samchain/econo-pairs-v1 huggingface dataset:
All this means that tradable output responds powerfully to the depreciation and, on the demand side, net trade and investment grow significantly. In reality, perhaps because there are significant frictions and uncertainties in the real world, the actual response of the tradable sector has been much more modest (even though the fall in the exchange rate has been bigger than 10%). 8  The impact of news about the future on the current economy is an area of active research for economists. See, for example, Beaudry and Portier (2006), Kurmann and Otrok (2013), and Kamber, Theodoridis and Thoenissen (2017). 9 The model used here is based on the model in Di Pace, King and Theodoridis (2017). 10 Broadbent (2017). 10  All speeches are available online at www.bankofengland.co.uk/speeches  10  Chart 9a: Total factor productivity  Chart 9b: Real exchange rate  Chart 9c: Investment  Chart 9d: Hours worked  Chart 9e: Saving ratio  Chart 9f: Consumption  Chart 9g: Output  Chart 9h: Inflation  11  All speeches are available online at www.bankofengland.co.uk/speeches  11  But there’s also a significant difference in the predicted behaviour of consumption, this time in the opposite direction. Because they agree about the coming hit to income, households cut their spending immediately in this simulation – it falls 1½% in the year after the news comes through – and the saving rate goes up. This dominates the sizeable response of net trade and investment, such that aggregate demand and output also decline.

If EU withdrawal results in significant new barriers to trade between the UK and its major trading partners in the rest of Europe, one plausible consequence would be a marked shift in relative demand for UK output. The economy would probably experience less demand for the things we’ve been exporting to the EU and more for UK-based substitutes for the goods and services we’ve tended to import. That wouldn’t matter much if the resources for one could be seamlessly and costlessly transferred to the other. In reality, however, those resources, human as well as physical, are likely to be specialised: they’re more productive in some areas than others. A plant used to produce a particular car part, as part of an integrated European supply chain, cannot suddenly be converted into one that makes a complex German 5  All speeches are available online at www.bankofengland.co.uk/speeches  5  machine tool. A field currently producing barley, sold into the European market, can’t easily or as fruitfully be replanted with olive trees. Someone steeped in one particular area of financial services cannot overnight, or costlessly, be reborn as an expert widget-maker, able to generate the same contribution to GDP. In the presence of specialised inputs a significant shock to relative demand can have coincident and material effects on aggregate supply. The general lesson here is that “total factor productivity” doesn’t just depend on aggregate resources. To the extent those resources are specialised it also depends on their allocation.
If a pair of jeans becomes cheaper because the dollar has fallen, or the price of plasma TVs has been halved because their production has increased in China, or the price of food goes down because the competition in the retail food trade has toughened, it is something that we essentially should be happy about. But should there be a sharp fall in demand then the situation would be completely different of course. So what risks do we see that could cause inflation to deviate from the path in the main scenario? There are a number of risks in the inflation assessment that have been in focus for some time, e.g. the twin deficits in the US economy, the developments in the Swedish krona, and productivity growth. In addition, new risks have emerged in connection to specific factors, such as the developments in food prices, and these are creating great uncertainty over how inflation will be affected in the period ahead – not least in the short run. Compared with the previous Inflation Report the main scenario on this occasion has taken account of the downside risks to inflation to a greater extent; e.g. increased international, as well as domestic, competition is now forecast to have a somewhat bigger impact on Swedish prices than previously assumed. There are arguments, however, that this could nevertheless entail an underestimation of inflation as much as an overestimation.

On the first of these, 1996-1997, a high level of interest rates in the previous years had without doubt contributed to both a drop in the general level of demand and to low inflation. The period was also characterised by an occasionally heated debate on monetary policy. The reason the Riksbank decided to keep policy tight at the time was that credibility for inflation-targeting had not yet been established. The two subsequent periods, 1998-1999 and 2004, were completely different. On both these occasions the repo rate had been relatively low the years before at the same time as the general level of demand was growing fast. The main factors generating the low inflation were changes on the supply side of the economy: deregulation, lower import prices and surprisingly rapid productivity growth. The Bank’s policy had hardly been called into question at all when it was conducted in 1996-1997; it was only in retrospect that the criticism came, and this has largely been the pattern in recent times, as I mentioned earlier. If one wants to argue that the Riksbank has systematically conducted excessively tight policy one should reasonably be able to show that other forecasters called the Bank’s policy strongly into question when it was formulated. So, in my opinion, there are on the whole fairly natural explanations for why inflation on average has been somewhat below target over the past ten-year period.
The savings tax example also shows that even a small country like Luxembourg can, through its membership in the  22  Guinea-Bissau, for example, has a GNP per capita of only $ whereas countries such as Brunei, Cyprus, Malta and Qatar have a GNP per capita of more than $  23  These include Andorra, Liechtenstein, Monaco and San Marino. The US is trying to resist the move. In July 2002 the Treasury Department in fact withdrew a draft law which would have made it compulsory for American financial bodies to provide extensive information on savings income invested in the United States by non-residents and replaced it with a less onerous law that limits the extent of information and the number of countries to which it would apply. 6  BIS Review 69/2002  EU, succeed in getting a larger country to give up some of the competitive edge it enjoys in a particular sector. It is to be expected that similar manoeuvres will become more frequent in an enlarged EU. Having a voice in setting the rules would then assume paramount importance, especially since the other new members, who are Malta’s competitors in several areas, would themselves be seeking to advance their own interests. This, in turn, also casts doubt on whether Malta would be able to obtain transitional arrangements and derogations comparable to those it has obtained thus far if it had to negotiate with the EU when Bulgaria, Romania and Turkey have become members. This leads to my third conclusion.

All the more, ad hoc policy meetings based on ad hoc policy documents should be minimized. This not only helps the central bank in its communication with the public, but also helps the decision-making body to maintain internal discipline. Separateness emphasizes that special attention should be paid to monetary policy in the central bank’s agenda. In order to avoid any attempt to displace the policy agenda by any other ‘extremely  1  For further details see Lombardelli, Proudman and Talbot’s article ‘Committees Versus Individuals: An Experimental Analysis of Monetary Policy Decision Making’, published in International Journal of Central Banking, Vol. 1, No. 1, May 2005. BIS Review 88/2005  1  important’ issue, separate meetings should be established for policy discussions. Indeed, a policy decision is worth a special ‘policy day’, split into: (i)  a staff presentation, when staff present the outcome of their analysis (based on a standard set of policy documents)  (ii)  a discussion of the analysis  (iii)  the policy decision  (iv)  communication of the decision to the public  Staff independence should protect the members of the decision-making body from the filtering of undesirable information which can occur whenever a particular decision maker directly manages the ‘Economic Department’. Although such behaviour is, with high probability, not intentional, this member can influence the interpretation of the ‘staff’ analysis in a way convenient to his own opinions. It could happen that the rest of the decision-making body members receive a biased analysis.
The bank’s critical functions were kept running. Shareholders and unsecured creditors were not bailed out. Over time, the creditors who were not covered by the deposit guarantee were paid back around 85 percent of the value of their original claims. The value of the bank’s assets was preserved to a larger extent than if the bank had been wound up. Danish banks’ funding costs rose following the resolution of Amagerbanken. However, it did not trigger a systemic crisis in the Danish banking sector, despite its occurrence in the middle of the European debt crisis. What the Danes got was a pricing of the true risk in their banks. Over time, this provides a basis for a less risky financial system. Bail-in may nevertheless be difficult to implement. Bail-in of a large bank, that is a bank with substantial liabilities, will inflict losses on a large number of creditors. That is the intention. But if these liabilities are owned by institutions that are critical to the functioning of the financial system, the problems in one bank can spread quickly. If the losses are substantial, the authorities run the risk of triggering a systemic crisis. Moreover, bail-in of creditors may make funding more expensive for other banks, particularly in turbulent times. For large, systemically important banks, the time-inconsistency problem remains. This weakens the credibility of the bail-in regime. Therefore, the Bank Recovery and Resolution Directive also provides for measures intended to bolster credibility. An important measure is that national authorities are to prepare resolution plans for individual banks.

Along with the downturn that followed in the wake of the financial crisis, the Irish bank bailout quadrupled Ireland’s sovereign debt. 3 The interest on the debt is borne by all, rich and poor alike, regardless of who had benefited from the pre-crisis economic boom. The banking crisis and the government debt led to a deep economic downturn in Ireland. It is only now that Ireland has returned to its pre-crisis level of prosperity. But the economic and social consequences would probably have been even more serious if the banks had not been kept afloat. The Irish bank bailout illustrates a number of classic questions: Was it right for the government to risk its citizens’ money to rescue the banks? Did the Irish authorities actually have a choice? When things went wrong, was it right to protect creditors as the Irish authorities ultimately did? How has this affected the future risk taking of the banks’ owners and creditors? The answer to the question of whether banks should be rescued is about economics and incentives. But the problems banks create and how these problems are solved are also a matter of morals and ethics – law and justice. Norway has also been faced with these problems. Why are banks bailed out? In 1923, a little more than 90 years ago, there was a banking crisis in Norway. One of the banks in serious difficulty was Andresens og Bergens Kreditbank, or Foreningsbanken, as it  1  IMF Country Report No. 15/20.
For its part, it was only upon seeing the FPC’s action, that the market became alive to the risks. It is possible that, having woken up, the market, though somewhat reassured that some action is being taken, worries that the FPC has not done enough. In that case, debt spreads might rise at the same time as banks switch towards more expensive equity financing (Column 3, Row B). Credit conditions could tighten, slowing the economy and so exacerbating the situation. A final variant (Column 4, Row B) would be that although the market and the FPC share the same information set, the market thinks an increase in capital requirements is unnecessary. In that case debt spreads, having already been low given the market’s view of the risks, would not fall. Firms overall funding costs might even rise slightly, given the required switch to more expensive equity financing. But, crucially, the system would be more resilient and any eventual bust should be less severe. These examples serve to illustrate that it is unlikely to be as simple as: a rise in capital requirements entails tighter credit conditions. Where there are question marks over the system’s capital adequacy, the reverse can sometimes be true. More generally, the first round effects on credit conditions will depend upon whether the policymaker’s actions revealed information about the state of the system and its approach to policy, and on whether the market regarded the actions as warranted, insufficient or too much.

1  For an outline of the keys steps necessary to further the progress already made by the international regulatory community on resolution since the crisis, see Tucker (2013), “Resolution and the future of finance”. BIS central bankers’ speeches  1  Re-regulation of the capital structure What about the effect of the reforms to the regulatory-capital regime? They affect the distribution of risk between the holders of bank equity and the holders of bank debt of various kinds. When fully implemented, and taking into account equity surcharges of up to 2.5pp for systemically important institutions, Basel 3 increases equity capital requirements by almost an order of magnitude.2 That means that, in future, banks will be able to absorb bigger losses while remaining a going concern. In other words, more of the risk in bank portfolios is being pushed onto shareholders, leaving less with the creditors. But perhaps less clear is the impact on banks’ overall funding costs. Will there be any effect at all? Over 50 years ago, Modigliani and Miller famously showed3 that, under certain restrictive conditions, a firm’s overall cost of funds does not depend on how it is financed. Equity is more expensive than debt finance, because it absorbs losses first. Increasing the proportion of a firm’s balance sheet funded by equity increases the share of that higher-cost form of financing. But it reduces the risk to debt-holders, causing debtfinancing costs to fall; and the cost of each additional unit of equity also falls as the balance sheet becomes less levered.
Going forward, private pensions and health insurance will have an increasingly important role in supporting sustainable financing in the long term for retirement and healthcare. More Malaysians are already turning to the private insurance industry to finance their healthcare expenditure. As a result, the medical and health insurance business has grown significantly in the last five years, averaging at an annual growth rate of close to 30%. About 80% of this business is written by life and composite insurers, mainly as riders to life insurance policies. Similarly, a larger role for private pensions may be envisaged under the pension reform initiative. At the same time, there is also a growing awareness among Malaysians of individual responsibility in financial planning. Planning for retirement and healthcare needs are clearly among the most important of financial decisions, but sound financial planning also includes individuals protecting themselves and their dependents from financial vulnerabilities arising from death, disability or unemployment, providing for children’s education and as well as making sound investment choices. These developments present enormous opportunities for the life insurance industry, particularly given the large untapped market that still exists with less than 45% of the population having a life insurance or family takaful policy. By the same token, however, they place equally important responsibilities on  BIS Review 24/2007  1  insurers to make sure that the products sold are suitable, that insurers have assets which match their liabilities; and that customers are given enough information to enable them to make responsible decisions.

In addition, the rise in longer-term rates constrains economic activity – making it even more difficult to sustain an economic recovery. Moreover, once confidence begins to erode, it can do so very quickly. Even if a country were willing to pay higher interest rates, this path is not viewed as credible given the implications such rates have for future debt service costs and deficits. Put simply, to wait and see ultimately is likely to necessitate an even bigger fiscal adjustment. In addition, waiting for the market to say “no more” may mean losing discretion as to the timing and magnitude of fiscal tightening. It is very unlikely that the time when market sentiment turns most adverse would also be the most attractive time to have to tighten fiscal policy. Thus, there is a balancing act between solving the longer-term problem of needed fiscal consolidation and, at the same time, not tightening fiscal policy too soon or too abruptly so as to derail the nascent expansion. So what should be done? I believe that moving ahead earlier with a credible plan is preferable to waiting. I am not going to enter a political debate about whether the restraint should be more in the form of higher taxes or lower spending. However, I do believe, like most other economists, that fiscal consolidation that has the least negative impact on investment in physical and human capital is bound to be most effective. That is because fiscal capacity depends on economic capacity.
Purchases of private assets and assets other than government securities are primarily relevant when markets that are important to the financial system are threatened, and we risk an acute financial crisis, such as at the start of the pandemic. Under the new Sveriges Riksbank Act, the Riksbank can – under certain conditions – buy and sell Swedish securities issued by the government and private actors. Our monetary policy toolbox in this respect remains the same as before. However, the new act has a more restrictive view of when it may be relevant to purchase private securities. The Riksbank may only buy and sell such securities if there are exceptional reasons. This means in practice that, from a monetary policy perspective, we can only buy and sell private securities when we cannot achieve the desired effect on the economy by using other measures. The new act also gives the Riksbank a more explicit mandate than before to trade in securities, also within the scope of our task of contributing to a stable and efficient financial system. To counter serious disruptions in the financial system, the Riksbank may if there are exceptional reasons buy and sell financial instruments at predetermined prices to temporarily support the functioning of systemically important financial markets. An important task for the Riksbank is to be the lender of last resort for important credit institutions that have problems, but also, under certain conditions, to act to keep markets that are critical to the financial system going.

In my view, three other major prerequisites are needed in order to foster robust, sustainable growth and durable job creation, namely : the continuation and strengthening of a policy designed to keep in check unit production costs, the improvement of the competitiveness of the economy, through ambitious structural reforms and lastly, the completion of a fully integrated European capital market. Raising the potential output growth and enhancing the competitiveness of the economy: If Europe wants to secure sustainable growth at levels that are as high as possible, the key variable is potential output growth. The level of potential output growth can firstly be raised thanks to investment: business leaders are completely free to invest wherever they want in Europe or elsewhere in the world. It is thus important that we create economic, legal and fiscal conditions that are as favourable as possible to investment in Europe. The investment appeal of Europe is crucial in this respect : the more we invest, the fewer inflationary pressures we will have, and the stronger potential output growth will be. BIS Review 60/2002  1  Another way of raising potential output growth is to increase the quantity of available labour and to boost gains in labour productivity: the fast transformation of information systems is likely to accentuate the structural transformation of the economies.
But part of it is up to us. For banks, the tiering mechanism adopted last September reduces the cost of negative interest rates by nearly EUR 4 billion for European banks, of which around EUR 800 million for French institutions. These figures are significant enough to be worth quoting, feel free to do so as well. As regards insurers, two points should be stressed. First, the return on non-unit linked life insurance products needs to further decline. Second, the measures taken at the end of last year regarding the profit-sharing reserve. This reserve, which belongs and will continue to belong to policyholders, can henceforth be taken into account in the calculation of insurers’ solvency ratio. I supported the adoption of this measure because it brings French practices into line with that of the other countries concerned, in particular Germany. However, it will never be able to compensate for insufficient solvency. Adapting to the low interest rate environment also requires increased vigilance with regard to the quality and pricing of loans. This is the role of the Haut Conseil de Stabilité Financière (HCSF – High Council for Financial Stability), chaired by Bruno Le Maire; last December we issued a recommendation on the maturity of mortgage loans and associated debt burden. It applies to all new loans issued since January. This means, in short, no more excesses, and a rapid change in behaviour. Otherwise, we might see a capital surcharge for non-compliant loans, although that is not part of my wishes.

The Paris financial centre and French public and private players have a recognised lead here, but they must consolidate it in a context of active competition. We will publish the scenarios by the end of March, and conduct the tests by December. I should point out that the results of this ground-breaking exercise will be published on an aggregated and anonymous basis. ** A word of conclusion on the Banque de France. Like you, we need to adapt, from payments to digitisation or cybersecurity. Our determined approach to innovation allows us to improve our performance and responsiveness. 2020 is the final year of our current strategic plan, through which we have reduced our headcount by more than 20% and our current expenses by more than 10% in five years. We will continue our transformation through 2024. We owe it to the people of France; but we also owe it to you, who are the leading players in the financing of our economy. Happy New Year to you, your staff, and our country. 3/3  BIS central bankers' speeches