samchain/econo-pairs-v1 huggingface dataset:
My reflections on amendments to the framework The fact that the different proposals for amendments in the monetary policy framework all have their advocates among well-reputed economists shows that there are advantages and disadvantages with all of them and that none is clearly better than the others. Personally, I believe, as I said at the beginning, that one needs to think very carefully before changing the current framework at all. One must be very certain that one has come to the end of the road, and we probably aren't there yet, as I see it. For instance, many of the problems I have taken up will be resolved, or at least alleviated, if the global neutral interest rate rises. Although most people believe that it will be low for a long time to come, there are also those who believe an upturn is not that far away. 33  32 Disregarding this long-term argument it is not obvious how a target for nominal GDP growth will contribute to resolving, or even alleviating, the problem of the interest rate’s lower bound. 33 For example, Goodhart and Pradhan (2017) say that global demographic trends in the coming decade will turn around the downward trend in the global neutral interest rate. 15 [24]  Higher inflation target a natural further development But if I were nevertheless forced to take a stand, I would say that I lean towards raising the inflation target as the most natural means of further developing the monetary policy framework.

I shall address policy responses in two steps; first, responses by the ECB and, second, responses by fiscal authorities. Sovereign contagion, the monetary transmission mechanism and the ECB’s Securities Markets Program The intensification over time of the sovereign debt crisis – as also illustrated by the contagion evidence I have just referred to – has presented the ECB with the challenge of preserving the proper functioning of the monetary policy transmission mechanism. In normal times the key interest rates decided by the central bank have an initial impact on short-term interest rates in the money market, and arbitrage relationships further propagate the policy impulse along the maturity spectrum and across different asset classes. Coupled with adjustments of money, credit and financing conditions, monetary policy can ultimately affect prices. The smooth working of this transmission mechanism allows the central bank to fulfil its mandate of maintaining price stability. Security markets, especially sovereign bond markets, have traditionally come to play a distinct role in the transmission of monetary policy in all advanced economies. This occurs  7  P. Donati, (2011), “Modelling spillovers and measuring their impact and persistence: Application to CDS spreads during the euro area sovereign crisis”, unpublished ECB internal manuscript, August. 8  X. Zhang, B. Schwaab and A. Lucas (2011), “Disaster calculus: Joint and conditional measures of euro area sovereign default risk”, unpublished ECB internal manuscript, November. 4  BIS central bankers’ speeches  via three channels. First, government bonds are often used as a reference rate for pricing loans or other asset classes.
At its very first meeting the Committee debated the merits of “gradualism” in adjusting interest rates. Although the debate attracted some interest, looking back over ten years it is hard to see that it had any practical impact. As chart 8 shows, there is no obvious persistent trend in the frequency of rate changes over the lifetime of the MPC. Economic conditions have determined the number and direction of rate changes. There is some indication that the number of changes was lower in the second than in the first five year period. But that reflected the size and nature of the shocks over the respective periods, and also the building of credibility which meant that market anticipations of future actions allowed the Committee to offset shocks by smaller changes in interest rates. It is striking that the MPC is in the middle of the ranking of the major central banks by the number of interest rate changes a year – see table 3. My view, therefore, is that it is the economic data which lie behind the debate and decisions of the MPC. Do you agree? To answer that question the Bank of England asked the Society of Business Economists (SBE) to carry out a survey of its members. The aim was to discover what kind of information was of most use to private sector economists in trying to understand the future path of interest rates at different horizons, and how the communications of the MPC were perceived as part of that process.

Second, there is little evidence that financial markets have in fact been particularly uncertain about the yield curve in the UK. Indeed, a survey of Goldman Sachs traders by their own economists showed that they thought, at longer horizons, interest rates were more predictable in the UK than in the euro area or United States.16 We are less predictable one month ahead for the very good reason, which I have explained before, that we are unable to pre-announce or signal the results of meetings the outcome of which may sometimes be unclear to MPC members themselves until well into the second day. Third, a key principle of our present arrangements is that decisions on Bank Rate are taken by majority vote of the members of the MPC. That is possible because they are voting on a single number – today’s Bank Rate. But there is no equivalent voting procedure which can map from individual views on an entire future path of interest rates to an overall path in a sensible manner.17 It might, or might not, be possible to find a consensus. But how would that square with making decisions on today’s rate by majority voting? The problem illustrates the important principle that communication cannot be divorced from the way decisions are made. Fourth, the Bank of England has tried extremely hard to ensure that forecasts are seen as probabilistic statements. The Bank of England has been publishing fan charts for inflation and output growth for more than a decade.
If bonds are highly substitutable (as might be in the case of UST and JGB) then if Japan were to stop buying US debt instruments the effect on US rates would be minimal. PBoC cannot stop buying foreign debt instruments as it would imply very big appreciation of renminbi, it can change the currency structure of its reserve holdings. This would force a change in composition of debt in hands of private investors and the impact on US rate would be small again. •  in the scenario of rapid adjustment of US current account deficit, for example following sizeable Asian currencies appreciation, current account surpluses in EM would have to correct massively, some countries may find that their current account surpluses are smaller than debt amortizations, and history shows that in 18 percent of cases sudden stops in emerging markets took place under current account surpluses. •  Calvo view implies very low risk of US long term rates going up (high likelihood of soft landing, low likelihood of hard landing), and relatively high risk of some emerging markets experiencing sharp current account reversals and possibly sudden stops. •  Calvo view is reinforced in the recent paper by Faruqee, Laxton, Muir, Presenti (2006) 18 , which shows that even when a new wave of protectionism hits the global economy, the US growth will slow only marginally by 0.2 percent, while impact on Asia could be sizeable, reducing growth by more than 1 percent.

Slower growth, tighter liquidity, and heightened risk aversion in mature markets generally mean lower commodity prices, less capital flows, and higher interest rates for EM borrowers - conditions that helped produce some spectacular financial crises in the past dozen years. Not a pretty picture, and one that begs the question of what lies around the corner“. However, if asset shortages story is correct, then upcoming US slowdown (or brief recession according to some non-consensual forecasts) would likely further increase excess saving (as fading growth prospects will discourage investment projects and encourage more private saving amid rising uncertainty, only partly offset by higher public dissaving due to automatic stabilizers), and lower valuation of US equities will make the world supply of assets even more scarce. In such situation US economy having hard times may not necessarily lead to higher risk premia for emerging markets (as it was the case in the past) rather any increase in risk premia would be used by investors to enhance returns, spread compression will continue, and yield curve inversion may even deepen on major markets, and knock the door in some emerging markets 20 . PIMCO seems to subscribe to this possibility, although they do not use asset shortage argument, but they do say: “Local markets investments may provide the greatest divergence of returns within the EM universe, with those “developing” economies furthest along the road to “developed” market status able to enact traditional policy prescriptions in a slowing global economy and therefore providing enhanced return potential to local fixed-income instruments“.
It is necessary that the people affected by them receive support to enable them to make a living in other industries and in other regions. However, despite the difficulties experienced by some people, these changes have on the whole led to improvements. A lot of work remains to be done to liberalise world trade, which is indicated by the fact that the potential increases in wealth from continued liberalisation are substantial. Calculations made by the World Bank indicate that welfare gains of between USD 400 and 900 billion could be made if all of the current trade barriers were removed. More than half of these gains would fall to poor countries. The agricultural and pharmaceutical industries, where the poorest countries have their largest comparative advantages, would account for 70 per cent of the profits, that is to say, USD 230 billion. For comparison purposes, it can be mentioned that total foreign aid amounts to USD 60 billion a year, while the OECD countries’ total agricultural subsidies are USD 330 billion a year. Increased trade liberalisation is therefore a better means of achieving wealth than foreign aid could ever be, because, to paraphrase the Chinese proverb, “if you give your friend a fish you will feed him for a day, but if you allow him to fish he will be able to feed himself for a lifetime”.

However, a historical warning may be appropriate; experiences show that confidence in integration, the market and the open society can be rapidly undermined in the event of major economic crises and political instability. This happened in the First World War, which broke off the globalisation process of the time. Later, the spread of Communism after the Second World War forced the previously successful industrial nations in central Europe out of the international community. At present, the main threat to a free exchange perhaps stems from the risk of an escalation of terrorism leading to more closed borders. It is therefore important that we constantly explain why tendencies towards increased protectionism and introversion are not good for growth. Globalisation cannot be taken for granted - it must be defended. Future possibilities and challenges I now intend to look ahead to the possibilities and challenges that follow in the wake of the increased integration and technological changes. I have already mentioned the importance of safeguarding and developing the advances already made, and this cannot be stressed too much. Nor should we forget that macro stability, that is to say, price stability and sound public finances, is an important condition for stable growth. The Swedish experiences over the past decade are a very good example of this. A stable economic policy framework is particularly important in the light of the demographic challenges that will soon have a major effect on the economies of many countries, particularly in Europe.
In this context, a key initiative is the proposal for the establishment of a European Systemic Risk Board (ESRB), which will be supported analytically and logistically by the ECB and for which Lucas has already initiated a lot of groundwork. The ESRB will be an independent body responsible for conducting macro-prudential oversight of the EU’s financial system as a whole. Once the legislative process is completed, the creation of this new European policy function will fill a significant gap in the ability to detect, assess and ultimately contain the build-up of risks. In particular, the ESRB will be tasked to collect information relevant for systemic risk from across the EU. This should help overcome the significant information gaps which have hindered a comprehensive risk surveillance thus far, for instance with regard to the interlinkages among the major crossborder financial institutions. The ESRB should be seen as the component of a global framework of macro-prudential oversight. This should support its effectiveness by also allowing it to contribute to the assessment and containment of global risks, which in turn may also contribute to the mitigation of risks in Europe. The Financial Stability Board, the IMF, as well as national authorities, are all actively engaged in the development of a comprehensive framework of macro-prudential supervision, which also takes into account the risks arising from systemically important financial institutions. The crisis demonstrated that only internationally  2  BIS Review 70/2010  coordinated initiatives are truly effective in addressing risks and vulnerabilities in the closely integrated financial system.

Birgir Ísleifur Gunnarsson: Interaction of monetary and financial stability in small open economies Welcoming address by Mr Birgir Ísleifur Gunnarsson, Chairman of the Board of Governors of the Central Bank of Iceland, at the SUERF Seminar, Reykjavík, 3 June 2004. *  *  *  Ladies and Gentleman On behalf of the Central Bank of Iceland, I warmly welcome you to this seminar on the Interaction of Monetary and Financial Stability in Small Open Economies. It is an honour for us to co-sponsor the seminar with SUERF. We are grateful to David Llewellyn, Eduard Hochreiter, Beatrix Krones and Micheal Bailey at SUERF for the excellent cooperation which we have enjoyed with them in its preparation. The topic of the seminar is an appropriate one which is attracting increasing attention, both within and outside central banks. I trust that the presentations and discussions over the next two days will leave us with a better understanding of this interaction and of the issues on which we wish to focus our attention in the period ahead. We will be assisted by very impressive speakers and participants. I wish to extend my gratitude to those who have agreed to give lectures and present papers and I look forward to inspiring and stimulating contributions by them. In this address, I will briefly describe our own recent experience in the areas of monetary and financial stability. The current Act on the Central Bank of Iceland was adopted in 2001.
Too many participants neither felt responsible for the system nor recognised the full impact of their actions. Bad behaviour went unchecked, proliferated and eventually became the norm. Yet a system reliant on total regulation and large ex post sanctions is similarly bound to fail because it promotes a culture of complying with the letter of the law, not its spirit, and because authorities will inevitably lag developments in fast-changing markets. A more comprehensive and lasting solution combines public regulation with private standards and then buttresses both with incentives to increase materially the understanding and accountability of individuals. In the UK, new laws and regulations are doing just that.20 Compensation rules now align risk and reward, with a significant proportion of variable compensation deferred for up to seven years across the banking industry. Regulatory references mean that the histories of those with a record of misconduct will be known to anyone considering hiring them.21 Authorities have also used their convening powers to encourage market participants to develop standards of market practice, such as the new Global FX Code and the FMSB standards for FICC markets.22 23 The UK Senior Managers' Regime (SMR) gives teeth to voluntary codes by incentivising firms to embed them and by re-establishing the link between seniority and accountability.24 Under the SMR, the most senior decision-makers of banks, insurers and major investment firms can now be held individually accountable if they fail to take reasonable steps (including training or proper oversight) to prevent regulatory breaches in their areas of responsibility.

But recall that the last two vintages of subprime pre-crisis were twice as likely to default as their predecessors, and that the leveraged loan market shows few signs of slowing. ******************** Turning finally to the lie that “This Time is Different”. If the experience of the financial crisis teaches us anything, it’s humility. We cannot anticipate every risk or plan for every contingency. But we can, and must, plan for failure. That is how we can create an anti-fragile system that is robust to both the intensification of known risks and the crystallisation of Rumsfeldian unknowns. An anti-fragile system requires resilient banks. A decade ago, major banks were woefully undercapitalised, with complex business models that relied on the goodwill of markets and, ultimately, taxpayers. Large global banks can now stand on their own. 34  See FSB Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities (2017). FPC record (Q3 2018). 36 Over the past year, leveraged lending has grown by around 15% (or 10% of total advanced economy credit to corporates) as compared with an estimated 13% growth (or 13% of the total share of US mortgages), for the sub-prime market to 2007. 37 With maintenance covenants falling from close to 100% in 2010 to around 20% now. 35  10  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  10  Their common equity requirements and buffers are now ten times higher than the pre-crisis standard.
Another possibility is a shortage of high-quality safe assets,10 with countries like China accumulating reserves particularly in the form of US Treasuries. That in turn will also have increased the demand for substitutes, including the government debt of other advanced economies. But recent events in the euro area have highlighted the fact that the debt of  8  For instance, if an employer is putting aside an additional 15% of the wage bill to cover accumulating pension liabilities and the price of buying a given stream of future income rises by 20%, then he would now need to put aside an additional 3% of the wage bill to meet those obligations. 9  See Ben Bernanke (2005), “The Global Saving Glut and the US Current Account Deficit”, Sandridge Lecture, Virginia Association of Economics, Richmond, Virginia, 10 March. 10  See Ricardo Caballero, Emmanuel Farhi and Pierre-Olivier Gourinchas (2008), “An Equilibrium Model of Global Imbalances and Low Interest Rates”, American Economic Review, pp.358–393. BIS central bankers’ speeches  5  some sovereigns is not as safe as market participants thought. That has led to increased demand for the debt of those sovereigns that are still regarded as safe, including that of the United Kingdom. How long such a “safe-haven discount” persists depends not only on what happens in this country but also what happens abroad: the demand for one country’s bonds as a safe haven depends in part on how risky those of other countries are thought to be.

What is probably more relevant to the supply of credit at the current juncture is the amount of bank capital and the cost and availability of bank funding. QE may then boost credit supply indirectly if it leads investors to increase their demand for bank debt and equity. As you will be aware, the Monetary Policy Committee has so far purchased £ billion of gilts, £ billion in a first phase during the worst of the recession in 2009 (QE1) and £ billion in a second phase as the economy slowed at the end of last year and which was  1  Cash can be thought of a zero-interest perpetuity issued by the state. But it has value because it can be used in transactions. The MPC’s asset purchases are actually financed by issuing bank reserves which pay Bank Rate rather than nothing and which can be easily converted into cash. BIS central bankers’ speeches  1  completed shortly before our latest policy meeting (QE2). To give some context, that represents around a quarter of the total stock of UK government debt in issue. It is, though, important to remember that throughout this time the Debt Management Office has been issuing substantial net quantities of new gilts in order to fund the Government’s budget deficit. So, despite the scale of our purchases, the stock of conventional gilts held by the private sector is actually higher now than when we started our purchases (see Chart 1). What impact have our purchases had on asset prices?
There can hardly be any doubt that in the 1950s, price changes would have been less abrupt in Norway if the devaluation had not taken place.” See Odd Aukrust (1965): Tjue års økonomisk politikk i Norge: suksesser og mistak, [Twenty years of economic policy in Norway: successes and mistakes] Articles from Statistics Norway, no. 15. 16  Erlend Loe (1999): L, J. W Cappelens forlag, p. 376. 17  Loe (1999), pp. 397–398. 4  BIS Review 147/2010  against serious missteps, which seems to be particularly important when decisions are made under uncertainty. This notion is part of the justification for the jury system in our courts of law. The French philosopher Marquis de Condorcet’s now well known jury theorem states that the higher the number of the group is, the higher the probability is that the group will make the correct decision by majority vote. 18 Group decision making has been widely accepted, not only by the courts but also by business, public administration and elected governing bodies. In his book The Wisdom of Crowds, James Surowiecki cites a number of examples where large groups outperform individuals or small groups of experts. Contestants on the television game show Who Wants to Be a Millionaire? have various so-called “lifelines”, including telephoning a smart friend or asking the studio audience for help. It has transpired that the studio audience is the contestants’ absolute best bet.

Given a small-sized and open economy, the increase and stability of exports is of outmost importance. Therefore, the research work, the reforms and the strategic decisions should be adopted in line with this target. In this respect, the role of banking systems acquires a particular importance, which should carefully identify the primary and profitable sectors and should provide their ongoing financing. Banking credit has been and remains one of the main instruments which shall provide the sustainable performance of the economic and financial activity at home. For this strategy to be successful, it must include as one of its substantial constituents the philosophy and priorities of the Western Balkan regional development. This need does not only derive upon the competition requirements and the achieving of the economy of scale, but also upon our common target for the European integration. During the recent years, I have continuously highlighted that the key of the successful integration in the European Union is the regional cooperation. There are many reasons backing the conclusion that our models of growth must be seen as complementary and not competitive to each-other. It is indispensable that the complete process of structural reforms takes place quickly and in a coordinated way, which precedes the membership to the European Union. Only in this way the whole region will converge naturally, avoiding episodes of misbalances within the bosom of the European family upon the membership. This will be a real contribution to the long-term sustainability of the European developments.