samchain/econo-pairs-v1 huggingface dataset:
In the previous years, the view had become established that monetary policy served financial stability best by focusing on price stability. This was linked to the widespread opinion that monetary policy should not “lean” against a growing bubble on the equity or real estate markets. It should wait until the bubble had burst before intervening and cleaning up. The “lean or clean” question was reassessed as a result of the financial crisis. It became evident that financial stability was not necessarily guaranteed, even where monetary policy – as measured by the criterion of price stability – was very successful. Moreover, the damage caused when a bubble bursts can be so enormous that it is not easily remedied using monetary policy instruments. To simplify things somewhat, we can distinguish two ways in which central banks can attempt to make a more substantial contribution to financial stability. The first is to steer monetary policy decisions more strongly in the direction of financial stability. The argument against this is the danger of overburdening monetary policy. One lesson from the years of the Great Inflation was that the overall result is not improved when monetary policy tries to achieve too many goals simultaneously. The credibility and success of monetary policy will inevitably suffer as a result. For this reason, the second option has much in its favour.

In the case of the SNB, foreign currency investments have increased substantially as a result of foreign exchange interventions. This has exposed the SNB to a substantial exchange rate risk, which is a consequence of monetary policy considerations. Consequently, it is one that the SNB must take. We reduce the risks through suitable diversification of our foreign currency investments. However, the primacy of monetary policy means that our scope for diversification is limited.4 Additional risks in connection with zero interest rate policies can result from the fact that it has become very difficult for investors to achieve a satisfactory return on bonds. There is a danger that investors seeking an attractive yield will become imprudent and take excessive risks. The longer a low interest rate phase, the greater the danger of unintended consequences in the form of speculative price developments and misallocations. We have been observing a substantial increase in real estate prices in Switzerland for some years now, with strong growth in mortgage loans. The SNB has repeatedly expressed its concern over these developments. Prolonged low-interest phases also present the insurance industry and pension funds with considerable challenges. It goes without saying that central banks continually evaluate and reassess the effects and risks of monetary policy in the light of the most recent data. This applies in normal times and even more so in exceptional situations such as we have experienced over the past few years.
This proved to be inadequate, and the baht continued with its appreciation. After a number of unsuccessful conventional measures, we resorted to the less conventional measure of imposing a reserve requirement on capital inflows in December 2006. The measure was designed to break the one-way momentum, to preserve overall economic stability, and to give the export sector time to adjust. To this end, it has succeeded. Other regional currencies continued to appreciate while the Thai baht had stabilized. The decision to impose the reserve requirement was a difficult one as it entailed a painful tradeoff between investor sentiment and export sector competitiveness as well as economic stability. In the end, cost-benefit analysis led us to choose the latter given the importance of export sector stability to the overall economy. Indeed, during the first three quarters of 2006, net exports accounted for 5.1 per cent out of 5.3 per cent GDP growth in total. Losing export sector stability will result in economic instability. As a small open economy, Thailand relies a great deal on international trade. Let me be clear that the reserve requirement was designed to preserve economic stability and to give time for the export sector, which includes many SME operations, to adjust. The reserve requirement was not designed to maintain a certain exchange-rate level. As such, the reserve requirement is not a permanent measure; it is temporary. In addition, the intended benefits of measures such as these will tend to decrease as people find ways to circumvent the regulation over time.

Higher capital requirements ensure that enough of the finance raised by banks is in a form that can absorb losses without the banks failing. Higher levels of capital enable banks to attract other non-capital funding, in turn making it easier for them to lend to households and businesses. At present it is the better capitalised banks that are expanding lending. How well are the banks doing in building resilience? There is good news here, as the banks have strengthened their capital positions since the darkest days of the crisis. But there is further to go. These capital positions are most often measured by the ratio of capital to riskweighted assets. Risk is difficult to measure, but I think that we must continue to do this, albeit accepting the uncertainty in the process by using a healthy dose of scepticism, and aiming to keep the  BIS central bankers’ speeches  1  method of measurement as simple as we reasonably can. But it is helpful to back up the riskbased measure with a leverage ratio that simply measures capital as a proportion of assets. In the lead-up to the crisis, banks around the world chronically underestimated the risks to which they were exposed. The consequences were dramatic and highly damaging, and we are still living with them today. The crisis has been fundamentally a product of banks that grew rapidly and failed to back that growth with sufficient capital to bear the losses.
The decentralised system of supervision we had before the crisis, based on loose cooperation between national supervisors, simply did not permit this. It is therefore misleading to say that the crisis was solely the result of periphery countries living beyond their means as a matter of policy. The authorities had to respect the single market rules and could not contain alone the large capital inflows that were fueling the imbalances. Indeed, with a national approach to supervision, the forces driving financial developments lay largely outside the legal capabilities of national supervisors. In saying this, I do not deny that supervisors were also too slow to react, due in part to a belief in self-regulating markets. Yet had they tried to contain these financial inflows, it is questionable whether they could have done so successfully. The conclusion I draw is as follows: to have an integrated financial market and overall stability there cannot be purely national supervision. Instead, there has to be supervision at level of the market – that is, at the European level. Let me therefore turn to the Single Supervisory Mechanism. 2  BIS central bankers’ speeches  The benefits of the Single Supervisory Mechanism The SSM, which will formally take over supervision in November next year, is being designed to solve the “financial trilemma”1 created by national supervision – that is, to support financial integration and maintain financial stability by moving supervision to the European level. It will address both the institutional and macro-prudential limitations that supervisors faced before the crisis.

This lesson is that a single financial market with a single currency needs a single system of supervision – and alongside this, a Single European Resolution Mechanism (SRM). The SRM is an essential component of banking union. It helps break the bank-sovereign nexus by allowing banks to be resolved at the European level with minimum use of taxpayer funds. And it adds credibility to the European supervisor by providing reassurance that banks can be resolved in an orderly and efficient manner without creating financial instability – especially large cross-border banks. With the development of banking union, we are creating the conditions for a more stable financial sector in the future and a better functioning monetary union. But we also need a banking sector that takes responsibility. As supervisors, we expect the banks to be better capitalised and less leveraged, more stable and efficient, to perform their indispensable role in financing the economy and supporting the on-going, fragile economic recovery. Because the crisis of the European economy is not over. It is true that modest growth has returned in the last six months and that countries under stress have gone through a painful but successful adjustment, reducing their deficits, correcting their initial loss of competitiveness in terms of unit labour costs and even achieving external accounts surpluses. At the same time, the recession has been deep and has left unprecedented and unacceptably high unemployment.
In particular, along with the adverse impact that the social distancing measures we may have to maintain in the future may exert on activity, there is a further effect. This is more difficult to measure a priori and relates to the possible and potentially persistent changes in agents’ behaviour in response to the “new normal”. These changes might include modified patterns of consumption and saving, or changes in supply chains or in certain aspects of firms’ operations. All these considerations would warrant qualifying the current recovery as uncertain, to take the second of the adjectives I used earlier to characterise this recovery. Additionally, from the standpoint of the sectors of activity, not all of them suffered on a comparable scale the consequences of the pandemic lockdown measures, as they are not equally susceptible to the imposition of social distancing measures. And the gradual startup in activity is not taking place at the same pace in the different sectors. The earlier normalisation of manufacturing and of certain services coexists alongside a slower than usual recovery in levels of activity in those other services, such as leisure and hospitality, where personal interaction is greater. Here, full normalisation is not likely to be attained until we have an effective medical solution. These differences in the pace at which normal levels of activity in productive sectors are being restored allows us to characterise this recovery as uneven, taking the last of my three adjectives.

Kristina Persson: Monetary policy and competition Speech by Ms Kristina Persson, Deputy Governor of Sveriges Riksbank, at Roslagens Sparbank’s annual general meeting, Norrtälge, 17 April 2002. *  *  * 1  Thank you for the invitation to come here to Roslagen Sparbank’s annual general meeting. Today, I do not intend to discuss current monetary policy, but rather to concentrate on an area that is of great significance for inflation and monetary policy, namely the competitive conditions in the Swedish economy. The objectives for monetary policy are clearly stated in the Sveriges Riksbank Act – to maintain price stability and to promote a safe and efficient payment system. The Riksbank has further defined the first of these objectives in an inflation target, i.e. that the annual rate of change in consumer prices shall be 2 per cent, with a tolerated deviation interval of ± 1 percentage point. Interest rate decisions influence price trends partly via the effects on resource utilisation, which means that the impact of the decisions has a certain time lag. It is partly for this reason that monetary policy is based on the total assessment of how the rate of price increase will develop one to two years ahead. There are a number of factors in the economy that affect inflation, but over which the Riksbank has no control. These include the exchange rate, fiscal policy, international economic developments, potential growth, the functioning of the labour market and competition conditions on the product markets.
By re-regulation, I don’t mean the return to tight control by regulators, but rather “smarter” regulation that focuses on systemic risks. Let me show my point with some examples. As a regulator, I would not be doing my job if I did not talk about Basel III. To avoid going overboard on its massive details, I will highlight just a few of its key features. In a nutshell, there are three parts to Basel III: capital requirement, liquidity risk management, and supervision of global systemically important financial institutions. Of the three, the capital part is in the most advanced stage with national implementation started last year in many countries including Thailand. It is expected that by 2019, most countries will be in full compliance with Basel III capital standards which include a countercyclical capital buffer that varies with credit cycles and a leverage ratio that limits excessive buildups of leverage. The liquidity part is new and aims to strengthen banks’ management of liquidity risk. A stress-test-based liquidity coverage ratio and a longer-term net stable funding ratio will be mandated in 2015 and 2018, respectively. The final part of Basel III deals with supervision of global banks whose failure could trigger the meltdown of the global financial system. Identified global systemically important banks will be subject to an additional capital surcharge above Basel III capital requirement. This extra loss absorption capacity is to be met with common equity and will be phased-in between 2016 and 2018.

Nor have they developed a class of professional entrepreneurmanagers, like those who drive MNCs in the West and Japan. Changing these institutional features of Asian economies will be an arduous task. But over time the countries can, and must, change discredited practices. State-owned or family-run enterprises can be transformed into firms run along meritocratic lines by professional managers. Greater public ownership can strengthen market discipline and the incentive to improve returns for all shareholders. Companies that are not profitable have to be closed or restructured. Asian leaders understand this. For example, the governor of the Bank of Thailand Mr Chatu Mongol Sonakul said, describing efforts to promote corporate governance in financial institutions and companies:4 “What we are doing is a very long process. We’re not talking of months or years. We are talking in, maybe, decades or generations. We’re not changing our way of working; we actually try to change our way of life.” Governments play a key role in fostering and managing this process of change. They have to make the political judgment on how fast to go, how to sell the changes to the people, and what compromises are necessary. Only they have the mandate to decide, and only they can take responsibility for the outcomes. South Korea under President Kim Dae Jung is a good example of how this can work, as well as of how difficult the process can be.
I hope that what I have just shared with you on the topic of Central Bank Independence and our experiences in adopting inflation targeting as a nominal anchor will be of some uses as food for thoughts. Finally, I truly wish to congratulate the Bank of Ghana for the successful launching of Monetary Policy Committee. Thank you. 4  BIS Review 53/2002

As its influence on the economy is subject to a time-lag, monetary policy has to be conducted in a forward-looking manner. Consequently, forecasts play a decisive role in analyses and decision-making. At the same time, the exchange rate, like other prices set on financial markets, is very difficult to forecast.11 Nevertheless, due to its significance for the development of small, open economies such as Sweden’s, it is important to form an understanding of exchange rate developments. The Riksbank tries to analyse and forecast the development of the trade-weighted exchange rate, which is to say the value of the Swedish krona against a basket of the currencies of Sweden’s most important trading partners. Due to the volatile nature of the exchange rate, no attempts are made to capture short-term variations in it. Instead, the focus lies on the more long-term trend. The starting point for this a statistical model in which the real exchange rate is related to relative GDP, the terms of trade and net foreign assets.12 However, the final forecast for the exchange rate considers the fact that the exchange rate both influences and is influenced by a multitude of other variables, including the interest rate differential in relation to other countries.13  10  See, for example, Ekholm et al. (2008). Pressure on firms to improve productivity can be seen as a positive aspect of a strong real exchange rate. A weak real exchange rate is otherwise frequently seen as being advantageous for a country as it benefits its exporting firms.
The problem is that national authorities can create their domestic currency, if they choose to do so, even if it leads to inflation, but they cannot simply create foreign currencies in the same way. So, once the run started, it was violent and contagious. For a time around the end of last year there was a significant possibility of a chain of default emanating from Asia that could have reverberated right through the global financial system. The immediate task was how to contain that risk. Essentially there are two broad options for dealing with an external financial crisis. One is simply to allow financial markets - exchange markets, interest rates, and stock and bond prices - to take the strain, and to seek to restore confidence, and moderate the impact of market movements, by restrictive macro-economic policy adjustment. The second is to limit the financial market impact and the extent of the associated macro-economic adjustment by providing or arranging alternative external financing. In practice these options are not, of course, mutually exclusive and the real question is the appropriate balance between them. Where a country has transparently been pursuing an unsustainable macro-economic policy, most people find it easy to accept that that country should bear the burden and adjust, painful though that may be. Many people find this harder to accept where, as in the present case, conventional macro-economic policies had, for the most part, been relatively responsible.

If the central bank is successful in pursuing, over a number of years, a constant rate of inflation, then unemployment BIS Review 103/1998  –9–  cannot remain above the natural rate indefinitely. Not only can central banks not bring unemployment down below the natural rate for long, neither can they be accused of keeping unemployment persistently above the natural rate. Monetary policy cannot influence levels of employment in the long run. There should be no surprise about this. A central bank can use its chosen instrument – interest rates – to hit a nominal target – such as an inflation target, or a target for the exchange rate or even the growth of nominal GDP – but it cannot use a nominal instrument to target some desired level of a real variable, such as the growth rate of output or the level of unemployment. None of the above means that monetary policy has no impact on unemployment. To the contrary, monetary policy does affect the movements of employment and unemployment over the business cycle. And the remit of the MPC makes clear how we should take this consideration into account – as I explained a year ago in a lecture at the LSE. By aiming consistently and symmetrically to hit the inflation target, the MPC should ensure that inflation is, on average over a number of years, close to the target of 22%.
Some key examples already underway include recalibrated regimes for digital bank and digital insurers as well as our collaboration with the Securities Commission on digital assets. We have also collaborated with Malaysia Digital Economy Corporation on ‘fintech booster’, a programme that aims to provide capacity building resources for companies to develop fintech solutions, including legal and compliance support. These initiatives are in line with our regulatory efforts to remove undue barriers to competition and innovation, as well as address market failures. Third, alternate forms of capital will be key in supporting the holistic and broader growth of businesses, including start-ups. Specifically, alternative finance instruments, such as venture capital (or VCs) and peer-to-peer lending, can help fill the funding gap for early stage and growth stage firms, who typically possess risk profiles less suited for bank-based debt financing. Alternative finance instruments can also help crowd-in additional capital from other large private and public capital providers, enabling firms to support their subsequent stages of growth, as well as foster a greater culture of innovation, dynamism, and entrepreneurship in the Malaysian economy. At present, the domestic alternative finance industry is still nascent. According to our estimates, 3/4  BIS central bankers' speeches  Malaysia’s alternative finance market size constitutes only 0.2% of GDP, which is small when compared to developed and peer markets. Realising the need to accelerate growth of this area, we have identified several strategies to develop alternative finance under the Financial Sector Blueprint 2022–2026.

•  Noyer C. (2007), “Hedge funds: what are the main issues?”, Financial Stability Review, Special issue on hedge funds, Banque de France, 10, pp 105-111, April. •  Rajan R.G. (2005), “Has Finance Made the World Riskier?”, European Financial Management, 12 (4), 499-533. •  Rajan R.G. and L. Zingales (1998), “Financial dependence and growth”, American Economic Review, 88, pp 559-586. •  Thornton D.L. (1994), “Financial Innovation, Deregulation and the “Credit View” of Monetary Policy”, Review of Federal Reserve Bank of Saint Louis Review, pp 31-49, JanuaryFebruary. •  Weber A. (2006), “Concluding Remarks”, Conference of the ECB-CFS Research Network on “Financial system modernisation and economic growth in Europe”, September 29. •  Weber A. (2007), “Hedge funds: a central bank perspective”, Financial Stability Review, Special issue on hedge funds, Banque de France,10, pp 101-168, April. 6  BIS Review 42/2007