samchain/econo-pairs-v1 huggingface dataset:
As regards interest rates, both real and nominal rates have fallen continuously since the mid 1990s. For households this has entailed significantly lower mortgage costs. At the end of 1992 the banks' average nominal lending rate to households was just over 15 per cent and inflation stood at just over 2 per cent. Now, the average lending rate is around 6 per cent, while inflation has remained at about the same level. So households can incur more than double the amount of debt today and still have lower debt-servicing costs. The favourable economic climate from the mid 1990s also contributed to a drop in unemployment, on the one hand, and an increase in wages on the other. All in all, this led to a rise in household disposable income. Moreover, disposable income has continued to increase during the period of relatively weak economic activity in recent years. This has been mainly due to unemployment remaining low, in spite of the economic slowdown. So low interest rates and high growth in household disposable income are two fundamental factors that could explain the rise in prices in the housing market. Furthermore, there is no excess supply in the housing market similar to that seen at the beginning of the 1990s when housing construction was encouraged through various kinds of grants and tax subsidies. Instead, there is very little construction of housing today, and discussions are concerned rather with how to step this up.

Recall that one of the key attractions in working for a particular organization is association with people who are liked and respected. Do people like  2  See Corporate Executive Board, Research Reveals That Integrity Drives Corporate Performance: Companies With Weak Ethical Cultures Experience 10x More Misconduct Than Those With Strong Ones, Press Release, September 15, 2010. See also Anthony Salz, Salz Review: An Independent Review of Barclays’ Business Practices, 189‐191 (App’x C) (discussing the impact of culture on two archetypes of employee behaviors, and collecting sources). 3  Somewhat tautologically, the proof of a good culture might be the absence of bad behavior. As Bill Dudley, the President of the Federal Reserve Bank of New York, has observed: “How will a firm know if it is making real progress [on culture]? Not having to plead guilty to felony charges or being assessed large fines is a good start.” William C. Dudley, Enhancing Financial Stability by Improving Culture in the Financial Services Industry, Remarks at the Workshop on Reforming Culture and Behavior in the Financial Services Industry, October 20, 2014. 2  BIS central bankers’ speeches  and respect leaders who lack integrity? Good luck attracting top talent in that kind of organization. A third key component in a strong ethical culture is values. Most firms elaborate rules of proper behavior, often in well‐crafted codes of conduct. In some large, complex organizations, the rules can be difficult and tedious, like the rules for conflicting interests and for avoiding trading on insider information.
The Central Bank introduced its repurchase facility in 1993 to mop up overnight excess liquidity from the market, while introducing the reverse repurchase facility in 1995 to inject overnight liquidity to the market. These two rates served as the floor and the ceiling for movements of the interbank call money market rate. This policy interest rate corridor was used from early 2000s to signal changes in the monetary policy stance of the Central Bank. Today this policy corridor is called the Standing Rate Corridor with the floor and the ceiling rates being known, respectively, as the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank of Sri Lanka. Open market operations are conducted in a more active auction based framework with overnight, short-term and long-term operations to maintain market liquidity and thereby market interest rates in line with the announced monetary policy stance of the Central Bank. The key operational changes to the conduct of monetary policy included the establishment of the Monetary Policy Committee (MPC) of the Central Bank in 2001 to strengthen monetary policy analysis and to improve the transparency of the decision making process. The Central Bank also began issuing regular press releases on monetary policy decisions to the public, based on an advance release calendar. This press release was often followed by a press conference chaired by the Governor and accompanied by the senior officials of the Central Bank.

Evolution of Monetary and Exchange Rate Policy in Sri Lanka and the Way Forward by  Dr. P. Nandalal Weerasinghe1 Senior Deputy Governor Central Bank of Sri Lanka  I am deeply honoured to have been invited to deliver the Olcott Oration 2017 and to join a list of great Anandians who have delivered this Oration before. I cannot think of a greater honour that my school could confer on me. I accepted this invitation with humbleness, with gratitude and respect, and with great pride. Let me also take this opportunity to appreciate the support and guidance I received during my school career at Ananda College. The guidance our teachers gave us laid the foundation for any success later on in our lives. My oration today, is on the rather technical topic of monetary and exchange rate policy. The biggest challenge that I have to face is to present such a topic to an audience with a majority who might not be familiar with the technical jargon involved. However, I will attempt to keep the discussion as simple as possible. Central Banking and Price Stability The prime responsibility of any central bank around the world is to maintain price stability by way of maintaining low and stable inflation on a sustainable basis. At the outset, I would like to discuss why low and stable inflation is important for growth and stability of the economy. Based on experiences of many countries and different time periods, we have seen varying levels of inflation.
Second, in the U.S., the banking system was recapitalized and deleveraging occurred quite quickly following the financial crisis. Capital from the Troubled Asset Relief Program, or TARP, was put into the large banks and soon many of them replaced this TARP capital by raising new equity. The SCAP stress test in 2009, and the annual CCAR stress tests that followed, worked to constrain the rate of bank capital distributions and, thereby, helped to build up bank capital ratios. And, U.S. banks worked hard to clean up their balance sheets. Poor assets were managed down or run off, and underwriting standards were tightened. Third, the Federal Reserve was particularly aggressive early on in its pursuit of monetary policy accommodation in order to keep inflation expectations well-anchored. This is a necessary condition, in my view, to maintain the efficacy of monetary policy. If inflation expectations were to get unmoored to the downside, then it becomes more difficult to pursue a stimulative monetary policy. Could things have been done differently in the U.S. in such a way that would have led to better outcomes? Absolutely. With the benefit of hindsight, we could have and should have been even more aggressive on the monetary policy side. While we made progress with some of the innovations on monetary policy that we eventually introduced – such as the openended purchase of $ billion of Treasury and MBS securities per month – it would have been better if we had done this sooner.

Another explanation some have offered is that there is a measurement problem – we are understating output growth and overstating price inflation. This type of issue, long flagged as a hedonic adjustment, seems most credible in particular market segments, such as in healthcare. Alan Blinder has posed this question: Would you rather have 1970 healthcare at 1970 prices or 2016 healthcare at 2016 prices? Based on the measurement of prices, 1970 healthcare is a much better deal. Yet, when offered this choice, almost all choose 2016 healthcare. Why? The reason is that people highly value the advances in healthcare technology, such as in cardiac care, or in the procedures that are practical today, such as hip and knee replacement, that simply weren’t available 50 years ago. BIS central bankers’ speeches  1  U.S. economic performance has also been held back by developments in the rest of the world. Growth outside of the United States has slowed. In the euro area, comparing the period from 2003 to 2008 to the period from 2010 to 2015, annual real GDP growth slowed from 1.9 percent to 0.8 percent. Japanese growth has remained muted over these periods at 0.1 percent and 1.0 percent respectively. In China, reported growth rates over these two periods slowed from 11.3 percent to 8.3 percent. These developments, along with policy and risk events that have increased demand for U.S. assets, have contributed to significant U.S. dollar appreciation over the last two years.
Over the past two centuries, upswings or downswings in the trend money growth have usually been followed, a few years later, by swings in the same direction in trend inflation.2 This relationship has remained significant over the past two centuries, across a variety of different monetary policy regimes and in spite of financial innovation. This naturally suggests that it is “hardwired” into the deep structure of the economy, i.e. that it is structural in nature. In turn, this suggests that by analyzing monetary developments – and in particular, by identifying swings in trend money growth, as well as its components and counterparts – a central bank can implement a more forward-looking monetary policy. The monetary nature of inflation, and given that money growth at the long-run horizon is ultimately under the control of the central bank, logically leads to a fifth key principle: the central bank has ultimate responsibility for inflation. Of course, in the short-run macroeconomic dynamics, and therefore also inflation, are determined to a significant extent by events outside the central bank’s control. The last four years provided a forceful reminder with the 2008 shocks in food and energy prices, which led to a temporary hump in Euro area inflation, followed by the large contractionary shock associated with the financial crisis and several months of deflation. These exceptional circumstances brought euro area HICP inflation to 4 per cent in the summer of 2008 and then to –0.6 per cent one year later.

Low interest rates, for example, can contribute to the build-up of financial imbalances via the so-called “risk-taking” channel.6 Simply put, very low interest rates may create incentives for banks to take on more risks. Recent research has provided empirical evidence compatible with such a notion. It has been documented,7 for example, how market based measures of bank’s risks as perceived by financial market participants tend to react positively to increases in interest rates, so that a lower interest rate leads investors to perceive banks as less risky. By the same token, several papers8 have shown that credit standards are correlated with the level of interest rates: lower interest rates, in particular, imply lower credit standards, including to customers who are perceived as representing a  6  See Borio and Zhu (2008). 7  See Altunbas et al. (2010). 8  See Jimenez et al., (2008), Ioannidou et al. (2008), and Ciccarelli et al. (2009). BIS central bankers’ speeches  5  higher credit risk. On the theoretical side, research done at the Banque de France9 has shown that, when the regulatory environment is not transparent, a decrease in the level of real interest rate increases banks’ risk-taking behavior. A time-honored principle of finance is that, ceteris paribus, the only way to increase the expected rate of return is to take more risk, and the result of such search for yield is therefore that banks will increase their risk exposure.
Generally speaking, structural reforms are always and everywhere difficult to implement in the face of vested interests. Depending partly on where you are in the business cycle, there is often a strong temptation to defer them to a later date. This is because of concerns about short-term negative impacts on the economy. Despite all those downsides, however, I still believe that there is no better time than now to put necessary reforms in motion. Short-term negative impacts are often overstated. They should not be used as an excuse to oppose reforms. If structural reforms are well designed, they will increase rather than decrease current demand, because they improve the prospects of future profits for businesses and hence permanent income for households. 19 That’s all from me tonight. Once I have completed my assignment to talk about growth in Asia, I need to put on my central bank governor’s cap again. If I may use Professor Lucas’s quote again with a slight modification, “Once one starts to think about deflation or inflation, it is hard to think about anything else.” Therefore, please give me your comments and questions before I put my central banker’s cap back on. Thank you. 19  Benoȋt Cœuré, “Structural Reforms: Learning the Right Lessons from the Crisis,” Speech at the Bank of Latvia Economic Conference, October 17, 2014.

14  Jonathan D. Ostry, Andrew Berg and Charalambos G. Tsangarides, “Redistribution, Inequality, and Growth,” IMF Staff Discussion Note, SDN/14/02, 2014. 15  Thomas Piketty, Capital in the Twenty-First Century, Belknap Press, 2014. 16  Joseph A. Schumpeter, The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle, Harvard University Press, 1934. See also Philippe Aghion and Peter Howitt, “A Model of Growth Through Creative Destruction,” Econometrica, Vol. 60, No. 2, pp. 323–351, 1992; Katsuhito Iwai, “Schumpeterian Dynamics: An Evolutionary Model of Innovation and Imitation,” Journal of Economic Behavior and Organization, Vol. 5, pp. 159–190, 1984. 17  Hiroshi Nakaso, “Asian Economy: Past, Present, and Future,” Speech at Securities Analysts Association of Japan International Seminar, April 24, 2015. 18  The Wall Street Journal, “Asia Seeks to Reach the ‘Unbanked’,” March 18, 2015. 6  BIS central bankers’ speeches  therefore the prospects for further strong economic growth, will be completely different once the issue of limited availability of banking services is addressed. Conclusion In my presentation today, I have emphasized that productivity growth is crucial to sustaining hitherto robust economic growth in Asia. Among many other things, in my view, the continued accumulation of human capital, market-friendly institutional setups and strong financial sectors, all play an important role in productivity growth. We have seen many positive developments in this respect in Asia, but much more needs to be done. What I have discussed today could be broadly categorized as structural reforms.
Whether or not we then use the minimum reserve requirement would depend, of course, on the results of the investigation, but also on future developments in the mortgage market. It is in any case within the Riksbank’s mandate to introduce a minimum reserve requirement, and the risks rising from a credit expansion in the mortgage market fall within the Riksbank’s area of responsibility. Better management of systemic risk At the same time, there is a need to revise and clarify the division of responsibility between the authorities so that we become better at managing the type of problem we now see in the mortgage market. I am now talking about measures that are needed in the longer run. A central issue concerns the current hesitation over which authority should deal with a runaway development in the mortgage market. The government has a role to play here, of course. But so do Finansinspektionen and the Riksbank, because we are the first natural “line of defence” as public authorities with the task of managing this type of problem. Unfortunately, it is at present unclear exactly which one of us is responsible for what. As you know, we have our own respective areas of responsibility. Finansinspektionen focuses on the supervision of individual financial institutions and upholds consumer  6  BIS central bankers’ speeches  protection, while the Riksbank is responsible for price stability. But there is also some overlap. Both Finansinspektionen and the Riksbank oversee the financial system and try to prevent financial crises.

Happily, the government has now appointed a financial crisis commission with the task of looking more closely into these issues. This is good news, and the sooner we can reach a satisfactory solution regarding how best to allocate responsibility, powers of authority and tools, the better. And although I do not wish to anticipate the commission’s inquiry, I see a future role for the Riksbank with regard to macro-prudential supervision. Monitoring and preventing systemic risk is very much in line with our current macro-oriented work on safeguarding price stability. Not least because the cyclical factors affecting price stability may lead to the build-up of systemic risk. Increase the resilience of the banking sector 4 The third type of measure concerns, as I said, strengthening the banking sector’s resilience in general. This is important not just because of the current developments in the housing market. The financial crisis showed very clearly that the current regulatory framework for the banking sector is inadequate. Although Swedish banks escaped relatively lightly this time, we could see how banks in other countries suffered acute liquidity and capital shortages. And this is why we now have an international agreement on the new regulatory framework for the banking sector – Basel III – which establishes new minimum requirements that the banks must meet with regard to both capital and liquidity. This is, of course, welcome. But the fact is that some weaknesses still remain. For example, the implementation period for the Basel III rules is very long.
Let me elaborate on where these challenges may come from. It is a well-known fact that the size of the banking sector in most post-communist acceding countries still remains far below the EU average. In the acceding countries, bank credit to the domestic private sector typically has a ratio of 30 to 40 percent of GDP, while the EU average is around 100 percent of GDP. This difference is to a large extent natural, reflecting the lower GDP levels of the acceding countries, their history, and the recent weaknesses in their legal and institutional environments. Nevertheless, it is quite likely that this legacy of the past will be overcome in the foreseeable future. The driving force might be the real convergence process. And perhaps more importantly, the acceding countries can capitalise on their reform achievements of recent years. Despite differences in their reform strategies and numerous transitional difficulties, most acceding countries have achieved great progress in building their financial systems. Their banking sectors are now mostly stabilised, privatised, and typically dominated by foreign ownership. Moreover, the acceding countries have also achieved considerable improvements in the functioning of their general legal and institutional frameworks. BIS Review 8/2004  1  Recent empirical studies by the IMF have shown that there might be scope for substantial convergence in bank credit in the acceding countries with EU levels. In some cases and in some periods, the real credit growth might reach as much as 30 percent a year, or even more.

This residual risk can be eliminated by euro adoption, and fasttrack entry into euro area thus seems to be an optimal exit strategy from the current regime. In the case of countries with floating exchange rates, on the other hand, the direct exchange rate risk may be  2  BIS Review 8/2004  much smaller. The debate may therefore pay more attention to preconditions that should be met before entry to minimise the risks of excessive credit booms with undesirable consequences. Let me conclude by saying that central bankers in acceding economies should focus on two issues in the period ahead. We should aim to meet the nominal convergence criteria in a sustainable manner and we should also provide good guidance in the area of financial stability. And we certainly need much more discussion to find ways in which central banks, fiscal authorities and financial system regulators can foster financial stability in the monetary union. The balance of risks will depend very much on the particular legal and regulatory framework of each economy and the quality of corporate governance in financial institutions. The risks could become serious only if the inflow of external funds were to be intermediated by a weak domestic financial sector. Further improvements in the legal and regulatory framework are thus very important. We must also strengthen our capacities in macroprudential analysis, as early identification can help prevent financial vulnerabilities from building up further.
Thus, goods CPIEFE inflation fell to 1.6% in November, that is, 2.1 percentage points less than in July, in a context where the exchange rate has fluctuated—give or take— between 650 and 680 pesos per dollar. Services CPIEFE inflation has declined at a more measured pace, in line with the moderate expansion of capacity gaps and its high content of indexed prices. In any case, it has accumulated a decline of a little over one percentage point in ten months. The low inflation for fresh fruits and vegetables was a surprise because of its atypical behavior compared with the known seasonal patterns (figure 1). Third-quarter activity figures continued to reveal limited strength. During the first three quarters of the year, sectors other than natural resources (i.e. Other GDP) grew slightly less than 2.5% annually, driven by services and trade, while construction and, especially, manufacturing performed rather poorly. Meanwhile, in the first three quarters, domestic demand—excluding inventory change—grew in tandem with Other GDP, driven by private and government consumption. Investment was better than expected, but in annual terms it was negative again, particularly due to the further deterioration of construction and other works (figure 2). The negative annual variation of the Imacec in October was unexpected. Beyond the volatility of month-to-month figures, the result is still strongly influenced by the poor performance of 2 / 19  BIS central bankers' speeches  mining, coupled with the weak performance of some industry lines (figure 3).

It is worth noting, however, that this risk persists because a large part of 6 / 19  BIS central bankers' speeches  promised projects in 2015 were due to be delivered between the last quarter of 2016 and the year 2017. Lately, there has been an increase in the down payment required by the banks to grant a mortgage loan, which could result in more withdrawn promises by those households that were unable to meet the necessary savings to comply. Profitability of the banking system has dropped, as interest spreads have reduced their contribution. This can be explained by a change in composition of the credit portfolio towards lower relative return products—fewer consumer and more mortgage loans—and by the migration towards less risky clients, who are offered lower interest rates. At the same time, the capitalizations of the first half of 2016 drove up the banking system’s capital adequacy ratios (CAR), strengthening their position to deal with adverse economic scenarios. In fact, stress tests indicate that banks have the sufficient capital to face severely stressful conditions. All in all, capital gaps are similar to those in comparable countries. Although several capital increases have been made lately, no changes in banks’ dividend withholding policies have been observed that would allow increasing the capital base endogenously. In an international context, the CAR level of the banking system remains below the 25th percentile in both OECD countries and in the region.