samchain/econo-pairs-v1 huggingface dataset:
Changes in market structure and regulation have implications for monetary policy implementation, and today’s discussion provided some interesting insights on these topics. This combination of changes in money markets and new policy tools, as well as observations on how central banks’ operating frameworks did or didn’t work during the financial crisis, suggests that those of us responsible for monetary policy operations should be researching and analyzing how monetary policy will be implemented in the years to come. What are the lessons from the crisis and the long period spent at the zero bound and how do these lessons change our views regarding monetary policy implementation? These are questions that many central banks are currently facing, particularly in advanced economies. They are certainly relevant for us at the Federal Reserve as we begin our own efforts to think about a long-run framework for monetary policy implementation.3 In my remarks tonight, I would like to give you my views on the significant issues, and the questions I believe deserve further study. I also want to emphasize how important it is for those of us charged with monetary policy implementation to seek broad engagement on these issues, particularly in our effort to better understand how our money markets function and how best to implement monetary policy in these markets. Motivation and background Why should we think hard about issues related to monetary policy implementation? After all, central banks could always go back to the frameworks they used before the crisis.

In the context of the economic recovery in 2021, the insurance sector saw a return to growth in all its activities: net inflows increased by 18% compared with the previous year. This allowed insurers to consolidate their solvency, with the average Solvency Capital Requirement (SCR) coverage ratio rising to 253% after the slight decline seen during the Covid crisis. Page 2 of 8  French banks in turn saw a “return to normal” in 2021 in terms of dividend payouts, which was completely justified. Their solvency ratio, which was already solid, increased even further over the year, reaching 16% for the top six French banking groups. Their profitability also improved (their RoE stood at 7.1% at end-2021 compared with 4.6% a year earlier and 6.4% in 2019): it is close to the European average but still structurally too low. Page 3 of 8  Banks continued to play their full role in financing the economy, providing a robust supply of credit: 4% growth in loans to SMEs and even 6% growth in residential housing loans, which is a particularly high rate. Credit in France is continuing to grow faster than the economy, so private debt – that of corporations and households – is still rising. With regard to corporate loans, I said here last year that the gradual winding down of the government aid measures posed a manageable risk to the financial sector. Indeed, the wave of business failures feared by some has not in fact materialised.
Imbalance within the economy has in fact been a persistent pre-occupation for us on the MPC. We necessarily, of course, take account of the exchange rate in trying to predict the future course of the economy. Its strength against the euro has been a factor which has dampened both external demand and the rate of inflation, so that interest rates have certainly been lower than they would have been if the exchange rate had been weaker. It is nevertheless true that, in common with most other analysts, we have not fully anticipated the persistence of euro weakness. We don't of course have a crystal ball. But even if we had, it is important to recognise that the link between relative interest rates and exchange rates is much more complicated - and indeed more unpredictable - than is often suggested. Our own exchange rate against the euro today, for example, is actually somewhat stronger than it was before our reductions in interest rates this year; and the dollar, too, is substantially stronger against the euro than it was before the much larger cuts in US interest rates. So, in setting interest rates, we can - and do - make allowance in our projections for what has happened, and, on a best guess, for what is likely to happen, to the exchange rate, and that may cause the exchange rate to soften or it may cause domestic demand growth to strengthen, thereby offsetting the exchange rate's dampening effect on the economy.

And at the very heart of that is their capacity to bring together financial resources not currently needed by their owners for expenditure on consumption or physical investment, and to channel those resources to wherever they can be most productively used – always allowing for risk. The free movement of capital, like free trade in goods and services, is an immensely powerful means of promoting efficient resource allocation nationally, regionally and globally, and as such it can make a major contribution to improving economic welfare – reducing poverty and raising living standards – which is, of course, what we all want to see. Certainly the free movement of capital, like free trade, needs to be governed by rules designed to minimise distortions and unfairness, and to reduce the risks of intermediaries being unable to honour their commitments or of broader, systemic, instability. I don't pretend for a moment that it works perfectly in practice: we could all well do without the wellpublicised institutional failures of recent years, for example, or the volatility which characterised the Asian financial crisis or the more recent "tech stock" bubble. But it is certainly the most effective means of financial resource allocation that we have so far discovered. The challenge is to make it work more effectively – more efficiently, both in terms of intermediation costs, and crucially in terms of the direction of the flow of resources – but also more reliably and securely for both savers and borrowers. This is largely down to financial markets themselves.
So, if it’s not fun and you’re not enthusiastic, you’re probably not going to do very well at it. So, the first thing is to find something that you’re really liking, you’re enthusiastic about. And two, basically find something where you can continue to learn. If you get into a job and you’ve been in the job for a long time and you’re doing the same thing, you’ve sort of mastered the job, then it’s probably time to move on. I was at a large investment bank for many years – 20 years to be exact – and I decided at the end of 2005 that I was going to retire because there was no job that they had that they would give me that I wanted. And vice versa. There was no job I wanted that they would give me. So it was sort of, I can keep doing my same job of being the Chief U.S. Economist and continue to do that for a great many, many years. But at that point I felt I was no longer learning so much. I was bringing in a little bit less enthusiasm to the job, and so, it was time for a change. I didn’t know what that change was, and after I announced I was retiring, Tim Geithner, who was the President of the Federal Reserve Bank of New York at the time, called me up. First conversation was, he asked me if I’d be an advisor at the New York Fed.

In fact, what did I do last weekend? Well, I was in Basel, Switzerland, at the BIS. This is where central bankers get together from across the world, exchange information with one another. So, the first thing is to explain ourselves to people in the community. Because the Federal Reserve is pretty mysterious in terms of – when I went to grad school even, I wasn’t really sure again what the Federal Reserve was. Had to be explained to me. The second thing we do in the community, and this is the more important piece, is to really learn what’s going on, on the ground, in the community. What’s happening in terms of businesses – are they successful? If they’re having trouble, what are the reasons for the trouble? Do they have access to the credit? Can they find people with the job skills they need to support their businesses? What are the challenges in the community, in terms of education, in terms of transportation? Queens, one of the issues is that if you’re not located near a subway line, it’s pretty hard to get around in Queens, and that has pretty significant implications for people’s ability to get to and from work, which is important in terms of economic development. Another issue is the affordability of housing. Queens is actually doing quite well. If you look at the employment growth in Queens over the last few years, it’s been very strong. Just like New York City as a whole.
A few examples serve to illustrate the point (Figure 1). A first distinction is between interventions in the boom and bust phases of a credit cycle. Imagine that some information came along to suggest that the banking system, while adequately capitalised currently, will taken as a whole be stretched down the road if credit continues to expand rapidly. Assuming for the moment common information to the market and the authorities, in this case a macroprudential intervention to require banks to build up capital in order to underpin their resilience in the period ahead might add only a shade to the cost of finance, as banks lose a small proportion of their tax shield. And if banks choose to de-lever, shedding risk to achieve the temporarily higher capital requirement, that action in itself might slow the boom. Now imagine a scenario in which information came along to reveal the system was seriously under capitalised right now. Maybe a bubble had gone unnoticed until it burst or some banks or funds unexpectedly fail, revealing inadequacies in the regulatory regime. Once the market came to appreciate that capital levels were too thin, funding costs would rise sharply. In those circumstances, an injection of additional capital, if it could be achieved, could help to bring financing costs back down. Although reliance on relatively expensive equity would be increased, that is dominated by a large fall in the cost of debt finance as failure becomes a more remote possibility.

In this programme it committed to reducing the budget deficit to 3% of GDP by 2013, by means of sharp cuts in public spending, although the programme was based on a relatively benign macroeconomic scenario, thereby  BIS Review 86/2010  5  raising the question of the need for additional efforts should budget deviations arise, an eventuality expressed by the ECOFIN Council in its recommendation on the programme. The scale of the fiscal crisis in Greece has led the Spanish government to strengthen and accelerate its fiscal consolidation programme in order to prevent market deterioration and the attendant serious consequences for the economy and the stability of the euro area. The package of measures approved on 20 May brings forward a significant portion of the effort to be made to reduce the deficit in 2011, when it should stand at 6% of GDP, and acts directly on its structural component, which is projected to fall by somewhat more than half with respect to the estimated 2009 levels. The government’s unprecedented austerity drive reflects the exceptional nature of the situation and the resolve to set public finances on the right track and thereby dispel the doubts which were fomenting contagion and instability. The unquestionable costs this will entail for society will be compensated by the enhanced protection from instability and by a sounder position on which to base recovery. It is thus absolutely essential to meet the new targets set, even if the macroeconomic scenario ultimately proves to be less dynamic than envisaged by the government.
Chart: The government’s petroleum wealth It may be useful to think of the government’s total petroleum wealth as the sum of the fund and the estimated value of the remaining oil and gas reserves. The chart shows how the composition 5/7  BIS central bankers' speeches  of this wealth has changed over time. Ten years ago, the estimated value of the reserves was more than double the value of the fund. Today, this relationship has reversed – the fund now constitutes more than two-thirds of the government’s estimated petroleum wealth. This could have a bearing on the choice of equity share. It is reasonable to assume that oil and gas reserves in the ground entail greater financial risk than a global, diversified securities portfolio. The risk associated with the government’s total petroleum wealth has been reduced by gradually transforming oil into financial assets. If we maintain the same level of risk tolerance for total government petroleum wealth as previously, we can take on somewhat higher risk in the financial portion without increasing overall risk to a higher level than previously. This point was also emphasised by the Mork commission. THE EQUITY ALLOCATION AND FISCAL POLICY As I mentioned in my introduction, one of the objectives of the fund and the fiscal rule is to ensure that Norway’s oil wealth will also benefit future generations. We have achieved this by limiting oil revenue spending over the central government budget to the expected real return on the fund over time.

VOLATILITY IN THE FUND’S VALUE Let me now turn from expected returns to the return volatility that must be expected when different equity allocations are applied. The most common measure of risk in financial markets is standard return deviation, i.e. return volatility around the average. The standard deviation of the fund’s benchmark portfolio is determined by two factors: equity return volatility and bond return volatility, and the degree of covariance between the two asset types. Chart: Equity allocation and volatility Volatility is lower for bonds than for equities. As illustrated by the straight line in the chart, this means in isolation that portfolio risk increases with the increase in equity exposure. There is a pattern in our data showing that the standard deviation for equities has over time been two to three times higher than for bonds. The analyses do not support estimates that differ from those of ten years ago for equity risk relative to bond risk. Equity and bond returns do not move in tandem. As a result, bonds reduce the variation in the fund’s value in addition to the contribution from lower volatility. For a given equity allocation, portfolio volatility will be smaller the lower the correlation between equities and bonds is, as illustrated by the dashed curves in the chart. The blue curve assumes a degree of positive correlation between equity and bond returns. This means that although bond and equity price often covary, this is not always the case. For the purple curve, we have assumed that the correlation is negative.
The European Commission recently estimated that the single market has brought about an increase of 2.75 million extra jobs and an extra increase in welfare of € per head in 2006, corresponding to a 2.15% increase of the EU’s GDP over the period 1992-2006. 12 However, much remains to be done, in particular in some market services sectors. The extension and deepening of the EU internal market remains clearly a priority as regards further financial market integration, the pursuit of effective competition in the energy market and the implementation of the Services Directive. The growing economic importance of services 13 suggests that improvements in European living standards are likely to depend especially on a high degree of competition and on productivity improvements in the services sector. Let me now focus more specifically on the financial sectors. Financial integration is indeed of key importance for the ECB, given the relevance for the conduct of the single monetary policy. The process of European financial integration is gradually taking place and considerable progress has been made for instance in capital markets and wholesale banking. However, the retail banking sector appears to have not yet reached its potential, and competition seems insufficient in this area leaving European consumers unable to take full advantage of the benefits of the EMU and the Single Market. 14 This seems also to have constrained, to some extent, the economic performance and development of these sectors in the euro area.

This inflation corrodes the households' purchasing power, increases the uncertainty for the future in every cell of the economy, heightens the volatility of financial markets, and damages the long-term perspective of development. Therefore, the primary focus of economic policies should be the undertaking of coordinated measures to mitigate the cost borne by inflation, and control and return it to its target, in the shortest time period and with the lowest cost possible. Against this backdrop, the Bank of Albania has embarked on the gradual normalisation of the monetary policy. This normalisation is undertaken in parallel with all the other central banks, across the region and around the world, which are facing the same high inflation phenomenon. It engenders a progressive raise of the key interest rate, by slowly changing the nature of the monetary policy stance from the current position, which has been stimulating, towards a more neutral position, which provides a more sustainable support for the long-term growth of Albania. During the discussions of the past two weeks, we have gladly observed that our viewpoint is also shared by the IMF Mission and the Ministry of Finance and Economy. 1/2  BIS - Central bankers' speeches  Our future projections suggest that inflation will continue to remain high in the two next quarters as well. Furthermore, the stabilisation of prices in foreign markets and the normalisation of the monetary policy stance will induce a progressive reduction of inflation, until its return to the target in 2024 H1.
The slope of the Phillips curve given exogenous changes in labour force participation and productivity (b) Productivity  0.4  0.1  0.1  0.2  0.2  0  0  0  0  -0.1  -0.1  -0.2  -0.2  -0.2  4  5  6  7 8 Unemployment  9  -0.2  Nominal wage growth  Nominal wage growth  (a) Labour force participation  0.2  0.2  -0.4  3  5  7 Unemployment  0.4  9  -0.4  Note. Quarterly percentage change and share of labour force. Sources: Own calculations  In the second example, it is exogenous changes in productivity that affect the fluctuations in the economy. The effects on wages and unemployment can be illustrated as follows. An increase in productivity leads to companies’ production costs being lower. Prices can then be cut and production can rise, which reduces unemployment. The increase in productivity does lead to real wages rising, but because the price fall is greater than the increase in real wages, this means that the nominal wages fall. In this example, therefore, both nominal wages and unemployment decline and the covariation is therefore positive. This should not be interpreted to mean that lower unemployment leads to lower nominal wages – the causality 11 [24]  goes from improved productivity leading to lower nominal wages and also lower unemployment. Figure 6b shows the example. The Phillips curve has a positive slope, as you can see.

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That would be a positive effect of the crisis. Why study economics? The British economist Arthur Cecil Pigou once noted what he considered to be the true purpose of economics in society: “The complicated analyses which economists endeavour to carry through are not mere gymnastics. They are instruments for the bettering of human life. The misery and squalor that surround us, the injurious luxury of some wealthy families, the terrible uncertainty overshadowing many families of the poor – these are evils too plain to be ignored. By the knowledge that our science seeks it is possible that they may be restrained. Out of the darkness light! To search for it is the task, to find it perhaps the prize, which the “dismal science of Political Economy” offers to those who face its discipline”. 1 Most of us may find these words rather grandiloquent. Economics is a subject that makes positivistic attempts to explain the interaction between firms, households and government. But the subject can also in more normative terms be used to indicate how society and markets should be organised. It took many years for economics to gain its own department at the University of Oslo. In the 1800s, political economy, as it was called at that time, was initially placed under the faculty of law. It was not until 1932 that the University Institute of Economics was established as a department in its own right. Many attempts have been made to define economics.

In this regard, your thought leadership in addressing the legal issues embedded in Islamic finance holds important element in the continued growth of the Islamic financial services industry. Here, I would like to take this opportunity to congratulate the Islamic Financial Services Board for organizing this timely seminar. I trust it will continue to be a constructive platform for the legal and industry practitioners to deliberate on effective and pragmatic solutions to the legal issues in Islamic finance. On this note, I wish all of you a productive and successful seminar. BIS Review 117/2009  3