samchain/econo-pairs-v1 huggingface dataset:
And this would benefit the banks in general, not just the select few with a large market share. In fact, our research indicates that with reasonably conservative assumptions regarding growth and inflation over the three years from 2003 to 2005, the profitability for the average bank in our sample would get back to the average return on assets over the past ten years by around 2005. Obviously, the improvement in the economy would need to materialise for this to happen - and I cannot predict whether it will or not. But at least the banks can take comfort from the fact that the current difficult operating environment may to a large extent be due to cyclical factors, which should eventually reverse. I would stress that this does not mean that banks should simply sit back and wait for the rising tide of the economy to lift them up, or that they should ignore the opportunities that may arise from merger and acquisition. Bank-specific factors will still matter in terms of explaining variations in performance across banks, even if their relative importance was less pronounced after the Asian crisis. Among these bank-specific factors, operational efficiency, as measured by the ratio of non-interest expense to total assets plays the most significant role in determining profitability, at least for the banks in our sample. Surprisingly, the effect of credit quality seems to have diminished over time, perhaps reflecting improvements in the banks’ ability to manage credit risk.

If we look at the performance of the banking industry over the last decade, the Asian financial crisis clearly marks a watershed. Between 1992 and 1996 our research indicates that the profitability of the average bank in our sample, measured by return on assets, improved by around 0.7 percentage points. It appears that this performance owed little to the macroeconomic environment of the time. Rather, it was due to improved performance at the individual bank level, driven by bank-specific factors such as more efficient operations and improving asset quality. In contrast, between 1997 and 2002 the average return on assets declined by more than 0.7 percentage points. This deterioration was largely driven by macroeconomic variables, with deflation contributing most to the worsening profitability. Bank-specific factors were less significant during this period in explaining both average performance and variations in performance across banks. 2  BIS Review 32/2003  It may seem somewhat obvious to say that the lower profitability of the banks over the last few years has been largely due to the poor economic environment. Certainly, as participants in the syndicated loan market, you will be well aware of the impact of the current sluggish state of the economy on loan demand and margins. But the conclusion does have important implications if we look to the future. If the profitability of the banks has gone down with the economy, equally it should go up with the economy as it improves.
Our two 3-year lending operations, in particular, were effective in securing term funding for banking systems cut off from wholesale markets, and initially had a strong easing effect on sovereign spreads. Our interventions in sovereign bond markets under the Securities Markets Programme have also been found to have reduced yields and volatility in the countries targeted.2 And when redenomination risks spiked, the Outright Monetary Transactions announcements were extremely successful in removing unwarranted fears about a break-up of the euro area. Importantly for the credibility of the ECB, the legality of OMTs was confirmed on the highest judicial level by the European Court of Justice and also by national constitutional courts. Fortunately, around the same time as these measures were introduced, euro area leaders called on the Presidents of major European Institutions to develop a roadmap towards deepening Economic and Monetary Union.3 This has led to a marked improvement in the institutional environment, which has contributed both to an improved transmission of our policy and to a stronger recovery. In 2014, the Single Supervisory Mechanism was launched under the aegis of the ECB, which directly supervises the 129 significant banks in the euro area. In contrast to the earlier attempts to build confidence in the euro area banking sector, its founding act was to carry out a thorough and credible asset quality review and stress test of bank’s balance sheets.

Indeed, the revisions to estimates of potential growth have mostly occurred after the crisis, whereas it is most likely that the slowdown in productivity had already startedbefore the crisis but was masked by the credit-fuelled boom. For example, in 2007 the euro area’s output gap was estimated by international institutions such as the IMF, the OECD and the European Commission to be negative – somewhere between –0.2% and –0.6%. The most recent estimates put the output gap in the region of positive2.7% to 3.4%, a significant downward revision to views of potential. At the same time as potential growth has been declining, the share of global factors driving inflation seems also to have been increasing. In large part, the common global trend can be explained by the decline in price of energy and other commodity prices. But low global inflation goes beyond weakness in domestic demand and falling energy and commodity prices. In recent years there has been a growing understanding of the role of global demand factors on domestic inflation.6 For example, it has been observed that changes in the degree of slack in OECD economies are having a smaller impact on inflationary pressures than it has in the past.7 In part this changing 5/7  BIS central bankers' speeches  correlation is a result of the success of monetary policy in anchoring inflation expectations.
It has become clearer than ever that early euro adoption is undesirable, at least from this standpoint. Furthermore, direct costs have emerged in relation to euro area membership, arising from the sovereign debt crisis and the establishment of resolution mechanisms. Bearing such costs entails not only additional financial efforts. It is politically difficult to justify to the general public the need for financial contributions to mechanisms that richer countries currently benefit from (the collapse of the Radičová Cabinet in Slovakia in 2011 is illustrative in this respect). Another argument for the reluctance to set a target date for euro adoption is also linked to the fact that the euro area, unlike the European Union, appears not to have been a convergence club for its members. Hence, the standard deviation of GDP/capita at PPS relative to the group average indicates higher disparities among countries part of the initial euro area setup, while homogeneity in terms of income has been increasing across the EU. In my opinion, this state of affairs does not rule out the success within the euro area, but merely highlights that it can be achieved only under certain circumstances (the prior achievement of a sufficiently high economic development level and coherent macroeconomic policies). The thorough preparation of euro adoption is therefore essential, so as to ensure the sustainable compliance with nominal convergence criteria, because a single currency area is no place for economies with competitiveness issues or rigid markets.

Today, however, the economy is still operating below full capacity, which limits inflationary pressures and is consistent with monetary policy remaining significantly expansionary. Nonetheless, as output gaps close, inflationary pressures will be incubated which must be contained in time in order to ensure that annual inflation will stand at 3% over the two-year policy horizon. Hence, the Board estimates that achieving the inflation target in the projection horizon requires, as has been said in recent months, a progressive normalization of the current significant monetary stimulus. As a working assumption, the baseline scenario estimates that the level of the MPR one year ahead will be similar to the one inferred from private expectations. In the long term, it will converge to its neutral level (figure 8). As usual, the outlined scenario is subject to several risks. Internally, the greatest risks come from domestic expenditure. The baseline scenario considers that a significant part of its current strong expansion is temporary. However, there is a risk that said strength is largely the response to stimulative macroeconomic conditions, which would mean that the downturn foreseen in the second half of this year may not occur, speeding the closing of output gaps. The medium-term impact on aggregate demand of reconstruction works and the funding thereof will have to be assessed continually. In the immediate term, April data and the reaction of economic sectors to the earthquake and tsunami reduces the possibility of a generalized delay in the economic recovery.
To be even more explicit; when we formulate our policy we have on several occasions deliberately chosen to allow deviations from the inflation target for short or long periods of time. When the consequences of the deviations have been lower interest rates than would have been the case with a stricter interpretation, there has been practically no criticism. However, it has been rather different with regard to deviations in the other direction. Neither the Riksbank nor any other central bank using inflation targeting can be described as an “inflation nutter”, to borrow a famous phrase from Mervyn King, now Governor of the Bank of England. That is, we do not focus solely on stabilising inflation; we also take into consideration the real economy – conducting what is usually termed flexible rather than strict inflation targeting policy. This is also entirely in line with our task as laid down in law. There are also other types of consideration that need to be made in monetary policy. One that is immediately apparent is how financial stability will be affected by the interest rate decisions. Over the past year, and also on a few earlier occasions, there has been extensive discussion of developments in the credit market at our monetary policy meetings. We have relatively short experience of how credit cycles affect the economy; up until the 1980s the financial markets were strictly regulated. Our knowledge of the risks entailed in a rapid increase in indebtedness and asset prices is thus limited.

At the Riksbank we are working continuously on, for instance, improving our analyses and forecasting methods to provide the best possible basis for making decisions. Our decision to publish inflation forecasts based on market expectations in the March Inflation Report was an example of this. One can assume that the Ministry of Finance conducts equivalent development work. I believe that an even deeper discussion of what is entailed in the considerations made between inflation targeting and the real economy can be a good thing. During the first years of inflation targeting, the Riksbank sometimes sounded like an “inflation nutter”. However, this stance was abandoned after a few years and since then we have communicated that we also take into consideration financial and real factors. A decision by the Executive Board of the Riksbank in 1999 clarifies our views on these issues. However, we can probably become even better at analysing and explaining the considerations we have to make when conducting a flexible inflation-targeting policy. The Executive Board has held several speeches on this theme over the past year and the aim is to publish some form of joint document on this subject in the near future. BIS Review 39/2005  3  With regard to fiscal policy, it has a stimulating effect on the economy primarily through what are known as the automatic stabilisers, i.e. through systems for taxes and expenditure, which are very extensive in Sweden, being designed to allow some “automatic” adjustment to cyclical developments.
Much slower increase in housing prices in Germany despite roughly the same development in policy rates Index, 2005 Q1 = 100 and per cent respectively Housing prices  Short-term interest rates  200  200  Germany Sweden  180  180  160  160  140  140  120  120  100  100  80  80 05  07  09  11  13  15  6  6  Germany Sweden  5  5  4  4  3  3  2  2  1  1  0  0  -1  -1 05  07  09  11  13  15  Sources: The BIS and the OECD Figure 11. Long-term inflation expectations close to target once again Per cent  Note. Inflation expectations according to money market participants. Source: TNS Sifo Prospera  19 [20]  Figure 12. Monetary policy determines long-term inflation – inflation is a “monetary phenomenon” Annual percentage change 14 1910s  12 10 1970s 1980s  8  Inflation  6 1950s  4  1940s  1990s 1960s  2  2010s  1900s  2000s  1930s  0 -2 1920s  -4 -6 -2  0  2  4 6 8 Growth in money supply  10  12  14  Note. Money supply refers to M3 and inflation refers to CPI. The squares show averages for different decades. Sources: Statistics Sweden and the Riksbank  20 [20]

Capital inflows helped fuel emerging market growth, contributing even more to the uneven global recovery. Looking a bit further ahead, as the recovery solidifies in the advanced economies and inflation risk rises in emerging markets, diminishing growth differentials will diminish, spurring volatility in capital flows. Choppy waters may be ahead. So I’ve given you my view of the current global environment of fluid, if not excess, liquidity. So if excess liquidity is not the main issue, what is? On top of the list we have oil prices, Japan crisis and geopolitical risk in the Middle East and how these risks interact with global fluid liquidity. Which naturally leads me to the next question – what are the global growth scenarios in such a context? BIS central bankers’ speeches  1  In our central scenario or most likely scenario, we see continued global growth. The US and Euro area shows signs of a firmer recovery, amid monetary and fiscal stimuli. Latest data show strong consumption and production. But structural obstacles do remain; for example, unemployment and real estate market issues in the US and sovereign debt problems in the Euro area. The growth prospects of Asian economies remain robust, underpinned by strong fundamentals. However, inflation risk is rising, and fast. On the tragic Japan crisis, our current view is that its impact on the global economy should prove temporary. History suggests that Japan will quickly rebuild and recover. And the main engines of global growth still remain.
But when the banks themselves wanted to carry out exchanges, they had to find international investors who were willing to buy Swedish kronor for dollars, at least for a time (they could always agree to exchange back again after a period, but then they would have de facto borrowed dollars). Unfortunately, during the toughest parts of the crisis, everybody wanted dollars and almost nobody was interested in owning kronor. The krona also fell steeply against the dollar, by over 30 per cent from the peak in 2008 to the lowest point in 2009. Exchanging kronor borrowed from the Riksbank to dollars in the volumes required would have been an impossibility for the banks. And, if they had tried, the krona would have dropped even more in value.5 Another question that constantly comes up is why the Riksbank doesn’t, quite simply, reach an agreement with the Federal Reserve so that they can always supply us with dollars should we need them. It worked perfectly during the crisis, so why not trust in a solution like this? This would also remove the problem of the shortage of dollars. Now, no doubt the Federal Reserve is happy to help solve problems that it is clearly in its own interest to solve. And doubtless this was the situation during the crisis, when the shortage of dollars in Europe threatened to rebound on the US market. But, should only one or a few Swedish banks be facing problems, the situation would be different.

The IMF does not only envisage risks of a poorer development than expected – it may also be worth pointing out that they also see the possibility of an even more positive development. The Riksbank’s overall assessment is that international economic activity will enter a calmer phase over the coming two years, but at the same time global economic developments are very good right now. Sweden: Continued strong economy leads to slightly higher inflation The situation in the Swedish economy is also good. Last year growth was over 4 per cent. For instance, strong global growth has meant that exports have developed strongly for several years. Domestic consumption is also increasing rapidly now, at the same time as employment is rising. But the slightly weaker international economic activity means that activity in Sweden will also be dampened somewhat in the coming years. Inflation is the Riksbank’s particular responsibility. The Riksbank’s objective is to maintain inflation at around 2 per cent a year. We measure inflation as a change in consumer prices. Last year inflation was over 1.4 per cent. Over the past twelve months the main contribution to the increase in the consumer price index, or CPI, came from increased interest costs. However, higher electricity prices, rents and food prices also contributed to the increase in price levels. Price reductions on post and telecommunications had a dampening effect on inflation, as did falling prices for computers, DVDs and TVs.
14  Within that, this rise in mark-ups among foreign relative to domestic sales-focussed firms is largest in the manufacturing and ICT sectors. Taken together, this evidence is consistent with a story of rising mark-ups being concentrated among internationally-operating firms, who perhaps benefit disproportionately from global network economies of scale and scope. These firms tend to occupy the fat and fattening upper tail of the mark-up distribution. These are firms that might legitimately be termed “superstars” (Autor et al (2017)). Given this diagnosis, what impact might the rise in mark-ups have had on the macro-economy? One aspect is what impact increased market power may have had on firms’ incentives to invest and innovate and hence on firms’ productivity. With investment and productivity each having under-performed over recent years, the relationship with market power has been subject to increased academic scrutiny recently (for example, Eggertsson, Robbins and Wold (2018)). The relationship between mark-ups and productivity is vital in understanding their macro-economic effects (Van Reenen (2018)). On the one hand, if highly productive ‘superstar’ firms, benefitting from network economies of scale and scope, have become more dominant, then higher mark-ups could be the side-effect of a positive supply shock in the economy. On the other hand, if mark-ups are the counterpart to increased market power and reduced competitive pressures, that would suggest a negative supply shock. These effects are not mutually exclusive. For example, Aghion et al (2005) develop a model which generates a concave relationship between competition and investment.

Despite the significant shifts in macro-economic relationships and in policymakers’ preferences arising from a rise in market power, the net effect on the (level and variability) of the optimal interest rate path is more modest. At root, that is because of the trade-off inducing nature of mark-up shocks. Third, the presence of market power and higher mark-ups also has implications for the level of output in the economy which could provide additional incentives to generate inflation. Monopolistic competition implies that output is inefficiently low relative to its (perfectly competitive) social optimum. For sufficiently small deviations from the steady state, the policymakers’ loss function can be re-written to reflect that inefficiency:  16  All speeches are available online at www.bankofengland.co.uk/speeches  16  𝐿𝑡 = 𝜋𝑡2 + 𝜆𝑥𝑡2 − Ʌ𝑥𝑡  (14)  where  Ʌ=  1 (1 − 𝜃)(1 − 𝛽𝜃) 1−𝛼 2 𝜖 𝜃 1 − 𝛼 + (𝜍 + 𝜑)𝜖  (15)  The optimal targeting rule is also then altered to become:  𝜋𝑡 =  1 𝜑 + 𝛼 −1 1 −1 (𝜎 + ) − 𝑥𝑡 𝜖2 1−𝛼 𝜖  (16)  The additional constant term reflects the well-known inflationary bias under discretionary policy, first articulated by Barro and Gordon (1983). Output at a sub-optimally low level increases the incentives of a discretionary policymaker to run looser monetary policy to push output towards its social optimum, thereby generating an inflation bias.
1, Spring 2003. 34 Such communications are a form of Odyssean forward guidance about the balance sheet. See Jeffrey R.  Campbell et al, “Macroeconomic Effects of Federal Reserve Forward Guidance, ” Brookings Papers on Economic Activity, Spring 2012. The authors distinguish between central bank forward guidance that simply forecasts macroeconomic performance and likely monetary policy actions (Delphic guidance), and guidance that publicly commits the central bank to a set of future actions (Odyssean guidance). 35 Because market prices are forward-looking, an announcement that affects expectations about the stock of  assets held by the Fed should have an immediate impact on market prices. However, the overall size of the market impact will depend on the expected path of portfolio holdings over time. In addition, completion of purchases may be perceived as strengthening the central bank’s commitment by making it more difficult to deviate from announced plans. 36 However, since term premium effects decay as securities age, selling securities with relatively short remaining  times to maturity may not be materially different than redeeming those securities. 37 The Fed’s first two purchase programs were launched with pre-announced sizes and time frames (although the  first program was later expanded). In contrast, the third program was open-ended and state-contingent.

Guidance that provides clarity around both short-term interest rates and the balance sheet might help to anchor interest rate expectations—for example by indicating while purchases continue that the central bank intends to maintain overnight interest rates at low levels even after the completion of asset purchases.38 Lesson 6: Focus on one tool during normalization Uncertainty associated with managing multiple tools and the degree of substitutability between them poses possible challenges in removing policy accommodation after a zero lower bound episode, as the central bank switches from conducting policy with one lever to another. It therefore seems prudent to take a gradual approach to normalization, emphasizing one tool at a time. The Fed’s adopted normalization approach has thus far been an effective one. Starting to raise rates first, and waiting to start reducing the balance sheet until normalization in the level of overnight rates is well underway, has helped to ensure that the economic recovery is sufficiently advanced before making changes to the balance sheet.39 This strategy has reduced the likelihood that an unexpected adverse shock to the economy not long after the start of policy tightening would have necessitated a return to the zero lower bound on the federal funds rate and 7 / 13  BIS central bankers' speeches  potentially a reversal in balance sheet normalization.