samchain/econo-pairs-v1 huggingface dataset:
11  All speeches are available online at www.bankofengland.co.uk/news/speeches  11  The level rule implies that policy rates snap back after the incidence of the shock. After all, if the downward shock to R-star is temporary, failing to raise policy rates in parallel with the recovery of R-star would lead to excessive monetary ease. But because the true shock to R-star is persistent, that approach creates a monetary tightening that widens the output gap and weighs on inflation. By contrast, the difference rule leaves policy rates lower and therefore does not induce the same instability in output and inflation. It stabilising properties are superior – and associated with a slower, steadier and more persistent rise in the policy rate. In the end, the learning process embodied in this model ensures that the outcomes of the different rules eventually converges. But during this process of convergence, the difference rule dominates in terms of social welfare and implies a slower, steadier and more persistent evolution of policy rates following the shock: one characterisation of a ‘steady-handed’ policy response. Of course, Chart 3 only illustrates the responses for one combination of underlying shocks and perceptions. A full analysis would explore all those combinations. But we can show – as illustrated in Chart 4 – that it is possible to construct scenarios (defined here as combinations of underlying shocks) that create this steady-handed response under the difference rule. This is probably the most relevant result for the current conjuncture.

Building on the work of Michael Woodford in collaboration with my former colleague and mentor Julio Rotemberg (who very sadly passed away a few years ago),11 linear approximations of these models around the inflation target steady state, in conjunction with quadratic approximations of social welfare derived from the household preferences upon which the model was based, defined the system within which model-optimal monetary policy could be determined. Over the past quarter of century, a lot of ink has been spilt in academic journals, doctoral theses, and central bank working papers exploring the features and implications of this general framework in great detail. 5  All speeches are available online at www.bankofengland.co.uk/news/speeches  5  For those of us schooled in modern macro using Thomas Sargent’s Macroeconomic Theory textbook,12 this linear / quadratic (or LQ) framework was associated with one important result: certainty equivalence. In other words, within the LQ set-up defined by Rotemberg and Woodford, the optimal monetary policy rule governing how the policy interest rate should respond to changes in the state of the economy is invariant to distribution of shocks to that economy. This does not mean that uncertainty does not matter. On the contrary, shocks are the drivers of economic fluctuations. The welfare losses associated with inflation volatility stemming from those shocks provides a rationale for the stabilisation of inflation that underlies the adoption of inflation targeting.
Moreover, as the use of public funds can never be completely ruled out, governments will have to agree on how to share any such potential burdens. This may require a set of binding burdensharing agreements or at least some principles that can be used in case of interventions using public funds. While I think this is doable, I do not think it is realistic to expect that the political commitment required to create such arrangements will arise anytime soon. Does this mean then that we are stuck with the trilemma? Not necessarily. One possible way forward in the short to medium run is to improve the current frameworks so that they better  19  Schoenmaker (2010). 20  A number of non-EU countries with a bank sector that has a high level of foreign ownership, including New Zeeland and Canada, have chosen such an approach. In New Zealand, branches are in principle prohibited. Every systemically important bank has to be registered as a New Zealand company. Canada used to have a similar ban on branches. In 1999, however, the law was amended to admit foreign bank branches, albeit with substantial restrictions. For instance, branches of foreign banks are not allowed to accept deposits of less than $ 000. The purpose of this restriction is to discourage retail banking operations. BIS Review 82/2010  21  match the international landscape of financial markets.

Perhaps the most important part of this deregulation process was the Second Banking Directive, which became effective in 1993 and which introduced the single banking license, enabling European banks to operate in any EU member state without the need for local authorisation. In fact one of the first European institutions that benefited from this regulation was the Nordic financial institution Nordea, which was established through cross-border mergers in 1997. Today, Nordea has substantial activities in four of the Nordic countries, and also constitutes a significant part of the financial system in all these countries. Measured in terms of lending, Nordea constitutes the largest bank in Finland, the second largest in Denmark, the third largest in Norway and the fourth largest bank in Sweden. The transformation of the banking sector towards a more globalised one has become apparent in the current financial crisis. We have experienced several severe financial crises also before cross-border banking became a notable feature of the financial sector, including the Swedish banking crisis in the early 1990s. But this time around dealing with the crisis became even more challenging because of the banks’ presence in several jurisdictions, creating a need for cooperation between several national authorities. Why do banks become multinational? How can we explain the increase in cross-border banking, in particular in retail banking? The deregulation of previously strictly-regulated markets made crossborder banking possible.
The figure shows the unrealised capital gains recorded by all insurance companies  (including mutual and provident insurers) on all asset classes. The unrealised gains on the bond holdings of insurers covered by the Insurance Code amounted to EUR 151 billion in 2015. Page 3 sur 7  inhabitant. The low interest rate environment is squeezing insurers’ profits: it is creating a situation where the returns on new securities added to investment portfolios are lower than the rates paid out on insurance policies. In response, insurers have already started to lower the rates paid to policyholders: in 2015, they fell by an average of 25 basis points compared with the previous year. However, this is still insufficient when compared, in particular, with the fall in 10-year OAT yields: a drop of 80 basis points over the same period. I would therefore urge insurers once again to show moderation and to be realistic when setting rates of return on euro-denominated life insurance policies for 2016. The low rate environment also raises a fundamental question about the diversification of savings products. 2015 was marked by a shift among savers towards unit-linked products: net inflows almost doubled compared with the previous year, to EUR 11.4 billion, while inflows into euro-denominated products declined by 25% to EUR 10.5 billion.2 However, unit-linked policies are almost certainly not the only answer, especially as their rise in popularity will need to be accompanied by a high standard of financial information, to ensure that policyholders are fully aware of the associated risks.

It is worth mentioning the matching adjustment, 3 the volatility adjustment 4 and the symmetric adjustment for equity risk, 5 which complement a set of transitional measures to ensure a gradual entry into force of the new regime. The effectiveness of these measures should be assessed in the coming years, and if it proves inadequate, amendments should be proposed. 3 which takes account of the reality of asset-liability matching. 4 which adjusts changes in bond spreads not linked to default risk. 5 which adjusts the capital charge according to the position in the equity cycle. Page 7 sur 7  **  I could also have talked about digital technology, or climate change; I know you are already dealing with these issues. Going forward, however, there is one thing we can be sure of: in a world of uncertainty, and therefore of volatility, the business of insurance, your business, will remain central to two key challenges: protecting against risks and preparing for the long term. Insurance is a strength, both for France and for its economy. As the industry continues to evolve, rest assured that the ACPR’s staff will remain fully committed to supporting you day-to-day. Thank you for your attention.
But that retreat from globalisation would also have a cost in inefficiency and restraints on the flows of capital between countries. We should not forget that the last decade of free financial markets has been a time of great progress across the developing world in Asia, Eastern Europe and South America. But the process of building up national controls is already underway in many countries including even the UK which has long been one of the most open economies for capital and ownership. It will continue unless we can convince each other that much better structures for cooperation and coordination are in place. That is an acute problem within the EU where the single market is based on a common passport. But dealing with the European problem is not the main priority since most of the biggest banks in the world are based elsewhere. I don’t think we should give up on this international agenda. The package of economic measures that were rolled out late last year – from coordinated cuts in interest rates, to provision of dollar liquidity and measures to support banks – showed the power and possibility of coordinated action. The programme of work on the regulatory implications of the crisis which has been coordinated by the FSF and will go in April to the G20 Summit demonstrates a wide accord on the main regulatory issues. But we need more progress on implementation as well as policy.

This is not in itself a particularly powerful argument, because the undershoot has been marginal and probably owes a great deal to the unexpected strength of sterling. Indeed, before we began to track a little below the target, we had for around two years been tracking above it. Nonetheless, the strength of demand in the economy does seem to have exercised less upwards pressure on prices over the past two years or so than we would have expected from earlier experience; and this applies both to prices of goods sold in the product market and to pay and earnings in the labour market. Why is this? In the product market, one factor may be greater competition, which has caused producers and retailers to accept lower margins. Another factor may be new forms of marketing and retailing, for example the spread of e-commerce. This may have cut the cost of distribution, and it may also have intensified consumers' awareness of prices and their resistance to price increases, by enabling them to compare prices more easily. Another possibility is that we may be seeing an increase in productivity growth, perhaps stimulated by the pressures many businesses faced from the strength of sterling, and perhaps also arising from the application of IT possibly the beginnings of the arrival of the new economy from across the Atlantic.
As I have just noted, this is also a feature of the recent strategy changes of the Federal Reserve and ECB. As a slight digression, it may be interesting to note that the tendency to see the inflation target as merely the Riksbank’s concern is not a new phenomenon. Urban Bäckström, Governor of the Riksbank 1994–2002, already pointed out this problem during the National Economic Association’s negotiations in February 1995: “I object to the title of today’s discussion, which is ‘The Riksbank’s inflation target’. Although it is natural for a central bank to strive for price stability, this endeavour must … permeate the entire economic policy.”20 At the time, the problem was the other way around, that is, more policy areas had to help keep inflation down. However, since the purpose of an inflation target is to anchor inflation at a certain level, rather than for it to be as low as possible, the argument is certainly valid even when inflation risks becoming persistently too low. Several good reasons for a more active fiscal policy In recent years, maintaining confidence in the inflation target has primarily been a matter of ensuring that monetary policy can continue to be used in the future to counteract recessions and increased unemployment – and thus provide support to fiscal policy in bad times.

House prices and financial stability Households have been increasing their borrowing at a rapid rate for a fairly long time now. The rise in household debt has been accompanied by a fast upswing in prices in the house market. There have been no clear signs to date that this development has begun to moderate in earnest. In all likelihood, there is a limit to how long it can continue. The Riksbank’s assessment is also that the rate of increase will slow down in the coming years as interest rates rise. Developments in the property market, chiefly as regards commercial properties but also housing, play an important part in the Riksbank’s analysis of factors that affect the stability of the financial system. A central question when judging whether house price developments have the potential to pose a threat to financial stability is the extent to which they can be assumed to be driven by exaggerated optimism and speculation. If such driving forces are significant then there is a risk that households could have difficulty meeting their interest payments when interest rates rise; further, the downward adjustment in prices could be very dramatic when the lack of realism in estimates finally becomes evident. The combination of households’ payment difficulties and sharp falls in collateral values could potentially cause problems for the banks. However, this is unlikely to happen in Sweden for several reasons.
In concluding my remarks on reforms aimed at making future crises less likely, let me also mention proposals currently on the table for the establishment of a Convergence and Competitiveness Instrument, also known as “reform contracts”, within the EU budget. The proposal is essentially to create a special EU budget account supporting timely implementation of needed (and possibly unpopular) structural reforms following contractual arrangements between Member States and the Commission. A review of the compatibility of product and labour market structures in euro area countries with the requirements of EMU is also underway, which might provide further impetus to structural reforms in the euro area and make countries less vulnerable to future shocks. After describing reforms aimed at crisis prevention, let me now turn to crisis resolution mechanisms. Like fire safety restrictions and fire-fighters, the two elements are individually imperfect but should reinforce each other and work in symbiosis. The European Stability Mechanism (ESM) was created in order to provide financial assistance to euro area countries in financial difficulty. The ESM will function as a permanent firewall for the euro area with a maximum lending capacity of € billion. Euro area Member States can apply for ESM financing if they are in financial difficulty or their financial sector is a stability threat in need of recapitalization. ESM interventions are conditional on Member States first signing a Memorandum of Understanding containing a programme for the needed reforms or fiscal consolidation to be implemented in order to restore the financial stability.

To an external observer, especially from Asia, the reform process may seem slow and haphazard, but one has to keep in mind that institutional evolution is almost never a formal optimization exercise starting from a “clean slate”, but rather something that builds on the existing institutional setting and adds additional layers and structures, and the institutional evolution of EMU is no exception, as pointed out in recent ECB research.6 The need to agree on reforms at both the domestic and the European level also introduces an additional element of complexity, which is perhaps difficult to understand from the outside. But it is important to point out that if one looks back it is impressive how much has been achieved in a matter of a couple of years. Let me just briefly describe what has changed in the institutional setting of EMU – and indeed also in the EU more generally – in just a few years. I will start with innovations in the crisis prevention toolkit, and will then move to crisis resolution tools. Fiscal governance reforms. As I mentioned earlier, one of the major weaknesses of the original institutional setting of EMU was that EU fiscal rules were not sufficiently binding and in particular that sanctions were not credible. This has been addressed in a series of reforms, starting with what we call “six pack”, a group of six Regulations which entered into force in December 2011.
The so-called “U6 measure” captures unemployment, underemployment (meaning workers who would like to work more hours) and marginal attachment, namely those workers that are not competing very actively in the labour market, for example because they are not available to start a new job at short notice. This measure currently covers just below 18% of the labour force and is thus considerably higher than the unemployment rate.4 We are experiencing a solid and broad-based economic expansion that is contributing to a narrowing of the output and unemployment gaps. But there still appears to be a disconnect between growth and inflation. As slack in the economy continues to be absorbed, reflationary forces will gradually build up and the traditional Phillips curve relationship between inflation and the business cycle should eventually reassert itself. That being said, current estimates of the slope of the Phillips curve still appear to be flatter than in previous times, which could be interpreted as an indication that the relationship between economic slack and inflation has weakened. A mismeasurement of slack (because of structural changes in the labour market) or an unstable relationship between slack and inflation over time could be among the reasons. At the same time, this effect could also result from discrete parallel shifts in the Phillips curve. Such parallel shifts can arise due to temporary changes in wage and inflation mark-ups, or – more concerning from a central bank’s perspective – the incipient dislodging of inflation expectations.

Likewise, the preparations and hard work that we undertake today to prepare for Basel II will, at the same time, strengthen the financial and supervisory infrastructures in our countries more generally, even before we implement Basel II. These preparations are important in helping to ensure the effectiveness of our supervisory systems, to enhance the transparency of our markets, and to develop the sense of a risk management culture in the industry. Together, they will contribute to the promise of greater financial stability in our markets. That is surely a goal worthy of the preparations we will demand of our banks, of our markets, and of our own agencies. We must recognise that, just as banking is becoming an increasingly complex business, the job of bank supervisors will only become more challenging in the coming years. To promote sound banking and risk management practices on a national, regional, or global level, we will need to work together and cooperate even more in the future. Your participation in this conference speaks to your interest in finding ways to deepen our cooperation as we move into this next journey for supervisors. “El trabajo compartido es mas llevadero,” as we say in Spanish: “Many hands make light work” - and, looking around this hall, you will see many hands ready to cooperate. And so, in closing, I encourage you to make the most of this unique opportunity to build contacts and working relationships and to share views on how we can work together toward greater financial stability in the future.
Some reforms underway represent efforts to ensure that our rules keep pace with the achievements that the industry has already made. On this note, I would argue that Basel II is just as much about aligning supervisory practices more closely with the industry’s latest advances as it is about promoting improvements in the management of risk within the industry itself. But I sympathise with the sense that the wide range of standards that are evolving in parallel represents a drain on the limited resources that firms have to keep pace with those changes. I agree that we must find a way to balance the dangers we are trying to ward off against the time and resources it takes to adapt to new circumstances and new rules. And I want to work with you to make sure that the labours you undertake are not merely exercises in compliance with new rules, but rather will represent honest efforts to strengthen your practices and your long-term prospects for growth and innovation. From my perspective as chairman of the Basel Committee, I can say that the Committee’s main focus in the near future will be on completing the current work and on implementing Basel II in a sound, consistent, and effective manner. This will allow us all a period to digest the framework we have designed. At the same time, we have always said that Basel II should be an evolutionary approach. This does not mean a moving target.

BIS Review 17/2005  3  In order to establish a common data set on which to base this review, the Committee has decided to begin a recalibration exercise in autumn this year. In addition, national field tests are already underway in some jurisdictions, while there will be a period of time during which banks will calculate their capital requirements in parallel under the 1988 Accord and under Basel II. We recognise that these tests and reviews will demand resources from both banks and supervisors. Yet I must emphasise that neither banks nor supervisors will be able to evaluate the calibration of the new framework – and hence its effectiveness – if banks do not participate fully and seriously in these initiatives. Only you can provide the data that all of us will need to ensure that Basel II functions as we intend and that it does not create unintended side effects. Consistent and co-ordinated implementation Second, supervisors are working to avoid unexpected outcomes by developing, in advance, a better understanding of how various jurisdictions will apply Basel II. This is also helpful to developing a more consistent set of expectations across countries. In a world where the business of banking is increasingly international, the need for supervisors to cooperate and to strive for more consistent principles would exist even if Basel II did not.