samchain/econo-pairs-v1 huggingface dataset:
Much of this reflects the inevitable correction of exuberance on the part of borrowers and lenders, the conditions for which were created by the failure to tackle the global imbalances that left most major countries with unsustainable exchange rates, unsustainable paths of consumption, saving and borrowing, and unsustainably low long-term real interest rates. Our economy too needs to rebalance as it recovers, and that affects the pace of recovery. Although the downturn in UK GDP from the peak in 2008 to the trough in 2009, at around 6%, was broadly similar to that in most other industrialised countries, our recovery has been noticeably slower, with a cumulative rise in output from the middle of 2009 of only about 3½% compared with 6% or more in many other countries. But has the process of recovery and rebalancing been derailed or merely delayed? With the right prescription we can ensure that it has been only delayed. Three factors in particular have adversely affected the pace of recovery in the UK. The first is an especially deep and protracted squeeze on the level of many people’s real take-home pay. Over the past four years, money wages have on average been rising at less than 2% a year. And higher energy and food prices, as well as tax changes and a lower exchange rate, passing through to the level of consumer prices, have all contributed to the squeeze. On average, real take-home pay is no higher than back in 2004.

Structural reforms are the familiar mantra of all international meetings. As a means of compensating for a large loss of competitiveness they are too slow acting to be effective. But in current circumstances they are, for the UK, a necessary complement to the other measures I have described. Since the crisis began real wages have fallen by almost 10% – a large but necessary adjustment to make the production of tradable goods and services more attractive than non-tradables, and to stabilise the public finances. Supply reforms can make that adjustment more palatable, and, by raising expected future incomes, they increase the rate of return on new investment and encourage spending, both investment and consumption, today. It cannot be for a central bank to design a programme of such supply initiatives, but in economic terms there has never been a better time for supply-side reform. BIS central bankers’ speeches  3  The need to rebalance the economy means that all of the policy responses I have discussed will be required to restore the economy to full health. The final part of the prescription is outside the UK’s control. Engineering a recovery while our main trading partner is in a downturn is a difficult undertaking. We would all benefit from a resolution of the problems in the euro area. The actions by the ECB have brought a period of calm to financial markets, and so bought more time.
For example, the labour costs in the new EU member states are between five and twelve times lower than those in Sweden and Germany, while the productivity gap has declined significantly over the past 10-15 years. What is interesting in this context - and an important lesson for the future - is that many studies that have been published do not find any evidence for the critics’ claims that offshoring will lead to a mass  BIS Review 60/2004  5  migration of jobs and the phenomenon of jobless growth. On the contrary, they indicate that offshoring, by promoting a better division of labour between countries, leads to cost savings and productivity gains that in turn mean that labour and investments in the industrialised nations can be transferred to more highly processed products. The consultancy firm McKinsey has estimated that each dollar invested in outsourcing to India gives the United States an economic gain of USD 1.121.14 and India a gain of USD 0.33. In the long term, this can even lead to a stronger development in employment. Thus, offshoring can be regarded, as President Bush’s economic adviser Gregory Mankiw pointed out, but was much criticised for, as a form of trade that will make production more efficient and increase GDP growth in the world economy. Offshoring is thus one means of increasing global wealth; continued multilateral trade liberalisation is another means.

If forceful measures are not taken to deal with the financial crisis and maintain financial stability, there is a risk of the crisis also having major effects on inflation and growth. The fall in output and employment can then be both deep and prolonged and that in turn can worsen the financial crisis. An efficient fixed-income market is a prerequisite for an effective monetary policy In other words, the monetary policy machinery I have described consists of two components. The first thing is to ensure that the repo rate does in fact affect the overnight market. Effects on this shortest rate must then spread to longer rates that are more important for economic activity. An effective monetary policy steering system is not enough by itself. We also need a fixed-income market that functions properly. So what are the fixed-income market’s functions? The fixed-income market caters both for those who need funds for their operations and for those with funds they need to invest for a certain period of time. As investment in the market is not risk-free, one of the market’s primary tasks is to price risk correctly. That in turn leads to an optimal distribution of risks between the markets’ participants. In this way the market contributes to an efficient distribution of economic resources. What a central bank requires of the fixed-income market is therefore not all that different from what society in general requires.
Market perceptions of risk were falling at precisely the time risk in the system was building. There was also little market differentiation between the spreads of “crisis” and “no-crisis” banks: their average pre-crisis spread difference was a mere 8 basis points. The extent of risk mispricing is clear from the movements in CDS premia as the crisis broke. Average spreads rose by a factor of over 50 for “no crisis” banks. For crisis banks, they rose by a factor closer to 70. Adjustments on that scale are a decisive rejection of the debt disciplining hypothesis. Debtors were meant to act as a brake on risk-taking incentives. Instead they had served as an accelerator. Why? The answer again lies in incentives – the incentives of bank managers and policy authorities. These incentives matter most at crisis time. Then, it may no longer be in the interests of either bank management or the authorities to have debtors bear risk. Doing so may run the risk of making a bad crisis situation worse. As much as bank management and the authorities may pre-commit to debtor’s bearing risk ex-ante, they may be tempted to capitulate ex-post. Economists call this a time-consistency problem. Agents cannot credibly commit to stick to their guns in the midst of war. Private contracts for bank debt and public policies towards bank debt suffer from a severe case of this time-inconsistency problem. Having debtors assume pain is fine on paper. But crisis wars are not waged on paper.

Mortgage design also varies in striking ways through time and across countries and even regions; for example, in terms of the sensitivity of mortgage rates to market rates, borrowers’ ability to pay down or increase the loan balance, the ease with which loans can be modified, and the rights of junior lien holders. Reflecting this international diversity, we are very happy to have panelists from the United Kingdom, Sweden and Denmark speaking today, as well as representatives from many foreign central banks and other international organizations in the audience. This is also a particularly opportune time to think about mortgage contract design given the ongoing debate about housing finance reform in the U.S., and the future of the government sponsored enterprises Fannie Mae and Freddie Mac. But debates about mortgage design are definitely not new! In fact, 40 years ago the Federal Reserve Bank of Boston hosted a well-known conference on “new mortgage designs” 2, which included Franco Modigliani, later awarded the Nobel prize in economics, and current Federal Reserve vice chair Stanley Fischer. An interesting contrast to today – the main focus of the Boston conference was the design of mortgages to deal with a high and volatile inflation environment. The financial crisis and its aftermath have brought mortgage contract design back into sharp focus.
Mugur Isărescu: Hard landing unlikely for Romania Interview with Dr Mugur Isărescu, Governor of the National Bank of Romania, by Mediafax news agency, Bucharest, 8 September 2008. *  *  *  Mr. Governor, foreign analysts have placed Romania along with four other states – Lithuania, Latvia, Estonia and Bulgaria – in a group of countries heading to a hard landing. In fact the economies of Estonia and Latvia have contracted sharply, with growth plunging from levels of around 10 percent into negative territory; inflation has reached two-digit levels and the external deficit exceeded 15 percent of gross domestic product. Is it possible for Romania to witness similar negative growth dynamics? Is it fair to include Romania in that group? Reading what those foreign analysts said, I have hardly found a solid rationale that would justify Romania's being placed within the hard-landing risk zone. On the contrary. Turning now to comments, I will underline that there are some similarities among the countries in this group: GDP per capita is below the EU average, they all have registered high growth rates in the catching-up process. However, there are also fundamental differences, among which the most important in my view is the monetary policy mechanism. Three of the four countries mentioned in the group have currency boards in place, and the fourth, i.e. Latvia, has a mechanism close to a currency board. Of course, currency board has its clear benefits.

After spiking over the next few months, inflation is, we believe, likely to drop below our 2% target due to the downward pressures from a weak level of demand on wages and prices (Chart 6). But it is then likely to climb back towards the target as the economy recovers. Compared with our previous collective forecast last November, there are differences of nuance in the “most likely” and “mean” paths for growth and inflation, but frankly to my mind those nuances are small beer compared to the main risks. My take on those risks is that, on the downside, the headwinds to demand and activity could prove stronger than currently foreseen. And, on the  1  See Tucker P M W (2009e), “The Debate on Financial System Resilience: Macroprudential Instruments”, Barclays Annual Lecture, London, 22 October, 2009. BIS Review 21/2010  1  upside, that we (and our peers) could prove too slow to withdraw monetary stimulus if animal spirits revive across the economy or further spikes in inflation outturns raise medium-term expectations. Meanwhile, the data are bound to be mixed. Four aspects of the conjuncture Against that background, I shall briefly review a handful of the issues that, one way or another, the MPC will face over the coming months. A balance sheet recession? I have a good deal of sympathy for those who argue that the current downturn owes a lot to stretched balance sheets – in the private sector, public sector, and the national economy as a whole.
One of the consequences of this prolonged cycle of high world growth is global utilization of resources (i.e., productive capacity and labor) being at its highest level in 25 years. The combination of high rates of resource utilization, large recent rises in prices of foods and fuels, and great international liquidity increases the risk of inflation acceleration, with a repercussion on the market’s expectations on the future course of policy rates. In the U.S., the evidence of a moderate deceleration of growth and of a decline in inflation has driven financial markets to project, on average, that the policy rate will remain unchanged, approaching the baseline scenario that the Fed has been communicating for some time already. Financial market expectations, however, are split between one group foreseeing cuts in the policy rate and another that now foresees rises. The main source of uncertainty originates in the future course of growth and inflation. The second quarter should feature a strong increase in measured growth, but future growth is still a question mark. About the euro zone, the market anticipates that, in order to hold inflation around the target – annual inflation below but close to 2% – the ECB will need to raise the policy rate a couple of times during the next 12 months by 25 basis points each. In the case of Japan, markets also project two rises in the policy rate over the next 12 months.

This process of monetary normalization is favored by medium- and long-term inflation expectations well anchored around the target, where agents preview that the Central Bank will do whatever it takes to prevent inflation from deviating away from the target in the policy horizon. If inflation stays too high for too long, there is the risk of it affecting medium- and long-term inflation expectations more permanently, thus making convergence with the target more difficult and costlier. As usual, future changes to the monetary policy rate will depend on incoming information and its implications on projected inflation. 4  BIS Review 87/2007  Consistently, the higher inflation rates of the past several months has prompted a revision to market expectations with respect to the future course of monetary policy, switching from a prolonged maintenance of the rate to two to three rises of 25 basis points each before year’s end. Price stability is one factor behind long-term economic growth. In order to ensure that GDP will grow for a long time more than 5% – the estimated rate of trend GDP growth – while keeping inflation under control, it is necessary to increase the rate of trend GDP growth and this does not depend on demand elements but rather on factors determining the growth in supply, such as policies and institutions that affect the increase in the amount and quality of the labor force, the amount and quality of capital stock and the productivity with which both factors are used in production.
However, as development in this area progresses it is probable that the number of specialised macroprudential-policy tools will increase. 10  10  The Bank of England recently carried out an inventory of the tools that could be used to conduct macroprudential policy, see Bank of England (2011): Instruments of Macroprudential Policy: A Discussion Paper prepared by Bank of England and Financial Services Authority staff, December 2011. BIS central bankers’ speeches  5  But do we really need any new tools in this area? Isn’t it enough that the supervisory authority can introduce a mortgage cap for consumer protection reasons and that the central bank can raise the interest rate to stabilise inflation and resource utilisation when credit growth is high? No, I don’t think so. Referring to consumer protection seems to be an overly narrow approach in the face of a rapid growth in lending to households and rising housing prices. On the other hand, the impact of the interest rate is too wide-ranging to be effective and risks doing more harm than good. A tool such as the countercyclical capital buffers may seem to be so wide-ranging that it should be able to work in approximately the same way as the interest rate. Both tools affect the price of credit in the economy. When the banks are forced to hold more capital their funding costs increase, as they do when the interest rate is raised, and the price of credit also increases.

Traditional regulation and supervision have also found it hard to handle the tendency to rollercoaster behaviour of the financial sectors. In good times, there is almost always a tendency to expand lending and to ignore the risks this entails. However, when the downturn comes, the same players tend to run for the exits at the same time, which serves only to  8  According to the analysis, a monetary policy designed such that housing prices continued to rise in accordance with the trend in the period 2000-2004 would have entailed a repo rate around 8.5 per cent, an inflation rate of –4.3 per cent and a level of GDP growth of –0.6 per cent in 2007, that is in the year before Sweden was hit by the global financial crisis (see Claussen et al., 2011). 9  Monetary policy is also ineffectual if one wants to counteract contagion risks due to the size and complexity of the banks and their exposures to each other. 4  BIS central bankers’ speeches  make the downturn worse. A vicious circle arises when a credit crunch leads to lower production and lower employment, which in turn feed back into in the financial sector by making loan losses even higher. This type of feedback effect between the financial system and the macro economy is not the province of traditional financial supervision either. This is where the concept of macroprudential policy comes in. Quite simply, financial supervision must be complemented by a much broader approach.
Since mid-March, the liquidity supply in the Swiss franc money market has been influenced by the exceptional measures taken to manage the Credit Suisse crisis. The SNB provided ample liquidity to Credit Suisse in the form of interest-bearing loans, which led to an increase in sight deposits. Due to outflows of customer deposits at Credit Suisse, some of this liquidity also reached other institutions in the financial system. This increased the supply of liquidity in the Swiss franc money market. As Thomas Jordan has explained, it was important that the liquidity assistance to Credit Suisse did not influence our monetary policy stance. We therefore consistently continued with our regular monetary policy implementation in the Swiss franc money market. This currently comprises tiered remuneration and the absorption of sight deposits by way of open market operations. To ensure that the secured short-term Swiss franc money market rates do not fall and that they remain close to the SNB policy rate despite the additional liquidity in the Swiss franc money market, we have reduced the increased liquidity supply via open market operations. As you can see from chart 3, we have used SNB Bills and repo transactions with various maturities to accomplish this. Not only our open market operations in the money market but also our foreign exchange transactions have an impact on sight deposits. Since the last monetary policy assessment, the Swiss franc has appreciated by around 2% on a trade-weighted basis. In order to ensure appropriate monetary conditions, we have sold foreign currency in recent quarters.

I will start with the domestically focused banks before moving on to the globally active banks and, in particular, the crisis at Credit Suisse. Domestically focused banks  For the domestically focused banks, the operating environment has changed markedly over the past year. Interest rates have risen significantly and there are signs of a slowdown in the real estate market. Overall, the domestically focused banks have benefited until now from the rise in interest rates. This rise has helped to restore their interest rate margins. The banks have been able to increase their profits and strengthen their capital buffers. At current interest rate levels, domestically focused banks’ profitability is likely to continue to improve. An unexpected upward interest rate shock in the future, however, would likely have a negative impact on these banks. First, in this scenario their interest expenses would increase faster than their interest income. This is because interest rates on many outstanding loans are fixed for several years. By contrast, rates on deposits are likely to react faster to a further interest rate rise. Second, higher interest rates could lead to credit losses in mortgage lending. This constitutes a significant risk for domestically focused banks because mortgages are often their main line of business. Against this backdrop, the results of our stress tests are crucial: Thanks to their capital buffers, most banks should be able to cope with such a scenario.
First, the variation in skills demanded by employers across industries has probably shrunk in a more service oriented economy, which would assist transition where it is needed. And second, policy intervention, particularly the furlough scheme, will help to preserve viable employment going forwards, and skills specific to particular jobs or companies, which is a good thing. Ahead of its May Monetary Policy Report, the MPC will assess the impact of the extension of the furlough and related schemes, announced in last week’s Budget. My expectation would be that this is likely to reduce the peak level of unemployment over the coming months. However some rise in unemployment as the scheme tapers will be hard to avoid. Just as workers are often specialised, capital such as plant and machinery can be specialised for specific tasks. The more specialised capital is, the harder it is to redeploy. Bank staff have estimated capital “redeployability” scores for different types of assets using a similar approach to Kim and Kung (2017). Information and communications technology, machinery and buildings tend to be highly redeployable, with uses across many industries. In contrast, there are few alternative uses for aircraft. Capital may also be in the wrong location even if the pattern of output is similar, if Covid results in such a change of location, for instance related to the rise of home working. It is also reasonable to think that there is, and will be, considerable uncertainty over which changes in demand will prove temporary and which will persist (Vlieghe, 2020).

In our assessment, the supply capacity of the economy is expected to be around 1¾% lower than it otherwise would have been in the absence of Covid by the end of our forecast period. But, of course, there are risks on both sides of this assessment. The third point is that, although those sectors which are growing may require new capital, elevated uncertainty is expected to continue to reduce investment other things equal, weighing on the capital stock and productivity growth. I have just used the phrase “other things equal” to describe the likely path of investment. However other things ought not to be equal going forward in my view. I mentioned earlier that we have had a decade or more of slower growth and weaker productivity growth. And, as Chart 5 shows, although business investment did recover from a low base following the global financial crisis, it too was weak in the period prior to the Covid pandemic. This was only partially offset by growth in government investment, which has also generally been weak over the same period (Chart 6). The effect of this weakness in investment can also be seen by looking at capital services – a measure of the value of the flow of services which are derived from the capital stock, including machinery, equipment, software, structures, and land improvements. This may better capture the drivers of supply growth than looking at growth in investment alone.