samchain/econo-pairs-v1 huggingface dataset:
It is shorter, more selective and clearer on what we think is important and what isn’t. Of course it is not difficult to draw up a long list of possible “triggers” for changes in sentiment in markets. Avian flu or worsening strife in the Middle East are two obvious ones at the moment. What we have tried to do in the new FSR is to identify the features of the economy and the structure of financial markets which could lead an initial shock to turn into a crisis. We set out six main sources of vulnerability. Two of these vulnerabilities are features of the global economy: unusually low premia for bearing risk and the large financial imbalances among major economies. Two relate to the balance sheets of the non-financial sector: rapid leveraging of some parts of the corporate sector and high UK household debt. And two arise from structural dependencies within the financial system: the rising systemic importance of large complex financial institutions (or LCFIs for short) and the heavy dependence of financial institutions on some elements of market infrastructure. In each case the probability of the risk materialising is small but non negligible.

The very first CSFI survey in 1994 highlighted the important tension between financial risk and business risk when it observed: “…that banks are being forced by the quest for new sources of business to become a different sort of financial institution – sometimes without noticing it, and probably without the necessary skills.” 5 ; As 1987 and 1998 remind us, the best laid hedges and collateral can lose much of their reliability during times of stress. When financial institutions seek to liquidate portfolios to meet margin calls or solvency requirements, their attempts to lower risk exposures can cause a high degree of correlation amongst assets that appeared uncorrelated in normal times. We saw the same phenomenon on a much smaller scale in May and June this year. In less liquid markets the price impact of any shock tends to be larger, the knock-on to balance sheets greater, and the spillover effects across market participants wider. Our contacts in financial markets continue to suggest that market liquidity remains plentiful, but that there is a trend towards tying up funds in potentially illiquid assets in markets with relatively few players. And while hedge funds have played a positive role in recent episodes of turbulence – by absorbing some of the losses – their capacity and willingness to provide liquidity in the event of a large shock to the market remains uncertain.
The effect of the interest rate differential on the krone has been amplified by developments in international capital markets. Part of the appreciation in 2002 may also be due to higher oil prices. In a highly uncertain situation and with fears of war in Iraq, the Norwegian krone, buoyed by a relatively high interest rate and oil wealth, may have been regarded as an attractive alternative. Investment in NOK may have been considered a good hedge against a downturn in the world economy as a result of fears of war and high oil prices. Since December last year, the interest rate differential between Norway and other countries has narrowed by  2  BIS Review 38/2003  about 3 percentage points. Since the beginning of 2003, the krone measured in terms of the trade-weighted exchange rate index (TWI) has depreciated by 11 per cent. At the beginning of the 1990s, the Norwegian economy was in a deep recession. Production was far below capacity. When growth in the economy picked up, capacity utilisation increased. The output gap shows the difference between actual GDP and the level indicated by trend growth - estimated at close to 2½ per cent in Norway. Around 1996, there was full capacity utilisation, and the output gap, as we normally measure it, closed. Subsequently, costs increased and prices for goods and services produced for the Norwegian market accelerated. The upturn peaked in 1997, with GDP growth approaching 5 per cent.

In the following period and until the end of 2002, the krone appreciated, and the effect of high wage growth gradually came into evidence in overall corporate results. Results last year were affected by a particularly strong krone in the second half of the year. The krone exchange rate, measured in terms of the TWI, has now returned to the level of the mid-1990s, while the business sector is still grappling with the high level of costs that has built up since 1998. Changes in the krone exchange rate have proved to be reversible, but the loss of competitiveness and jobs caused by the relatively high level of domestic wage growth is more difficult to recoup. In recent years, labour costs have accounted for an increasing share of corporate earnings. In 2002, labour costs accounted for more than 90 per cent of total factor income in manufacturing. The increase in wage shares is affecting corporate behaviour. The demand for labour is declining. Credit demand and investment in the enterprise sector are low. At the same time, the commercial property market is weak. Vacancy rates for commercial premises are high and rents have fallen. This will have an impact on investment in the period ahead. Lower interest rates will normally result in higher inflation, partly because the krone depreciates, and partly because of a rise in demand. Enterprises will thus be able to increase their earnings. Business sector activity is stimulated most effectively by low interest rates and a weak krone.
Using Section 13(3) of the Federal Reserve Act, the New York Fed agreed in principle to lend $ billion to JPMorgan Chase and to secure the lending with a pledge of Bear Stearns assets valued by Bear on March 14 at approximately $ billion. This step made it possible for JPMorgan to agree to acquire Bear and to step in immediately to guarantee all of Bear’s short-term obligations. This guarantee was especially important to stave off the feared systemic effects that would be triggered by the panic of a Bear bankruptcy filing and of the failure to honor its obligations. And by agreeing to lend against a portfolio of securities, we reduced the risk that those assets would be liquidated quickly, exacerbating already fragile conditions in markets. The portfolio of securities is described in Annex II to this testimony. On the evening of Sunday the 16th, I sent a letter to James Dimon, the CEO of JPMorgan Chase, to memorialize the fact that we had reached a preliminary agreement that the New York Fed would assist the acquisition with $ billion in financing, with the understanding that the parties would continue working during the week towards a formal contract. We also  6  BIS Review 39/20086  provided regulatory approvals, including under Section 23A, to assist with the merger and a transitional period for phasing in the assets under our capital rules.

Bear Stearns With this important context, let me return to the actions taken by the Federal Reserve in response to the situation that arose at Bear Stearns. That response was shaped in roughly four stages: (1) the decision on the morning of March 14 to extend a non-recourse loan through the discount window to JPMorgan Chase so that JPMorgan Chase could in turn lend that money to Bear Stearns; (2) the decision on March 16 by JPMorgan Chase and Bear Stearns for JPMorgan Chase to acquire Bear and guarantee certain of its liabilities, along with an agreement in principle that the Federal Reserve Bank of New York would provide certain financing in the context of that acquisition; (3) the launching of the Primary Dealer Credit Facility; and (4) the events of the following week, culminating in the March 24 announcement of revised merger agreement and guaranty terms between JPMorgan Chase and Bear, and the finalizing of the terms and structure of the associated loan from the Federal Reserve Bank of New York. Let me begin with the market situation in which Bear was operating in the days leading up to March 13. Fixed-income traders had begun hearing rumors that European financial institutions had stopped doing fixed income trades with Bear. Fearing that their funds might be frozen if Bear wound up in bankruptcy, a number of U.S.-based fixed-income and stock traders that had been actively involved with Bear had reportedly decided to halt such involvement. Many firms started pulling back from doing business with Bear.
The production function approach On the other hand, our ability to analyse why output deviates from its long-term level can be improved if a production function (PF) approach is used. This is a common technique used by international organisations such as the IMF and the OECD. The Riksbank has used such an approach since 2010.7 A production function shows how output depends on production factors and technological level. In the most common case, we may consider that output (Y) depends on the number of hours worked (H), the capital stock (K) and total factor productivity (TFP). The level of TFP determines how much output is derived from a given amount of hours and capital.8 TFP can thus be seen as a measure of the level of technology. By specifying a form for the production function, the following breakdown is obtained:9  The wage share in the economy is usually about two-thirds, which is why hours are considered to stand for two-thirds of the production factors (  ) and capital for the  ). The contribution of each factor to output can then be calculated. remaining third ( Output increases through more capital weighted by a third, more hours worked weighted by two thirds and improved TFP. But, in practice, it is difficult to measure TFP. Instead, it must normally be estimated as a residual, often called a Solow residual after Nobel Prize winner Robert Solow. The output that does not depend on the input factors of capital and labour is assigned to TFP.

Michael C Bonello: Interview with The Times (of Malta) Interview with Mr Michael C Bonello, Governor of the Central Bank of Malta, appearing in The Times, 10 May 2007. *  *  *  You have long argued for structural reforms and the same message emerges from your Statement in the Bank’s recently published Annual Report for 2006. With an election due in the coming year or so, is there any point in repeating your plea? The Central Bank of Malta has a statutory responsibility to advise the Government on economic and financial matters. In performing this advisory role the Bank cannot be conditioned by considerations of electoral expediency or feasibility. Central bankers must take a long-term view of the economy’s best interests; and it is clear that in the long run the remaining rigidities and inefficiencies which burden the Maltese economy are unsustainable. Although it is true that the economy has entered a recovery phase, it is also a fact that Malta has not benefited to the same extent as other countries at a similar level of development from the favourable global conditions of the past three years. This suggests that structural factors prevented the economy from responding effectively to the cyclical upswing. That partly explains why per capita GDP in Malta has fallen against the EU average, from 74 per cent in 2001 to 72 per cent last year. This relative decline cannot be corrected unless productivity growth accelerates.
So what explains these large regional variations in levels of economic activity, income and spending? Plainly, many factors are at work, economic, geographic, historic, social. There is a large literature on the 7  determinants of growth, which suggests each of these factors is important. But let me focus on one which is I think key to understanding regional differences - levels of productivity among firms. A few years ago, the US economist Paul Krugman noted: “productivity isn’t everything but in the long run it 8  is almost everything”. Krugman was talking about the determinants of growth, and hence living standards, in the economy over the longer-run. He assigns productivity a central role. The raw numbers, looked at over long spans of history and large cross-sections of countries, suggest Krugman is right. Take a simple example. Since 1850, inflation-adjusted national incomes in the UK have risen around 9  20-fold. This is a massive rise in living standards. How much of that was the result of higher productivity? Well, in the absence of productivity growth, UK living standards today would only be around double their 1850 value – in other words, at late-Victorian levels. In the UK, productivity has not been everything but it has been almost everything. The same is true elsewhere around the world. 6 7 8 9  ONS Quarterly National Accounts 2016 Q2, available here See World Economic Forum (2016) for a summary. Krugman (1994). Hills et al (2016).

Firms whose credit conditions have tightened face a profits squeeze and cut their production of (red and blue) cars. Households facing the same tightening in credit conditions face an income squeeze and cut their consumption of (red and blue) cars. As a result, aggregate activity or GDP in the economy – the sum of red and blue car production – falls in this hypothetical economy. There is a recession. While both regions are affected, the impact of this recession is not felt equally. Red firms might borrow more than Blue ones and Red consumers more than Blue ones. This means the tightening of credit conditions  2  In practice borrowing behaviour is likely to be driven by several other factors, such as expectations of future earnings, access to finance and the amount of collateral with which to borrow against. 3  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  3  has a larger impact on Red Car than Blue Car region - its recession deeper, the impact on unemployment greater. This further widens the income gap between Red Car and Blue Car regions. What can be done? Enter a central bank with a mandate to support the whole economy. They can do so in two ways. First, they can cut the interest rate at which they lend to banks which, in turn, is reflected in banks’ lower cost of lending to companies and households.
To sum up: the Spanish banking industry has proved resilient to the economic crisis triggered by the pandemic, maintaining the supply of credit to the private sector and an adequate solvency level. It has also been able to swiftly recover its profitability. The banking sector in the new macro-financial climate Despite these favourable circumstances, the recent macro-financial deterioration I described earlier calls for a prudent approach on the part of banks and for close monitoring of the risks associated with the Ukrainian conflict. Indeed, as noted above, these factors have led to a downward revision to the economic outlook published by the Banco de España for 2022 and 2023, as well as a significant upward revision to our inflation projections for 2022. Against this backdrop, our latest Financial Stability Report, published in May, included some simulation exercises on the impact of a potential rise in interest rates or energy prices on the economic and financial situation of Spanish firms, households and general government. I will now turn to the results of these exercises, updated to include the latest developments and market expectations of interest rate hikes. Thus, in the case of businesses, an interest rate hike could drive up the percentage of firms under financial pressure. Specifically, within corporate bank financing, short-term and variable-rate loans predominate, and changes in interest rates therefore pass through relatively swiftly.

In order to achieve nominal stability, monetary policy must provide a nominal anchor. Since the Second World War, there have been several monetary policy reforms in Norway. In the period between 1972 and 1986, monetary policy was to a limited extent focused on stabilising the rise in prices. During this period, inflation was high and variable. Consumer prices in Norway rose almost twice as much as in Germany. At the same time, the value of the Norwegian krone against the German mark was almost halved, contributing to high imported inflation. From the mid-1980s, during and after the credit bubble and the cost shock, it was recognised that a substantial revision of economic policy would be necessary and that the problems created by inflation had to be taken seriously. From 1986 to 1992, Norway operated a fixed exchange rate regime. The fixed exchange rate was the anchor for inflation in Norway. The difference between inflation in Norway and Germany narrowed substantially. Deteriorating competitiveness due to high wage growth would no longer be remedied by means of devaluations. Substantial emphasis was placed on the importance of wage formation for developments in employment. Only when wage growth dropped below the level of our trading partners did unemployment begin to fall and the manufacturing sector began to pick up. Thus, the fixed exchange rate policy was not introduced in order to strengthen the internationally exposed business sector. On the contrary, it was a breach in the approach whereby monetary policy and frequent devaluations had been used to shelter these sectors.
Jarle Bergo: Monetary policy challenges and experiences in Norway Speech by Mr Jarle Bergo, Deputy Governor of Norges Bank (Central Bank of Norway), for the Norwegian Shipping Club, Oslo, 4 September 2006. Please note that the text below may differ slightly from the actual presentation. The address is based on the assessments presented at Norges Bank’s press conference following the Executive Board’s monetary policy meeting on 16 August, Inflation Report 2/06 and on previous speeches. *  *  *  Introduction Monetary policy in Norway is oriented towards low and stable inflation, with annual consumer price inflation of close to 2.5 per cent over time. In its conduct of monetary policy, Norges Bank operates a flexible inflation targeting regime, so that weight is given to both variability in inflation and variability in output and employment. Monetary policy functions through an interaction with other components of economic policy. Among other things, this interaction must take into account that the Norwegian economy is exposed to strong external influences, particularly through developments in oil and gas prices. Oil gives us an economic asset that is not available to many other countries, but it also poses considerable challenges. First, when oil is extracted and sold, our national wealth is transformed from petroleum wealth into financial assets. Norway’s national wealth belongs not only to our generation, but also to future generations. The authorities must therefore exercise fiscal discipline, taking into account long-term considerations. Moreover, the size of the cash flow from petroleum activities varies considerably.

But the Federal Reserve states itself that in the long term stable prices are a condition for sustained output and employment growth. The introduction of formal inflation targeting has been under discussion in the US for several years. The debate was rekindled with the appointment of Ben S. Bernanke as Chairman of the Federal Reserve on 1 February this year. He has argued that quantifying the concept of long-term price stability may reduce the uncertainty associated with monetary policy and more effectively anchor longterm inflation expectations. In his view, however, the introduction of a long-term inflation target is fully  2  BIS Review 80/2006  consistent with current US monetary policy 1 . There has been little interest in US political circles in changing the monetary policy framework 2 . Pursuant to the Regulation of March 2001, the mandate for monetary policy stipulates that monetary policy shall be aimed at stability in the Norwegian krone’s national and international value, and at the same time underpin fiscal policy by contributing to stable developments in output and employment. The operational objective of monetary policy is low and stable inflation, with annual consumer price inflation of approximately 2.5% over time. The mandate implies that inflation targeting shall be flexible, so that weight is given to both variability in inflation and variability in output and employment. The concrete target for inflation varies somewhat among central banks.
It is important to realise that this constitutes major progress, in particular from the point of view of European integration. No one would have imagined that this would have been possible a few years ago. However, it was not enough to contain the crisis. As of last August, against the backdrop of expectations of slower growth, financial market tensions increased again. A vicious circle developed between the risk of a Greek default, uncertainties surrounding the debt of other euro area countries and their banking sectors. In other words, as sovereign debt had previously been considered a risk-free asset, banks purchased massive amounts of government bonds. This was especially the case in Europe due to the interdependence of the economies and the free movement of capital. For instance, German and French banks have a relatively large exposure to Greek, Italian and Spanish debt. The fear of a credit default by these countries therefore constitutes a risk of very heavy losses for banks. Since this would ultimately affect the public finances of the States if it materialised, it in turn increases concerns about the fiscal soundness of these countries, creating a vicious circle. So you can see that much of this mechanism is not entirely rational. Only the Greek debt situation is truly critical, while all the other countries have solemnly undertaken to repay their debts in full and they are in a position to do so.

We support the IMF in scaling-up its work on the macro-critical implications of climate change, digitalization, poverty alleviation, youth employment, and inclusiveness in general. We look forward to the successful conclusion of a new general SDR allocation of $ billion and encourage the Fund to work on options for voluntary reallocations of SDRs for the benefit of poorer members. We welcome the doubling of the New Arrangements to Borrow, as well as the renewal of the Bilateral Borrowing Agreements to meet the members’ high and growing overall demand for Fund resources and the shift towards UCT arrangements. We welcome the work on the 16th General Review of Quotas and reaffirm our commitment to a strong, quota-based, and adequately resourced IMF at the center of the global financial safety net. 2/2  BIS central bankers' speeches