samchain/econo-pairs-v1 huggingface dataset:
It’s time to talk about money Speech given by Sir Jon Cunliffe, Deputy Governor Financial Stability, Member of the Monetary Policy Committee, Member of the Financial Policy Committee and Member of the Prudential Regulation Committee  London School of Economics, London 28 February 2020  I am grateful to Alex Michie for his assistance in drafting these remarks and Ben Dyson, John Jackson, Josh Sadler, Tom Mutton, Alice Carr, Emma Sinclair, Ryland Thomas, Michaela Costello, Chris Ford, Simon Scorer, Justin Jacobs, Wayne Chapman, Samantha Riley and the Bank’s Archivists for their input. 1  All speeches are available online at www.bankofengland.co.uk/news/speeches  Intro One of the questions that I find hardest to answer simply is “what does the Bank of England do?” I get asked this penetrating question a lot, especially by children when I visit schools as part of the Bank’s outreach and education programme – which incidentally is one of the most rewarding parts of my job. There is a long, comprehensive and accurate answer of course, describing our monetary policy and financial stability objectives, policies and actions and our role in demand management. When I talk to economics classes in schools, I can often feel their teachers willing me to come out with these textbook answers. But I find that the better and simpler answer is that we are responsible for ensuring that the money of the United Kingdom ‘works’. Money, like electricity and water, is crucial to the operation of a modern society.

And this year, we will consult on giving greater access to our balance sheet as well as our infrastructure to non-bank payment providers. There is also still considerable opportunity to improve the domestic retail payment systems. FPS is not available, unlike in some other countries, at the till. And while the card schemes offer instant transaction it can take a number of days for merchants to receive the value of the transaction. These add to costs which are eventually borne by consumers. Two years ago, the 3 main scheme companies in the UK were consolidated into one entity that now is developing a new single ‘instant payment’ interbank system - the ‘New Payments Architecture’. The aim is to provide a faster, more resilient, and more efficient interbank system that is open to bank and non-bank payment service providers, and one that will enable and encourage innovation and competition including instant payment at the point of sale. Innovation and competition can lead to better, cheaper, payments services in the economy. But, the payment systems on which we depend have to be reliable and robust, prudentially and operationally. Regulation, therefore needs to keep pace with the changes in the payments landscape and the proliferation of new actors. The same risks have to be subject to the same regulation. The current regulatory regime focusses on the banks and core payment systems that have traditionally performed most of the functions, the ‘chain of actions’, involved in making transactions.
In normal times, the ECB calculates each week the expected liquidity needs of the banking sector and publishes an estimate of the “benchmark” amount of liquidity needed. This benchmark is calculated under the assumption that banks prefer to fulfil their reserve requirements smoothly by holding, in aggregate terms, the same level of current account holdings with the central bank on each day of the reserve maintenance period. The ECB then provides an amount of liquidity close to the “benchmark” in its weekly liquidity operations (the so-called “main refinancing operations”). This pattern of liquidity provision has functioned well in the past, when it has succeeded in delivering short-term money market rates close to the target rate corresponding to the announced monetary policy stance. However, since 9 August when the tensions in financial markets first spilled over to the short-term euro money market, an increase in precautionary demand for liquidity and a change in the temporal pattern of liquidity demand within the reserve maintenance periods have altered the behaviour of banks, temporarily rendering the assumptions underlying the “benchmark” computations less realistic. As a result, while maintaining entirely unchanged the structure of its operational framework (a testimony to the flexibility and resilience of this framework), the ECB has somewhat departed from the regular patterns of liquidity provision that it normally follows in order to  2  BIS Review 143/2007  steer the very short-term money market rates.

The Joint Staff Report on the Treasury flash event, the Treasury Department’s subsequent request for information, and the work that has followed identified a number of changes that have reshaped the Treasury market over the last decade. These include the increased electronification of trading, the changing nature of intermediation and liquidity, and the entry of new market participants. In light of these changes, the Joint Staff Report highlighted four important priority areas for additional work. In taking these efforts forward, we have benefited from ongoing engagement with market participants and other members of the public. The first priority is gatherings like this one, where both private and official sector participants come together to study and share views on what the market’s evolution means for its structure and liquidity. Understanding how the Treasury market is evolving can enable us to be good stewards of its trajectory. A second priority is improving the availability of data on activities in the cash market. After the historic volatility that occurred on October 15, 2014, the official sector had limited access to transaction data. This resulted in a months-long lag in the process to gather and analyze data from the event. The introduction this year of transaction data reporting by broker-dealers to the official sector is thus a critical step forward. While closing this data gap for the official sector is an important milestone, work remains to ensure that the scope of collection is sufficiently complete and dynamic to maintain coverage of relevant firms, as intermediaries and liquidity providers evolve.
But the dilemma goes further - given that it is rational for others to expand their budgets it becomes rational for your own country to do so too - even if your instinct is not to “free ride”. Otherwise you might rationally expect to end up among the small minority that does not expand and at the same time still have the tighter monetary policy that results from everyone else expanding. This is the classic “prisoner’s dilemma” from game theory. The conclusion is that it is necessary to have rules for fiscal policy that limit deficits and debt when monetary policy is united and fiscal policy divided, and that these rules need to be followed. But the conclusion is also that the pressure to over-expand is as strong during an upturn as during a downturn. In fact this is what we have seen in the euro zone during the heyday of the late 1990s - a much too expansionary fiscal stance in some euro zone countries, which led to tighter monetary policy and thus an incentive for others to weaken fiscal discipline. The euro zone then started the downturn with large deficits, considering the earlier boom, instead of surpluses. What the Pact then required, a 180-degree turnaround in fiscal policy to a tighter stance, reinforcing the downturn, was considered by some as stupid. In fact it was the lack of savings during the boom that was stupid.

As a result, Malaysia was accorded full FATF membership status in 2016, which not only demonstrates a strong commitment to combat money laundering and financing of terrorism, but also reflects a safe business environment in Malaysia. 1/3  BIS central bankers' speeches  Importantly, this recognition enables Malaysia to better participate in the international financial system without qualifications and sanctions, enabling our business and economy to transact and exchange freely with the rest of the world. Such a recognition is priceless for an open and trading economy like ours. Maintaining the integrity of the financial system and safeguarding legitimate business activities is thus paramount in ensuring that this recognition is preserved and that we have a thriving and conducive business environment. Preventing and combating financial crime is a shared responsibility of all stakeholders. Hence, it is imperative that all DNFBP sectors including legal professionals play an important complementary role to financial institutions in safeguarding this by preventing the proceeds from unlawful activities and funding of terrorism from penetrating into our financial system, while facilitating investigations and prosecution of these financial crimes. The legal fraternity also plays a crucial role in the public sphere as an instrumental component in the administration of justice as well as in upholding the rule of law. In many financial transactions or exchanges, the legal fraternity also acts as a gatekeeper, or intermediary arising from their position of trust.
As the basis of an inflation-targeting policy is that the long-run inflation expectations are anchored around the target, this development has gradually made it more important to bring up inflation. The Riksbank has therefore needed to focus more and more on its main task, to maintain confidence in the inflation target, while the scope for taking other issues into consideration has become more and more limited. It is these considerations which form the basis for the policy being pursued by the Riksbank today. It is not a question of a rigid fixation with achieving exactly 2 per cent all the time. On the contrary, the Riksbank normally demonstrates a considerable degree of flexibility when it comes to how fast the target should be met. There is a limit to this patience, however. Difficult to maintain confidence simply through communication I believe the critics take the importance of maintaining confidence in the inflation target far too lightly. This argument is often not considered at all, with everything focusing instead on the Riksbank needing to stop the increase in household debt and housing prices by raising the interest rate. If confidence in the inflation target is even mentioned at all, the idea seems to be that it is something that should be maintained by the Riksbank communicating that even though it intends to continue to allow inflation to undershoot the target for some time to come, it will eventually bring inflation back up to the target at some point in the future.

It is a question of dampening these debt and price increases using macroprudential or fiscal policy measures, but also fundamental reforms on the housing market to generate a sustainable and improved balance between supply and demand. But if the Riksbank is so concerned, shouldn’t it then reconsider its policy and raise the interest rate? I hope that it has become clear during my discussion here that I think there are solid and convincing reasons to pursue the policy the Riksbank is currently pursuing, but I would like to repeat them briefly in any case. The inflation target has been a nominal anchor in the Swedish economy and a major reason behind the favourable economic development over the past two decades. For some time now, following the long period of inflation falling below the target, there have been signs that confidence in the inflation target has begun to falter. The Riksbank’s main task is to maintain confidence in the target – a task it does not share with any other authority. The repo rate is a blunt tool when trying to curb increases in household debt and housing prices as it influences so much else in the economy. A considerably higher rate would likely be needed in order to have a substantial effect, but then inflation and growth would be dampened, quite extensively in the worst case scenario. Neither low inflation nor weaker growth would contribute to a sustainable rise in the interest rate level.
Implementing the reforms needed to create a better balance on the housing market and to build more housing will, however, take some time. Measures to restrain the accumulation of debt by households and to strengthen the banking system will therefore be necessary during this period. Over the long term, mortgage borrowers will benefit from lower indebtedness The measures that need to be applied to restrict households’ opportunities to borrow and to strengthen the banks’ resilience may have short-term effects on demand and inflation, which monetary policy needs to consider. But the measures may also impact different groups in society in different ways. In practice, this could be one reason for why it has been difficult to apply appropriate measures. There are so many groups to consider: mortgage borrowers and other households, high income earners and low income earners, households in rural areas and households in metropolitan areas, and so on. But in several cases, the variations are also large between different households within these different groups, which makes it difficult to determine who will win and who will lose from different measures. It may therefore be difficult to conduct a policy that clearly mitigates the consequences for those households hit hardest by the measures. Another difficulty concerns distribution effects in the short and long terms. These can often differ. In the short term, it is likely that many indebted households – mortgage borrowers – may be forced to cut back on their consumption while they reduce their debts.

3 As measured by the change in the cyclically-adjusted primary balance, European Commission (2021),  “European Economic Forecast” – Spring 2021 4 McKinsey (2021), “The future of work after COVID-19”. 5 Bloom, N. et al. (2012), “Really Uncertain Business Cycles”, NBER Working Paper Series, No 18245, National  Bureau of Economic Research, July. 6 Batini, N., di Serio, M., Fragetta, M., Melina, G. and Waldron, A. (2021), “Building Back Better: How Big Are Green  Spending Multipliers?”, IMF Working Papers, No 87, International Monetary Fund, March. 7 Darvas, Z. and Tagliapietra, S. (2021), “Setting Europe’s economic recovery in motion: a first look at national  plans”, Bruegel, 29 April. 8 European Commission (2021), “The euro area”, Flash Eurobarometer 488, May. 80% of thosesurveyed believe  that having the euro is a good thing for the EU and 70% say the same aboutthe euro and their country. 4/4  BIS central bankers' speeches
Second, the Rule has the desirable feature that when economic shocks push the economy away from the central bank’s objectives, the Taylor Rule prescribes a policy response that can help push the economy back toward the central bank’s goals. Third, a number of studies have shown that Taylor Rules are robust in the sense that they generally perform quite well across a range of different assumptions about how the economy is structured and operates. Despite these attractive features, I don’t believe that any prescriptive rule, including the Taylor Rule, can take the place of a monetary policy framework that incorporates the FOMC’s collective assessment of the large number of factors that impact the economic outlook. 1  Jonathan McCarthy, Paolo Pesenti, Argia Sbordone and Joseph Tracy assisted in preparing these remarks. BIS central bankers’ speeches  1  As I see it, the Taylor Rule has several significant shortcomings that can be detrimental to the attainment of the Federal Reserve’s mandated objectives. These shortcomings are not just theoretical; they have been very relevant to monetary policy in recent years. First, the Taylor Rule is not forward-looking. Its policy prescription is based on the current size of the output gap and the deviation of current inflation from the Fed’s objective, not on how these variables are likely to evolve in the future.

So, in a rapidly changing environment, the Taylor Rule and other similar prescriptive rules will wind up being “behind the curve.” For example, in the fall of 2008, Taylor Rule prescriptions were well above the level of rates that was appropriate given the sharp and persistent deterioration in the economic outlook and the sharp tightening in financial conditions that occurred during that period. Of course, many economists at that time recognized that such prescriptions would have been inappropriate and suggested various ad hoc modifications to the prescriptions – in fact, John himself suggested that modifications to his rule were appropriate at that time. 2 Nonetheless, there was no consensus about the “right” modification to the rules at that time, in part, because the circumstances were unprecedented and the outlook so uncertain. If the FOMC had been required to justify to Congress deviations from a reference rule at that time, I believe that this would have slowed down how we responded to the crisis and would have resulted in a monetary policy that was not sufficiently accommodative. The consequence could have been a longer financial crisis and a deeper recession. Second, the Taylor Rule, as typically used, assumes that a 2 percent real short-term interest rate is consistent with a neutral monetary policy. However, a large literature concludes that the equilibrium real short-term rate is very unlikely to be constant, with its value affected by many factors, including the pace of technological change, fiscal policy and the evolution of financial conditions.
These changes raise issues that should be addressed by regulators in order to maintain the integrity of financial markets.” IOSCO is currently assessing the responses to this Consultation and steps that could be taken to help mitigate these possible risks. I look forward to the report for the G20 Finance Ministers in October. Conclusion In conclusion I would like to send these messages and make a comment on the central banks role in present time: My first message is to underline once again that all what has been decided has to be implemented strictly, comprehensively, and fully. As the continuous challenges demonstrate clearly, we are not back to “business as usual” as some thought some months ago. We need resolve and fortitude of the public authorities and lucidity on the part of the private sector. Secondly, a lot remains to be done. No complacency should be tolerated in any field. And I cannot help saying that on top of what is clearly identified by the international community as the urgent issues in discussion in the Financial Stability Board, we are far from understanding the potential global systemic instability that is associated today with the sheer size of the non-banking sector which experienced an exponential growth over the last 20 years. I would call all of us to better understand this aspect of the global financial dynamics.

Jean-Claude Trichet: Intervention at the Eurofi Financial Forum 2011 Speech by Jean-Claude Trichet, President of the European Central Bank, at the Eurofi Financial Forum 2011, Wroclaw, 15 September 2011. *  *  *  Ladies and gentlemen, It is a great pleasure for me to be back here at the Eurofi Financial Forum. These events always provide a very good opportunity to exchange views on issues that are central to the effective functioning of the financial sector and its key task of supporting sustainable growth in the real economy. As we are all well aware, this is a very challenging time for the advanced economies. We avoided a dramatic economic depression in the autumn of 2008 – following the collapse of Lehman Brothers three years ago to this very day. But we still have a long way to go to move beyond this crisis. At the Pittsburgh Summit two years ago, the G20 leaders reiterated their promise to do “everything necessary to ensure recovery, to repair our financial systems and to maintain the global flow of capital”. Now, more than ever, we need to make significant progress in delivering on those promises. Today, I would like to focus on what has been achieved so far by our collective efforts to repair our financial systems – in particular, the establishment of the new European supervisory structure, the agreement on Basel III and the global framework for systemically important financial institutions (SIFIs).
In this scenario, either much of the past decade of prosperity was an illusion or, alternatively within the space of only a few years, the productive potential of the U.S. collapsed for some unexplained reason. I suppose it is natural to believe that some elements of the story are true. But for me, the evidence for this is minimal, and the implications for productive capacity are exceedingly pessimistic. And even if it is true, the market mechanism should cause wages and prices to adjust in order to reemploy unused resources. For example, there should be some lower real wage that would make it profitable for firms to fund the necessary on-the-job training for workers who need some modest acquisition of skills. According to this pessimistic hypothesis, something is preventing the market’s pricing mechanism from achieving such results within a satisfactory time frame. My own view is more optimistic and, I believe, more consistent with the idea that our best days are ahead. Without a compelling explanation for the hypothesis that the productive capability of the U.S. has been diminished, I think the evidence favors the belief that aggregate demand is simply much too low today. After all, today there are roughly 14 million unemployed Americans. Only a few years ago, there were only about half that many. It is hard to believe that an additional 7 million Americans have suddenly lost the necessary skills to work in today’s economy, and I have not seen any evidence supporting such a dramatic and rapid loss of skills.

“An Historical Analysis of Monetary Policy Rules,” in John B. Taylor (ed.) Monetary Policy Rules, University of Chicago Press. BIS central bankers’ speeches  3  modern treatments is due to John Taylor in an article published in Econometrica in 1979.3 This framework continues to be a mainstay of optimal policy analysis, as evidenced by a large literature that includes work by Michael Woodford in recent years.4 Taylor expresses the central bank’s dual-mandate objective as monetary policymakers attempting to minimize the weighted sum of squared deviations of inflation and the level of output from their goal values. That is, a central bank attempts to minimize a simple quadratic loss function like the following: L = (π – π*)2 + λ * (y – y*)2 Here π and y are inflation and the (natural) logarithm of output, and π* and y* are the policy goals for these variables. In most formulations, y* is the log of the level of potential output – the level of output at which resource slack has a neutral influence on the level of inflation. Thus, (given the properties of logarithms) y – y* is the usual output gap, the percentage difference between actual and potential output. And π – π* is the gap between the actual and desired rates of inflation. Ideally, we’d like both of these gaps to be zero, but this usually won’t be the case.