Mr de Larosière accepted the invitation to give the keynote speech at the traditional Vth Dubrovnik Conference on Transition Economies organised by the Croatian National Bank. Definitely, his knowledge, experience and insight into the transition process were invaluable to the Conference. The title of his lecture was non-pretentious (like the man himself): “Transition Economies”, but his messages were very strong and deep (again, like Mr de Larosière himself). In his concluding remarks Mr de Larosière, among other things, had the courage to point out some of the negative human facets of transition, for example: “… in some countries the human costs of transition have been high, for instance in terms of male life expectancy ..., growing inequalities of income and increased poverty.” (de Larosière, 1999, p.10). Of course, there are many positive human sides to transition. What I would like to do today is neither present to you a comprehensive survey of transition as there are numerous articles entitled: “Ten years of transition …”, nor give some new empirical evidence about causalities between the main variables in the transition process. I would simply like to share with you some of the experiences I have had as a policymaker in transition, experience of course gained in my own country - Croatia.

In response to the weak demand, the Albanian economy is growing below its potential, inflation is low, public and private balance sheets show difficulties, and the banking system has been facing upward non-performing loans. These problems have been detected at an early stage by the Bank of Albania and we have, therefore, taken relevant measures to tackle them. The monetary policy of the Bank of Albania has been constantly on the easing cycle. The key interest rate reached the record low 2.75% last Wednesday, from 5.25% in 2011. In line with the best practices of central banking, we have adopted a forward-looking communication strategy. I am convinced that not only the financial market, but also the real economy has received our message that the monetary policy is and will continue to be on the easing side in the quarters ahead. Moreover, we have intensified our liquidity injection operations, which have succeeded in meeting all the market liquidity needs, by extending the horizon for injection and facilitating access to liquidity by broadening the collateral base. Time has proven our monetary and operational policies successful. The Bank of Albania has managed to contain and control the downward inflation pressures. We are convinced that the steps we have taken will bring inflation back to our 3% target, in the medium term. We have managed to anchor the economic agents’ expectations on inflation. This has enhanced the effectiveness of the monetary policy and contributed to maintaining confidence in the national currency and the Albanian financial system.
As to inflation, the latest data continue to evidence very moderate behaviour, with an increase in April, for the euro area as a whole, of 1.2%. The projected reduction in the degree of slack in the economy should enable inflation rates in the area to draw closer to levels compatible with the Eurosystem’s objective of price increases below, but close to, 2%. 3/9  Spanish economic developments and outlook Regarding the Spanish economy, the INE estimate for GDP growth in the first quarter of 2018 shows a rate of increase of 0.7%, in line with the two previous quarters. That said, there has been a slight decline of 0.2 pp in the year-on-year rate of change from 3.1%, at end-2017, to 2.9% in the first quarter of this year, which is consistent with the continuation of the current upturn, albeit at a somewhat lower rate of increase than that observed in the past three years. On the latest projections published by the Banco de España in late March, output is expected to expand by 2.7% in 2018, 2.3% in 2019 and 2.1% in 2020. The latest information would broadly confirm this scenario, albeit with a possible slight upward revision this year and next, as a result of the greater fiscal boost built into the draft State Budget for 2018 and in the recently published Stability Programme Update for the period 2018-2021, on which I shall comment later.

In sum, we revised our end-2015 inflation forecast down by 0.6 points to 5.5 percent from 6.1 percent in the October Inflation Report. This revision is driven by falling oil prices. The projected noticeable decline in inflation compared to 2014 is largely due to falling oil prices as well as our projections that cumulative exchange rate effects will continue to taper off and food price inflation will recede to past years’ averages. The course of inflation in 2015 will be determined by base effects. We expect base effects to pull annual inflation down until August and push it up the rest of the year. Thus, we project that annual inflation will remain on a downward track until the third quarter and increase slightly to 5.5 percent due to base effects in the fourth quarter (Chart 18). In addition to these forecasts, we discuss alternative scenarios on the inflation outlook and the global economy in the Risks section of the Inflation Report. You can examine the Report for details. 4  BIS central bankers’ speeches  While concluding my remarks, I would like to thank all my colleagues who contributed to the Report, primarily those at the Research and Monetary Policy Department as well as the members of the Monetary Policy Committee, and thank every one of you for your participation. BIS central bankers’ speeches  5  6  BIS central bankers’ speeches  BIS central bankers’ speeches  7  8  BIS central bankers’ speeches  BIS central bankers’ speeches  9
In addition, the purchase programs have affected the duration of the portfolio. The securities that have been purchased by the Desk since November have had an average duration of about 5.5 years. With those purchases and the adjustments from the earlier purchase programs, the duration of the overall SOMA portfolio has reached about 4.5 years, which is somewhat higher than the typical level of between 2 and 3 years that was observed before the financial crisis. This combination of its larger size and longer duration results in a greater amount of interest rate risk embedded in the SOMA portfolio. 13 Of course, under the view that the asset purchase programs operate through a portfolio balance channel, this is precisely how the programs have an effect on the economy – by transferring risk away from private investors and onto the Fed’s books. The risks to the portfolio arise because the characteristics of the assets that have been purchased differ from those of the liabilities that have been created by those purchases. The assets held in the SOMA portfolio have fixed coupon rates that reflect longer-term interest rates. However, the purchases of those assets create reserves in the banking system, and the Federal Reserve pays interest on those reserves at a short-term interest rate that it  13  Note that the securities purchased under these programs involve no credit risk, given that they are issued by the Treasury or are guaranteed by government sponsored enterprises.

It is also important to note that unwanted side effects can be minimized if different public authorities operate in a well-defined and respected framework. We have such a framework in  BIS central bankers’ speeches  3  the Eurozone. It is based on fiscal discipline leading to debt reduction. If those disciplines are not respected or implemented with insufficient vigilance, then monetary policy through public sector debt securities purchases may be perceived as creating strong moral hazard, thereby weakening the necessary consensus and compromising its efficiency. When fiscal transfers take place between countries of the Eurozone, they are implemented through mutually agreed and conditional programs. There are permanent temptations to blur the distinction between those fiscal programs and the monetary and liquidity operations of the Central Bank. Those temptations should be resisted. This is the reason why the Eurosystem has been extremely rigorous in implementing its collateral rules in a transparent and neutral way. Let me conclude. Unconventional monetary policies are necessary but complex. They create more interference with markets than policies conducted in ordinary times. As a consequence, it becomes more difficult to avoid unintended spillovers of stabilization policies on the allocation and distribution of resources. This reality should not prevent Central Banks from acting decisively when there are risks for price stability. But such actions demand rigor and precision in their implementation. For Central Banks, their balance sheet has become the main tool of monetary policy for the foreseeable future. It has proven effective.
Brainard’s uncertainty principle can also be applied to this type of uncertainty. If there is uncertainty as to whether there has been a shift in a longterm trend, the central bank should rely more on historical correlations that are more certain. The more uncertain the most recent observations are considered to be, the greater the weight that should be given to historical correlations and the more cautious the central bank should be in its actions. 23 It would of course be practical if Brainard’s uncertainty principle was entirely general and could be applied to all types of uncertainty, but unfortunately this is not the case. 24 Two important exceptions – which have both been applicable to the Riksbank’s monetary policy in recent years – are worth mentioning. The first concerns the shift in long-term inflation expectations. We had a situation in 2014– 2015 when expectations began to fall below the inflation target of 2 per cent. In such a scenario the central bank should act more aggressively to anchor expectations to the target. An overly cautious monetary policy risks reducing confidence in the target. It was therefore necessary to conduct an aggressive and strong monetary policy that reduced this risk and quickly restored confidence in the inflation target. The second exception concerns when the policy rate is close to the effective lower bound. I am sure you remember that the Riksbank and other central banks around the world cut their policy rates very quickly when the financial crisis struck in 2008.

Greater consumer activism and  BIS central bankers’ speeches  3  demands for more consumer-focused corporate information reflects the increased demand by consumers for institutions to account for their behaviour and values. In terms of the demand for ethical and responsible finance, greater awareness among consumers and investors on the availability and viability of such positive finance is also needed, including among governments, corporates and the retail market. Education, engagement, incentives and the alignment of legal and regulatory frameworks on the utilisation of such finance will be important to achieve this. Finally, is the need to foster strong leadership at the global level that can have an advocacy and facilitative role in resolving barriers and bringing together different stakeholders to work together in a coordinated and cohesive manner. The Responsible Finance Institute, initiated as a think tank based in the United Kingdom, that brings together responsible finance experts from around the world and has a unique role for this endeavour. The focus on collaboration and convergence between the diverse fields of ethical and responsible finance has great potential to harness the best practices of positive finance in its various forms to collectively wield a powerful force in shaping future finance. Moving forward, stable and sustainable development can be best served by re-connecting the current gulf between finance and value creation that is reinforced by bringing benefit to society.