samchain/econo-pairs-v1 huggingface dataset:
However, it is not alarmingly high credit growth that is visible in the Swedish economy now, but a high level of debt in the household sector that is primarily a consequence of high credit growth prior to the financial crisis (see Figure 3). At present, growth in household credit is only slightly higher than growth in disposable incomes. Growth in corporate credit is at the same time low.13 The increase in lending by the major banks over the past five years has consisted almost entirely of Swedish mortgages (see Figure 4). My assessment is that it does not have any major impact on household debt to hold the repo rate slightly higher for a limited period of time (see Figure 2). 14 To have an effect that is more than marginal, one would probably need to hold the repo rate so high that the costs in terms of poorer macroeconomic growth would be very high. So what one gains by monetary policy leaning against the wind in terms of dampening debt, reducing vulnerability in the economy  11  Sveriges Riksbank (2013). 12  This is, of course, a simplification. Actually, an unfavourable scenario could also occur within the normal forecast period, that is, within the next three years. See also Sveriges Riksbank (2013). 13  Companies’ market borrowing has increased in recent years, which to some extent compensates for the downturn in growth in bank loans. However, even if one takes this market borrowing into account, credit growth in the corporate sector appears relatively low.

Attitudes to change have varied, partly depending on what role one believes monetary policy played in the crisis. Was inflation targeting one of the perpetrators, contributing to interest rates being too low prior to the crisis; was it the bystander who could only look on in horror, or was it the saviour who ensured that inflation expectations nevertheless remained firmly anchored?6 Personally, I do not believe that the argument that the financial crisis stems from an overly expansionary monetary policy is particularly convincing. As I see it, it was primarily a combination of a lack of supervision and regulation of the financial markets.7 Two obvious lessons are that there was over-confidence in the ability of these markets to regulate themselves and that the distortions in incentives on the financial markets had been underestimated.8 Given the enormous socio-economic costs the financial crisis entailed, there is of course a strong will to correct what one perceived went wrong to ensure it cannot happen again – this applies in particular to the central banks, who had to deal with quite a few of the problems. There is thus an instinct to take on the task of ensuring that financial crises do not arise – not merely through advocating better supervision and regulation of the financial markets, but also through monetary policy. But there are a number of problems with this. Risks linked to household debt have held back monetary policy This leads me on to the situation in Sweden and how monetary policy has been conducted recently.
As I will talk about shortly, I believe such policy could provide more clarity about our attitudes toward providing monetary accommodation – and would be more in line with a structure I would have preferred to have seen in our August 2011 and January 2012 actions. This policy also can be structured in a way that would represent a balanced risk-management approach to achieving the dual goals of maximum employment and stable prices that the United States Congress has mandated to the Federal Reserve. Communications enhancements First, though, I’d like to discuss the Fed’s latest initiatives to enhance communications. As an accountable central bank in a democratic society, the Federal Reserve has an obligation to clearly articulate what it is trying to achieve with monetary policy. I believe that our latest communications efforts are an important step in further increasing such accountability to the public, as they reaffirm our commitment to both legs of the dual mandate and describe the ways in which we will seek to achieve those objectives. The framework statement Let’s start with the framework statement of our policy goals and long-run strategy. The framework clarifies how the FOMC interprets our statutory responsibilities for facilitating maximum employment and price stability in terms of measurable and achievable economic goals that we aim for over the longer run. We say that the Committee sees a rate of inflation of 2 percent over the long run as being consistent with the price stability leg.

Namely, if the policy prescriptions for achieving the inflation and unemployment goals are in conflict, we will take a balanced approach promoting the return to each, taking into account the size of the deviations and the relative  3  2  See FOMC (2005). BIS central bankers’ speeches  speeds at which convergence can be expected. As we all know in this audience, there is an enormous literature related to characterizing the monetary policy loss function for a central bank with a dual mandate – such as work by John Taylor, Lars Svensson and Michael Woodford.4 For me, our Federal Reserve dual mandate responsibilities are well captured by a quadratic loss function that equally weights squared deviations of inflation and unemployment from their period goal values. In the U.S. today, that would be 2 percent for inflation and 5-1/4 to 6 percent for unemployment given today’s structural challenges in the labor market.5 Just about every major central bank around the world publishes something akin to such a framework statement. In one way, the Federal Reserve is different because, unlike other countries, we have a dual mandate, and so our framework explicitly addresses goals for both inflation and the real side of the economy. But just about every bank with a single price stability mandate also says that it will avoid undue disruptions to the real side of the economy when pursing its inflation goal. Indeed, some are quite clear about following a flexible inflation targeting strategy. Policy projections What about the policy projections?
The leading economic institutions and private research institutes state that we will probably continue to see a rather dynamic growth rate at a global level. However, you seem to be very concerned with inflation, to the point that many people are betting on a further rate rise before the end of the year, to 3.5%. The primary mandate assigned to us is to guarantee price stability, and we have to be credible in order to be able to anchor inflation expectations. This is extremely important not only for our credibility, but also because it enables a favourable level of medium and long term market interest rates to be maintained. I am convinced that this is also the sentiment of the 313 million European citizens (315 if we include the Slovenians, who will be the next to join the euro area), who are asking us to safeguard their purchasing power by maintaining price stability. Therefore, this is not only what the Treaty commands us to do but also what our European fellow citizens are emphatically asking us to do. Could inflation trends lead you to adjust rates again? After our last meeting in Frankfurt, I said, on behalf of the Governing Council, that strong vigilance remains of the essence so as to ensure that upside risks to price stability are contained. Do you regard the 2% inflation limit as being absolutely inviolable or is there some degree of flexibility? What has to be kept in mind is that we take a medium-term perspective.

Structural reforms of this sort have been decided upon by national governments within the framework of the agreements made in Lisbon and we should not forget that the ultimate objective is to increase the pace of economic growth in order to ensure more prosperity and provide more jobs for everyone, which is fundamental for the weakest and the poorest. Rather than finding a compromise between the various members of our society, between those that have costs and those that reap the benefits, I see it more as a compromise between the present and future. It is a forwardlooking investment and a better future for the weakest part of the population which entails costs at the beginning. And in any case let us not forget that we cannot ask our children and grandchildren to pay our bills! In Europe, the population is shrinking to the point that by 2020, according to different studies, there will be 20 million people available for work. In the United States, it is on the rise. How is this? Perhaps this is because the United States is a population with entire generations of immigrants in which the birth rate is higher. And then there is the cultural aspect, they are more optimistic than us. Why? This involves philosophical and cultural aspects and I am not convinced that they are structural.
By 1873 Bagehot had seen enough to declare that the correct policy for the Bank to pursue in order to head off an incipient panic would be to lend “freely and vigorously…on all good banking securities”, but to do so only “at a very high rate of interest...that no one may borrow out of idle precaution.” 1 Bagehot had two other pieces of advice for the Bank that are relevant today. First, he advised that there should be a “clear understanding between the Bank and the Public that, since the Bank holds [the] ultimate banking reserve [it] will recognise and act on its obligations”. Second he advised that the Deputy Governor must be “a man of fair position” who “must not have to say ‘Sir’ to the Governor”. This is a slightly old-fashioned way of saying that the Deputy Governor should be independent minded, that the Bank should empower its staff and must always remain credible with the public. (Even though Bagehot foresaw many things, even his liberal mind hadn’t foreseen the day when the Bank would have more than one Deputy Governor, and among them a woman!) 3. A balance sheet that has evolved to meet the needs of monetary policy  From a £ million loan to the government in 1694, the Bank’s balance sheet has grown a long way to its current size of £ billion.

Or carburettor would have been blocked. The mechanic would hypothesise all possible reasons for the failure of the engine. Third, experiments are designed to test each hypothesis made. The mechanic may open the fuel tank to see whether there is fuel. If there is no fuel, he will try to start the engine having filled the tank with fuel. If there is fuel in the tank, then he would examine the second hypothesis, that is, whether there is a blockage in the tube that distributes fuel to the engine. If there is a blockage, he will clean it and try to start the engine. If there is no blockage, then he would experiment the third hypothesis, namely, the working of the electrical system. In this manner, he would experiment all the hypotheses he has made one by one and make relevant conclusions. Fourth, the results of the experiments are analysed in order to ascertain whether the hypothesis is proved. Or else, when several hypotheses have been made, to ascertain which hypothesis has been proved. Fifth, making final conclusions out of the observed results of the experiments. A disciplined motorcycle mechanic would follow these steps involved in the scientific method and attend to the required repair of the fault in the motorcycle. In this sense, a sideway motorcycle mechanic is not different from a trained scientist, since both follow the scientific method in reaching conclusions.
Options provided to firms include: distribution to shareholders includes dividends and share buybacks. Purchasing financial assets includes M&A. Source: Bank of England Finance and Investment Decisions survey. And, on a related question, 80% of all the publicly owned firms agreed that financial market pressure for short-term returns to shareholders had been an obstacle to investment. Somewhat surprisingly, a significant proportion of the privately owned firms in the survey also saw financial market pressures as an obstacle to investment. This implies perhaps that financial market pressures for returns have a more general effect on the way investment returns are viewed by firms. The underinvesting firms also faced non-financial obstacles. Chief amongst these were greater risk aversion and greater uncertainty about the economic environment, which may include uncertainty about the returns to investment. I want to deal with these under my second set of observations around rates of return. At this stage, however, it is worth noting that for the group that underinvested, non-financial obstacles seem to have played as big a role as financial ones in their investment decisions. And, when looking at constraints on finance, using profits to finance investment appeared as important as constraints on borrowing. 9  All speeches are available online at www.bankofengland.co.uk/speeches  9  As I noted earlier, the question of constraints on finance for investment in the UK has deep roots.

7  My colleague Ben Broadbent has noted that the difficult-to-reverse nature of investment projects creates an option value of waiting which increases with uncertainty leading firms to require projects not just to cover the initial cost but to do so by a wide margin. See 'Uncertain Times', Speech given by Ben Broadbent, Deputy Governor, Monetary Policy at the Wall Street Journal, The News Building, London. October 2016, available at: http://www.bankofengland.co.uk/publications/Pages/speeches/2016/929.aspx. 8 Eg, Gilchrist, Sim and Zakrajsek (2014), 'Uncertainty, financial frictions, and investment dynamics', NBER WP 20038 and Christiano, Motti, Rostagno (2014), 'Risk shocks', American Economic Review 104(1), 27-65). 12  All speeches are available online at www.bankofengland.co.uk/speeches  12  Risk aversion was cited as an obstacle by 70% of the underinvesting firms. This may be due to 'scarring effects' from the crisis which markedly lowered returns from investment in 2009 and increased the cost of finance. Interestingly, nearly 40% of firms in the survey had a hurdle rate above the rate of return they had experienced on investment in the past five years, suggesting perhaps that for many firms investment has not met expectations. Such experiences may have increased both risk aversion and uncertainty. This would be consistent with other more general studies documenting enduring risk aversion (or scarring). 9  Academic literature suggests that experience of adverse events can affect future risk-taking behaviour. There is evidence that individuals who experienced the Great Depression reported lower willingness to take financial risk throughout their lives.
Acting in the opposite direction, it appears that consumer-facing companies may have squeezed their margins by more than had been anticipated during 2009/10. The various changes to VAT during this period have also complicated the task of forecasting inflation. However, relative to the February 2009 forecast considered here, changes in VAT did not contribute significantly to the surprising strength of inflation in 2009/10, since the effects of the temporary reduction in VAT in December 2008 were included in that forecast, and the main impact of the more recent increase in VAT did not come through until the first quarter of this year. BIS central bankers’ speeches  3  thinking that the degree of pass through may be relatively limited, but by the start of 2010 that judgement was shown to have been wrong and we have incorporated close to full-pass through in forecasts since then. By contrast, the unexpected strength of inflation through much of 2010 largely stems from the surge in commodity prices. Could inflation remain high? To summarise: there’s no great puzzle as to why inflation has been above target for much of the past few years. Our economy has been subject to a series of large shocks – to oil and other commodity prices, to VAT, and to the sterling exchange rate – which have raised inflation. The scale of these shocks can more than account for the overshoot of inflation relative to target.

Moreover, it is possible, albeit with the benefit of hindsight, to explain why inflation in recent years has been higher than we expected. But that is all in the past. What matters for monetary policy are the prospects for inflation over the next 2 to 3 years. My broad view of the inflation outlook is similar to that described in the February Inflation Report. Inflation will probably rise further in the near-term as recent commodity price increases pass through the supply chain. But further out, inflation is likely to fall back as the temporary impacts of the price level shocks wane and the slack in the economy associated with the deep recession from which we are only gradually recovering continues to pull down on inflation. But the risks and uncertainties associated with the inflation outlook means it is impossible to know with any certainty by how much and over what period inflation will moderate. Indeed, it is quite possible that inflation may be considerably higher or lower than the central view taken in the February Report. This leads to the third item on our charge sheet: could inflation remain high? The simple answer to this question is – I’m afraid – yes. I would highlight two risks in particular. The first is that global price pressures continue to add to domestic inflation. There are a number of potential channels through which this could operate.
Completing the banking union should be seen as a priority, in particular by overcoming the current deadlock over its third main pillar, the European Deposit Insurance Scheme (EDIS) with a mutualized component. The commitment to deploy such a scheme would have a strong impact on citizens’ trust and would contribute to increased risk-sharing in the euro area. In addition, it would help align financial responsibility with the pan-European decision-making that already exists in the areas of banking supervision and resolution. The current misalignment makes EMU governance more prone to institutional and political frailty. As a complement, it is also crucial to eliminate certain regulatory barriers and practices that are hindering the emergence of a fully fledged European banking market. In addition, completing the capital markets union is essential to enhancing the euro area’s capacity to cushion macro-financial shocks and to providing a better environment to channel private investment. Currently, the limited development of equity markets and the sizeable home bias in portfolios have significant negative consequences for the smooth functioning of the monetary union. Indeed, they set a limit on the capacity of risk-sharing mechanisms in the euro area. Moreover, an enhanced capital markets union could improve the channelling of the abundant aggregate savings to satisfy investment needs in the areas of infrastructure, energy and innovation, in which private investment is crucial. For example, according to European Commission estimates, the energy transition will require additional investment of over € billion each year over the next decade.

But how can this be done in an environment where interest rates are already very low to start with? It is important to remember that there has long been a trend with falling interest rates around the world – a trend that has nothing to do with monetary policy, but rather concerns ageing populations and other structural factors that have pushed up savings in relation to willingness to invest. In the midst of this the central banks have also had to manage the effects of the financial crisis and a protracted economic slump. Many of them, including the large central banks like the ECB and the Federal Reserve in the United States, have conducted an expansionary monetary policy to support the recovery and bring up inflation, both via very low policy rates and via more unconventional measures such as various asset purchase programmes. Monetary policy in Sweden has also needed to take this into account. So to safeguard the upturn in economic activity and inflation in Sweden and to turn around the negative trend in inflation expectations, we have cut the repo rate down to a negative level, and with effect from the beginning of 2015 we have implemented an asset purchase programme to make our monetary policy even more expansionary. Our assessment is that this monetary policy has by and larger been successful. Market rates have followed our cuts in the repo rate and become negative. And the bond purchases seem to have pushed down interest rates more or less in the way we expected.
If oil prices remain as high for the foreseeable future, the funding requirement will be somewhat lower. To base decisions on this, however, would be a very risky strategy. Even though Norway’s petroleum wealth is substantial, it is our human resources that account for most of our national wealth. Even a small increase in the “return” on human capital might generate considerable gains. The return on this capital partly depends on our pension schemes and the application of social security rules. These should be designed in such a way that they provide incentives and opportunities to work. Labour market legislation must also promote production and employment. In May, the Storting (Norwegian parliament) deliberated the Pension Commission’s proposals for reforming the national insurance system. There was agreement on the main points but the specific design remains. If we succeed in reducing the growth in pension expenditure through a modernised national insurance system and other reforms, this will be an important contribution to addressing the fiscal challenges we are facing. This BIS Review is available on the BIS website at www.bis.org.

I believe that joint actions must be undertaken in order to minimize the threats of asset bubbles resulting from effective regulations in the sector of open pension funds, to better diversify investment portfolios as well as to enhance the sector’s prospective levels of return. In order to achieve those goals, we have to commit ourselves to: •  increase the limit on foreign investment and gradually modify some terms and conditions of using them from the current level of 5% to 30% of assets,  •  allow open pension funds to take recourse to derivatives with a view to hedging their investment portfolios,  •  in a longer perspective, gradually raise the open pension funds’ limit on investment in equities from 40% to 60%. Pension funds should invest a large part of their portfolios in equities because the return on equities should exceed that of debt instruments over a long horizon. CalPERS, the world’s  7  Rozwój systemu finansowego w Polsce w latach 2002-2003, Narodowy Bank Polski, December 2004, p. 120. 8  Regulation of 13 September 2005 concerning the deposits of a pension fund, Polish Journal of Laws – Dz. U., No. 186/2005, item 1549). 9  Regulation of 20 December 2005 repealing the regulation concerning the deposits of a pension fund, (Dz. U. No. 260/2005, item 2180). BIS Review 134/2007  3  largest pension fund, invests 45% of assets in equities on the US market and 20% in equities quoted on foreign markets.