samchain/econo-pairs-v1 huggingface dataset:
But we should not forget the importance of other major aspects such as a clearly defined legal system and a properly functioning technical and organisational infrastructure. I would also like to address another aspect that is of particular importance to a central bank: the stability of the system. Maintaining stability in the financial sphere should not be viewed in isolation, as it is closely interlinked with the human and economic factors discussed earlier. Political and economic stability, the quality of the human contribution, a clearly defined legal order and an efficient infrastructure are the keys to the success of a financial centre. To this, we should add a reputation which is founded upon a sound attitude and a good track record, going beyond the criteria we have enumerated. Stability of the financial system is a concern primarily for the market participants themselves. Furthermore, it comes within the remit both of the bank supervisors and of the central bank, which is responsible for monetary policy. As you know, responsibilities and powers are kept separate in my country, the task of supervising the banks being assigned to an independent body, the Federal Banking Commission. Discussion about whether it would be preferable to unite the two institutions under one roof has been going on for a long time. Both solutions clearly have their advantages and disadvantages, each of which may be weighted differently depending on the requirements of society. Consequently, the debate must be pragmatic and not dogmatic.

It is definitely easy to make a reasonable case that the Government could have considered the matter more carefully when it made radical changes to its housing policy at the onset of the upswing in 2003, and that it would have been more prudent to postpone them until the boom came to an end. (I presume people realise which Prime Minister this criticism is levelled at). But there are even stronger arguments for claiming that, in spite of the questionable timing, this represented a very positive reform to the housing system framework, which the Government can be proud of. However, the response by the banking system certainly caught the Government by surprise. As things have developed, this is now a secondary consideration. The banks’ response rendered the housing system in its old form virtually obsolete overnight, whether we like it or not. Mortgage interest rates are admittedly still high in Iceland. That is by no means the most interesting point in the current debate, however. Access to credit and finance terms for buying or building housing in Iceland have never been better. But it seems obvious that a large part of the banking system is probably subsidising its own mortgage lending at the moment. Of course this may be a deliberate risk taken in the faith that, since such lending is long-term, lenders will eventually reap handsome profits when interest rates move into line with those in other countries.
But mindful of the old Chinese proverb that ‘He who lives by the crystal ball will die from eating broken glass’ I will stick to interpreting what’s happening in the economy right now. I’ll focus on two issues: first, what’s happening to inflation? And second, why has unemployment risen? Over the past couple of years, the headline rate of inflation has been pushed about by sharp movements in energy prices. Back in the autumn of 2004, CPI inflation was closer to 1% than the 2% target. A year later it had risen to 2.5%. It then fell back below target until the spring of this year, when it moved back up to around its present level of just below 2.5%. The first spike in inflation above the target – in the autumn of 2005 - corresponds with the very sharp rise in petrol prices around the time of hurricane Katrina. The second upward movement corresponds with the big jump in domestic gas and electricity prices this spring. This autumn petrol prices have fallen back sharply from their August peak. But CPI inflation has scarcely changed. Why? The simplest explanation is that the recorded inflation rate is still being boosted by high utility prices, and the effect of lower petrol prices has been partly offset by high seasonal food prices and the introduction of university tuition fees. Any broader-based pick up in inflation has been relatively small. Of course, life is not quite that simple.

BIS Review 116/2006  5  While demand has not been growing unusually slowly over the past year, it is now two and a half years since it grew at a rate significantly above its longterm average. And that average could be an underestimate of how fast we could safely grow. Even so, there is a risk that a temporary rise in the inflation rate will spark off inflationary pay increases. And if that were to happen, the MPC would need to raise interest rates to restrain demand and bring inflation back to target. I thought this risk looked quite significant in August when – as the Governor said at the time – the Committee saw a 50/50 risk that consumer price inflation would rise above 3% this winter. At the same time, the latest figures were confirming that the economy had recovered its momentum. So it seemed prudent to take back the modest cut in interest rates which the Committee had narrowly voted for the previous August. I cannot speak for other MPC members. But for me, raising rates this summer was akin to buying insurance against the risk that a possible spike in inflation – which we could do little to avert – would cause people to revise up their expectations about future inflation, and maybe dent the credibility which the Committee had built up over the previous decade.
Likewise, the iTraxx Sovereign Western Europe Index, consisting of 15 sovereign CDS across Europe, rose by approximately 70% in the same period. 2  This is an approximation of the real effective exchange rate, assuming constant weights and inflation differentials. 3  Annualised volatility computed over one calendar month on the basis of daily movements. BIS central bankers’ speeches  1  rate on 6 September, EUR/CHF volatility has fallen below 10%, though it remains high from a historical perspective. The introduction of the minimum exchange rate also had an impact on some of the dynamic properties of the Swiss franc. As the red bar on the left side of chart 2 suggests, there was previously a positive correlation between the movements of the Swiss franc and those of risk indicators such as the VIX Index, i.e. investors tend to buy Swiss francs when perceived risk increases. In the same vein, the blue bar on the left of the chart shows that the correlation between the movements of the Swiss franc and those of risky assets, such as the equity shares on the MSCI World Index, has historically been negative. In other words, negative market developments have often been accompanied by a rising Swiss franc. Intriguingly, as the right side of chart 2 shows, the introduction of the minimum exchange rate appears to have had a significant impact on these correlations. The SNB’s implementation of monetary policy: liquidity measures On 3 August, the SNB started to implement liquidity measures against the massively overvalued Swiss franc.

Let me provide some further information on these operations. That day, the SNB announced that it was narrowing the target range for the three-month Libor from 0.00–0.75% to 0.00–0.25%. It also stated its intention to expand sight deposits at the SNB. These were subsequently increased from around CHF 30 billion at the beginning of August to over CHF 250 billion by the first week of September. The SNB used a range of well-established instruments to effect this extraordinary increase in the supply of liquidity to the Swiss franc money market, as chart 3 shows. Firstly, reverse repo operations were discontinued. As a result, outstanding reverse repos fell from CHF 26 billion on 3 August to zero a week later. Secondly, the SNB stopped renewing SNB Bills that fell due, and later started to repurchase those that remained outstanding. While these amounted to some CHF 110 billion at the end of July, this figure gradually decreased to below CHF 45 billion by the end of August, reaching some CHF 20 billion by the end of November. Thirdly, to further boost liquidity, on 10 August the SNB also started to employ foreign exchange swaps. These amounted to approximately CHF 80 billion by the end of the third quarter. Fourthly, the SNB again resorted to conducting repo operations, which provided the Swiss franc money market with approximately CHF 18 billion of liquidity in August and up to around CHF 33 billion in November. These exceptional liquidity measures exerted downward pressure on interest rates.
It is also obvious that the central bank must react to be able to carry out its tasks. So the way a central bank should react afterwards, once the bubble has burst, has not been debated as much as the question of how to act prior to this. Leaning against the wind – act sooner, not just later… This debate has previously been somewhat “polarised” between two stances – to “lean against the wind” or to “clean up afterwards”. The former stance involves the central bank raising its policy rate if property prices and lending increase at an alarming rate, even if an interest rate increase is not obviously justified on the basis of the forecasts for the real economy and inflation. One usually says that the central bank should “lean against the wind”. The basic idea is that keeping the policy rate higher than it would otherwise have been contributes to holding back the rise in property prices and ensuring that the fall in prices that comes sooner or later is much milder. A more balanced development in property prices also leads to more stable developments in the real economy and inflation. Although growth may be slightly lower in the upturn phase, there is on the other hand less risk that property prices will fall dramatically later on, which could contribute to a severe downturn. This is in some ways similar to an insurance policy: By accepting slightly weaker growth in the short term, one reduces the risk of much more negative developments further ahead.

This can’t be seen as an anomaly. If anything, it remains counterintuitive that net capital flows are still going “uphill” from emerging to developed economies. That means that some of the poorest citizens of the world are lending money to some of the richest, allowing those to finance their consumption. The same holds true for commodities prices. Commodities markets increasingly function like asset markets with the development of financial instruments based on commodities baskets. In fact, commodities have become an asset class in themselves which warrants special attention in terms of financial stability. On the other hand, there may be good reasons to think that “fundamentals”, such as strong growth in commodity intensive emerging economies countries underpin the current behavior of many commodity markets. Finally, financial volatility may be the product of some very specific features of the current environment. The conjunction of economic uncertainty, high risk aversion and ample liquidity worldwide is especially conducive to abrupt shifts in sentiment and portfolio allocations. Volatility becomes a problem when it is policy induced and, therefore, financial markets contribute to aggravating shocks instead of attenuating them. Then, durable instability settles in and creates potential threats for the real economy. We may be in such a situation today as there are doubts about the mutual consistency in economic strategies pursued by major economies. At the same time, some of the policies implemented to deal with volatility may cause additional damages and distortions in capital markets. I will address those two issues before turning briefly to longer term challenges.
A great strength of the MPC is that its members can honestly express differences of view in an open and transparent way, and that means we are not forced to agree and minority opinions are respected. Over time, that should make for a better decision-making process. So while I have not been in agreement with the majority view on the Committee over the past year, I hope that the arguments I have made have not been in vain. And I suspect the issues I have raised in today’s speech – the impact of the global economy and the pound, the role of the “output gap” and the importance of expectations and credibility – will continue to be key issues for the MPC over the years ahead, as the Committee continues in its vital role of maintaining monetary stability in the United Kingdom. References Orphanides, A. and Williams, J.C. (2005) “Monetary Policy with Imperfect Knowledge”. No. 2005-51, Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) Sentance, A. (2011) “The UK’s inflation problem: Selling England by the Pound?” Speech at the IEA State of the Economy Conference 17 February 2011. 16  BIS central bankers’ speeches

Private investment activity has also resumed following a period of excess capacity due to overinvestment prior to the Asian financial crisis. There are also plans for massive investment in infrastructure development in the region. While Asia has the internal capacity from its high savings to finance these investments, the resulting higher import demand that these investments will generate will contribute to the further unwinding of the global imbalances. This stronger domestic consumption and investment demand in Asia is also being supported by the strengthened and more developed financial systems. The relatively low level of leverage of the corporate sector and the continued access to financing support this trend. While regional economic integration has always been part of the Asian economic landscape, regional financial integration has been a more recent phenomenon. While regional financial integration will facilitate the already strong trade and investment linkages in the region, a more important aspect of financial integration for Asia is that it will facilitate a more efficient intermediation of funds within Asia. Asia’s more developed financial markets and continued initiatives to liberalise the financial sector will also strengthen inter-linkages with both the traditional financial markets and with new financial centres in other emerging economies. Going forward, products from Asian financial markets can be expected to increasingly assume greater importance as an asset class. It will thus increase the potential for the diversification of risks and contribute towards stability of the international financial system.
Le Lab is a genuine Open Innovation laboratory: its goal is to bring new practices and technologies into our activities, and to that end experiment where necessary within short and flexible cycles. To do so, it works in close collaboration with innovative firms. An example of this work is to use artificial intelligence to improve our scoring of businesses. Scoring is something that Banque de France has been doing for a very long time: its branch network all over France gives quotations of companies based on analysis of financial data but also on-site visits (more than 250.000 last year). These quotations are then provided to banks and other institutions, in order to facilitate access to financing and therefore financial inclusion for many SMEs. This is why we are working, in collaboration with start-ups, on how to improve our data analysis and include learning algorithms in our scoring process. Of course, this is not easy – the integration in existing processes is complex, in particular the role of expert judgment. And we are 3/5  BIS central bankers' speeches  also part of a larger experiment led by the French government called “signaux faibles” (low signals). It aims at bringing together data from various French public authorities and developing AI analysis capacity to identify businesses showing signs of vulnerability, in order to better target public support towards them. A second way is by revisiting some of our policies and adapting them.

For instance, when embedding artificial intelligence in financial solutions, the risk grows higher of a “black box”, where it is more and more difficult to trace and understand outcomes. Discrimination bias may occur and leave out customers, without even being detected as such. And big data never forgets: yet, financial inclusion means being sometimes able to overcome past conditions and give customers a “second chance”. In addition, digitalization of our economies also brings about a risk of digital divide between those who are at ease in a digital world and those who don’t understand it or don’t have access to it. This is a major issue for financial inclusion. When a bank or an insurer prioritizes access to its services via digital devices, those who don’t use those devices can be left out and become “second-class” clients. We must not overlook this. 3/ Fintech and financial inclusion: moving forward Faced by the new ways, the new challenges and the new risks that Fintechs are bringing to financial inclusion, how do we, at the Banque de France, adapt to the digital age and leverage digital tools, to further improve our policies and actions in favour of financial inclusion? The first way is by developing our understanding and use of new technologies: in addition to our Fintech unit at ACPR which I’ve mentioned, Banque de France has launched in June 2017 “Le Lab”.
For instance, if the repo interest rate is set as 16.25 percent, then the CBT borrowing rate will be 15.00 percent, while the CBT lending rate will be 17.50 percent. 13  (iii)  b. Late Liquidity Window (LON) Interest Rates: Within the scope of the Late Liquidity Window, CBT overnight borrowing and lending rates will be 4 points below and above the interest rates on repo auctions, respectively. For instance, if the interest rate on repo auctions is set as 16.25 percent, then the CBT LON borrowing rate will be 12.25 percent, while CBT LON lending rate will be 20.25 percent. c.  The interest rates on overnight and one-week maturity borrowing facilities provided for primary dealer banks via repo transactions within the framework of open market transactions will be 0.75 points above the interest rates on repo auctions. For instance, if the interest rate on repo auctions is set as 16.25 percent, then the interest rate on borrowing facilities provided for primary dealer banks will be 17 percent. The method of one-week maturity repo auctions will be modified. Accordingly; a. One-week maturity repo auctions will not be held via the traditional method; but the quantity auction method. In other words, the interest rate on the repo auction will be set by the Committee. Additionally, banks and intermediaries will only quote quantities for the repo auctions with a oneweek maturity.

In the current crisis, monetary policy is said to have played a role in contributing to excessive risk-taking behavior in the period leading up to the crisis, but monetary policy is also powerful in handling the economic and financial downturns through aggressive actions on interest rate and the provision of liquidity. This shows that it is crucial to get the stance of monetary policy right early by formulating monetary policy in a forward-looking manner. This, of course, is easier said than done. And the last lesson is communication. One lesson we learnt clearly from the crisis is that policy actions alone cannot ensure a successful outcome without the support of an effective communication strategy. In this crisis, the Fed has demonstrated the importance of this to the highest level through its ability to articulate its understanding of the situations, to communicate the rationale for the use of unconventional measures, its approach to making the results of the stress-testing exercise public, as well as its ability to manage market expectations while maintaining policy credibility. All these have been instrumental to the success so far of the Fed’s policy response. It is, therefore, clear from the crisis that wellexecuted and credible communication can help anchor market expectations. Let me now turn to my second remark on strengthening the monetary policy framework. I agree much with what has been said about the need to improve bank regulation and supervision going forward, especially to reduce procyclicality in the financial system.
However, in the really long term, it is structural factors such as long-term growth, propensity to save and technological progress that are crucial for movements in interest rates rather than short-term fluctuations. Let us begin with a definition that can help us bring some structure to the discussion and to understand the challenges we are facing. The interest rate we normally see is nominal, and measures how much we pay in terms of money when we borrow or how much we receive when we save. But as prices usually rise over time, the value of our money also declines. To take this into account, one can look at the real interest rate, that is, the nominal interest rate minus the expected rate of inflation. The real interest rate measures how much we pay for our loans in real terms, that is, in terms of our purchasing power. In the very long turn, the real interest rate is determined by structural factors, such as savings and investment. And in a small, open economy like Sweden’s, these factors are primarily determined by international developments. Monetary policy, on the other hand, does not have any marked effect on the real interest rate in the long run. However, monetary policy does influence the rate of inflation and inflation expectations. If monetary policy is based on an inflation target that is perceived as credible, long-term inflation expectations will coincide with the inflation target.

There is thus good reason to assume that demographical developments have contributed to an increased propensity to save in the world and thus to a lower real interest rate. 5  See Rogoff (2015). BIS central bankers’ speeches  3  The demographic effect on saving in China is worth mentioning in particular. The single-child policy contributed to a severe decline in the birth-rate. At the same time, life expectancy increased. The combination of weak social safety net and fewer children to provide for the elderly was probably an important explanation for the increase in saving in the Chinese economy. As China has become increasingly integrated into the global economy, saving in China has also been increasingly channelled to other parts of the world for investment. Increased propensity to save in many emerging markets Many other emerging markets have also increased their savings, but partly for other reasons than a change in demographics. Experiences from the Asian crisis in 1998 contributed to many emerging market countries’ central banks building up their currency reserves to be able to withstand future currency outflows. The increased demand from these countries for low-risk assets, such as government bonds, led to yields being pushed down at the end of the 1990s and until the years prior to the financial crisis. The rising demand for safe assets also contributed to an increase in the differential between the risk-free rate and the rate on higher risk investments.