samchain/econo-pairs-v1 huggingface dataset:
During the forecast period, we expect CPIF inflation to first fall to around 1 per cent, but then to rise again to around 2 per cent at the end of the forecast period. CPI inflation fell dramatically during the crisis as a result of our repo rate cuts, but it will increase to a level higher than CPIF inflation as we increase the repo rate to a more normal level. When we compare various measures of resource utilisation with the forecasts we make for inflation in the latest Monetary Policy Update, the following picture emerges. Underlying inflation measured in terms of the CPIF begins to rise in 2011. By that time, resource utilisation measured in terms of variables such as the RU indicator, shortage of labour in the business sector, capacity utilisation in the manufacturing industry, the employment rate and the HP trend-based measures the employment gap and the hours gap will probably already have risen to above-normal levels. Underlying CPIF inflation will then rise to 2 per cent at the end of the forecast period. Resource utilisation measured using the GDP gap based on HP trends will then have reached a normal level. The HP gap will then be more or less zero. My own assessment is also that the GDP gap will then have reached the zero level. However, even by the end of the forecast period, unemployment will not have reached the average level in the years before the crisis. Our forecasts thus paint a rather complex picture.

In the years before the crisis, resource utilisation was probably higher than the HP gap indicated at that point. This view is also suggested by the fact that GDP growth was high, employment was increasing rapidly, underlying inflation was rising to above 2 per cent, and that household borrowing and house prices were similarly rising rapidly. (Figure 1. GDP gaps in September and in real time). This is a widely known problem that occurs internationally, and not just here. Orphanides says that one should not use the GDP gap as a measure of resource utilisation, due to the uncertainty in estimates of the gap. He shows, for instance, that the International Monetary Fund’s (IMF) calculations of the GDP gap for the United States at different points in time have yielded conflicting results with regard to resource utilisation and that these have therefore led to incorrect economic policy recommendations. He draws the conclusion that one should focus more on GDP growth than on the GDP gap, which, he claims, may provide more robust decision-making data. 2 There are also other ways of measuring resource utilisation. A common method is to use a production function where potential GDP is determined by potential labour productivity and the potential number of hours worked. Other possibilities include using so-called UC  2  See, for example, Orphanides, A. (2010) “Monetary Policy Lessons from the Crisis”, Central Bank of Cyprus, May 2010.
In the meantime, as the inflation expectations indicate figures above the medium-term target of 4 percent points, we think that there are many things to do towards disinflation. The Central Bank, not being content with what has been achieved so far, will continue to further increase the efficiency in expectations management in forthcoming periods. The rest of this text provides the general framework of the monetary and exchange rate policy to be implemented in 2008. The first part addresses the strategic framework of the monetary policy, while the second part explains the exchange rate policy, foreign exchange auctions and guidelines for liquidity management. BIS Review 4/2008  1  Inflation targets Inflation targets have been set as “point target” since 2006. The target has been defined as the end-year Consumer Price Index (CPI) inflation calculated by the annual percentage change of the Consumer Price Index (CPI) and the target horizon, has been set as 3 years in line with 3-year budget implementation. The Central Bank continues this practice in 2008 as well. By considering the structural transformation of the economy, convergence process to the developed countries and the pricing behavior that remained from high inflationary period, a target of 4 percent has been considered appropriate for the medium-term as agreed with the government. Therefore, inflation targets for 2008 and 2009, which were previously announced as 4 percent, are maintained and the inflation target for 2010 has also been set as 4 percent.

For example, if an entrepreneur wants to start a new business in Spain, he or she has to go through 10 separate procedures, while doing so in Slovenia requires only two.14 In Latvia, incidentally, the figure is 4 procedures. Our economic structures in Europe also tend to be less conducive to technology adoption than in the US, a channel which has been found to be highly favourable for productivity growth.15 Indeed, an important explanation why, from the 1990s onwards, Europe has lagged behind the US in terms of productivity growth is the slower adoption of information and communication technology, in particular in the services sector.16 The reasons for this are several, but two themes are worth highlighting for the current policy debate. One is the relatively closed nature of services markets within Europe, which slows down the diffusion of new technologies. Given the relative importance of services in our economies, this weighs on aggregate productivity growth, as well trickling down to other sectors.17 This calls for the completion of the single market in services. A second theme is the relative rigidity of national labour markets. Reaping the productivity gains from adopting new technology tends to require fundamental organisational restructuring – for instance, due to the automation of certain tasks. This means that firms need to have the flexibility to reallocate workers to different tasks, which in turn requires them  13  Bartelsman, E.J., J. Haltiwanger and S. Scarpetta (2013), “Cross-Country Differences in Productivity: The Role of Allocation and Selection”, American Economic Review, vol. 103(1).
Corporate credit markets are stretched. Finance is cheap because bond investors seem to be less concerned about the safety of their investments. So in this speech, I want to consider the degree to which these markets have become stretched, and how well conditioned the wider economy is for that stretching. Will it cause a strain? 1. When do stretched asset prices (not) strain the wider economy? Before we turn to the world today, I’d like to frame the issue. I start from the point that asset prices are not - horror of horrors - always a reflection of the rest of the economy. 3  They can be stretched above levels supported by ‘fundamentals’ as investors squeeze the compensation they get for the risks they take. When they later adjust, some investors have a bad day and others a good one, but the ups and downs of asset markets don’t have to be a problem for the wider economy. For stretched asset prices to strain the economy, I think one or more of the following channels needs to be active. All share the common theme of the wider economic body not being fit enough to cope. 3  See Claessens and Kose (2017) for a review. 3  All speeches are available online at www.bankofengland.co.uk/speeches  3  i)  The level of debt in the corporate sector comes to rely on stretched asset prices.

9  This was comprehensively covered in a recent speech by Jan Vlieghe. See Vlieghe, G (2017), ‘Real interest rates and risk’; 8  All speeches are available online at www.bankofengland.co.uk/speeches  8  Stretched asset prices have not been matched with less prudent financing. But developments in the world economy show that we cannot take for granted that it will stay that way. The IMF Global Financial Stability Report showed how, across the G20, appetite of investors for risk has loosened financing conditions and propelled nonfinancial corporate debt levels to new highs. Even excluding China (where corporate debt developments deserve much more attention than I can give them here), between 2006 and 2016 emerging market economies in the G20 saw corporate debt increase from 42% to 57% of GDP, and advanced economies saw it go from 80% to 86% of GDP. In the United States, levels of (non-financial) corporate sector debt have been testing previous highs. Moreover, averages can mask important underlying shifts. Leveraged lending in the US reached new highs last year. 10  Net debt to EBITDA ratios have been trending upwards in recent years and underwriting  standards have been loosening. Three quarters of issuance is now ‘covenant-lite’. 11  All this goes to show that it’s more than a hypothetical that levels of corporate debt can come to rely on stretched credit markets and investors’ lack of concern for their own safety.
Moreover, Iceland’s investment-grade credit ratings from Moody’s and S&P were preserved throughout the crisis. This is why the sovereign has been able to tap international capital markets twice so far since the crisis struck. You can see from this that the key characteristics of crisis management and bank resolution in Iceland were that shareholders lost all their equity, unsecured bond holders were bailed in, vital infrastructure elements of the domestic banking system were preserved, and deposits were given preference over other unsecured claims. Today this seems in many ways a standard approach, but it was not universally well received at the time. On the whole, these measures were successful, which mitigated the effect of the banks’ failure on the economy. The domestic payment system functioned more or less seamlessly throughout, and there was continuous access to deposits and basic banking services in  2  BIS central bankers’ speeches  Iceland. International payment flows were seriously affected, however, not least because of the freezing order imposed by the British authorities on Icelandic banks, but also because of general distrust among foreign counterparties. Let me now turn to the macroeconomic part of the story. I will paint with a rather broad brush here, both because time is limited and because the issues are somewhat better understood.

Már Guðmundsson: Iceland’s crisis and recovery – facts, comparisons, and the lessons learned Speech by Mr Már Guðmundsson, Governor of the Central Bank of Iceland, at the Institute of International and European Affairs, Dublin, 27 April 2015. *  *  *  Accompanying charts can be found at the end of the speech. Chairman, Ladies and Gentlemen, It gives me great pleasure to speak here at the Institute of International and European Affairs in Dublin about Iceland’s crisis and recovery and some of the lessons that could be learned from this experience. This is not least because of our historical bonds and the affinity that I feel exists between our people, to which we can now add the common experience of being hard hit by the Great Financial Crisis. It is well known that Iceland was the first advanced country to experience a full-scale banking crisis during the autumn of 2008, when its three big cross-border banks failed. It was also the first advanced country to go on an IMF programme. What is probably less well known is that at that point, Iceland was already on its way into a recession after an unsustainable boom and serious overheating during 2005–2007 and a currency crisis in the first half of 2008. The banking collapse and the associated wealth loss and further currency depreciation made the recession significantly worse, of course, as did the recession that hit the global economy in the fourth quarter of 2008.
A little bit of stodginess? Speech given by Sir Jon Cunliffe, Deputy Governor Financial Stability, Member of the Monetary Policy Committee, Member of the Financial Policy Committee and Member of the Prudential Regulation Committee  Cumbria Chambers of Commerce, Kendal Friday 13 July 2018  1  All speeches are available online at www.bankofengland.co.uk/speeches  “In my view both as a citizen and as a policymaker, a little stodginess at the central bank is entirely 1  appropriate”  Alan Blinder’s 1999 advice to central bankers, quoted above, was not, I am pleased to say in these fitness conscious times, an injunction on the appropriate nutrition for monetary policy makers. Rather, it was advice on how to respond to uncertainty or, to be precise, the need for caution when faced with a particular type of uncertainty – uncertainty about the impact of monetary policy on the key variables in the economy it seeks to influence. But I would like today to look at the case for ‘stodginess’ when faced with uncertainty more generally about possible changes in how the economy works and the ‘model’ of the economy that policymakers necessarily have in their minds. Uncertainty, as I have noted before is the natural environment of monetary policy. There is a large academic literature on the optimal way for policy to deal with different types of uncertainty. But I would like to look at these issues first in the context of my time on the MPC and then in relation UK monetary policy going forward.

The Federal Reserve has many responsibilities, most closely linked to the execution of U.S. monetary policy and the regulation and supervision of the U.S. financial system. In fact, the official title of the Federal Reserve Act includes the phrase “to establish a more effective supervision of banking in the United States,” so supervision has been a core responsibility of the Federal Reserve from the beginning. But what does “a more effective supervision of banking” mean? At the highest level, the Federal Reserve’s mission for supervision and regulation is to promote a safe, sound, and stable banking and financial system that supports the growth and stability of the U.S. economy and a fair and transparent consumer financial services market. That’s a lot, so it is useful to drill down a little; I can do that by describing what we do on an ongoing basis at the Federal Reserve Bank of New York. At the New York Fed, we operate under delegated authority to supervise the financial institutions in the Second Federal Reserve District, which encompasses New York, parts of New Jersey and Connecticut, the Commonwealth of Puerto Rico, and the U.S. Virgin Islands. This area includes enormous diversity in institutions from state member banks with total assets of less than $ million operating in a local community to bank holding companies with trillions of dollars of assets operating on a global scale.
28  All speeches are available online at www.bankofengland.co.uk/speeches  28  Chart 9: Mean and median UK-listed firms’ mark-ups Mark-up (e.g.

Market Power and the Macro-Economy – A Simulation Approach  Having assessed some evidence on the evolution, and macro-economic implications, of increased mark-ups and market power, the next question is what implications these may have for the setting of monetary policy. This does not appear to have been an extensively examined area of research, whether among academics or 17  policymakers. What follows is an initial exploration of some of the potential channels. One simple way of beginning to gauge how a rise in mark-ups might affect the economy and monetary policy is to simulate their impact using a macro-economic model. For this purpose, we model the economy using the Bank of England’s in-house DSGE model, COMPASS. Taylor rule, with interest rate smoothing. 19  18  Monetary policy is assumed to follow a simple  The simulations are shown for a variety of different values of the  relative weight policymakers place on output and inflation deviations from target in the Taylor rule. Chart 13 considers the impact on inflation, the output gap and monetary policy of a temporary mark-up shock that delivers a one percentage point increase in annual inflation. The dynamics of the economy are largely as we would expect following an adverse supply shock. The inflation rate rises, and real GDP usually contracts, in both cases temporarily. Although temporary, these disturbances are often material and always persistent, despite monetary policy acting to damp these fluctuations. The reason monetary policy struggles to damp these fluctuations is because a mark-up shock is trade-off inducing.
My predecessor at the helm of the Dallas Fed, Bob McTeer, used to say, “The first rule of forecasting should be “don’t do it.” The second rule, he would add is, “If you give a number, don’t give a date.” But given the assignment to venture a vision as to where the fed funds rate would be in each of the next three years and over “the longer run” to the nearest onequarter of one percent, the 17 intrepid souls of the FOMC, including yours truly, did so. Only three envisioned that the fed funds rate might rise from current levels by year-end 2012; six saw it doing so by year-end 2013 and 11 by year-end 2014. Over the longer term, the 17 members envisioned a funds rate of between 3¾ and 4½ percent. Bob McTeer’s admonishment clearly does not resonate with the FOMC. And yet I would caution, again, that at best, the economic forecasts and interest-rate projections of the FOMC are ultimately pure guesses. I have yet to find a single economist on this planet who consistently forecasts the economy accurately, let alone projects with any precision the interest rate on overnight funds one year out or far into the future. If you examine the record of the Blue Chip economists or even of our superb Federal Reserve staff, you will find confirmation of a paucity of reliable economic forecasts.

I note that even publicly traded companies that wrestle with the relatively easy task of providing forward guidance on revenue and earnings find that exercise especially vexing; most won’t venture beyond forecasting the upcoming quarter – and that is after they already have a month’s worth of the quarter’s data in hand! In this morning’s Financial Times, Charles Goodhart, professor emeritus at the London School of Economics and former member of the Bank of England’s Monetary Policy Committee, claims to have examined the record of three central banks that have most prominently engaged in the practice of providing multiyear rate forecasts. He concludes: “The record for central banks in New Zealand, Sweden and Norway is not encouraging. In the short run, over the next three months and to a lesser extent over the subsequent quarter, these central banks do have additional (inside) information about their own future actions. Beyond this, however, the extra informational content of those central bank forecasts is zero. Moreover, the market knows that central bankers have no superhuman forecasting ability and will tend to view the supposed longerterm forecasts as a version of jawboning, attempts to persuade the market to change its mind for immediate policy purposes. Again, there is little empirical evidence that the market responds to such jawboning, and why should it when the central bank is as ignorant of the longer-term future as they are?”6 I don’t in any way consider my learned colleagues on the FOMC to be ignorant.
This action increases the amount of Treasury bills in circulation, thereby creating a greater stock of investible assets for nonbank money market investors – an outcome that tends to put upward pressure on Treasury bill rates and potentially other term money market rates. 38  Domestic depository institutions are subject to a regulatory leverage ratio that is calculated as an average over the quarter and thus experience less variation in balance sheet costs at the end of quarters. 39  The Federal Home Loan Banks (FHLBs) are one type of institution that requires this feature for some of their cash holdings. Prior to liftoff, the FHLBs, which have access to unremunerated deposit accounts at the Federal Reserve, were able to use this to support their negotiating position with borrowers at quarter-ends, but now with rates further above zero it is less effective in this regard. 40  ON RRP does not always provide a completely firm floor on the tri-party repo market. For example, late-day funds can generate some softness. Also, there is evidence that some lenders in repo markets are reluctant to frequently switch their counterparties. However, ON RRP is otherwise a close substitute to repo with a private counterparty. In particular, since all tri-party repo is unwound at the same time, there is no possibility of early return of funds, which, as I mentioned earlier, is a significant benefit some federal funds and Eurodollar borrowers are able to offer. 41  Prime funds’ share of participation is significantly larger on quarter-end dates.

Term deposits are likewise similar to IOR; TDF offers a somewhat higher rate to banks that are willing to lock up their funds for a time. 22  The FOMC’s decision to use a target range for the federal funds rate, instead of a point target as was used prior to December 2008, further supported the use of this operating framework. The FOMC’s use of a range supports this framework by underscoring the fact that variation of the effective rate within that range is expected and is consistent with the level of interest rate control it desires. 23  Frost, Logan, Martin, McCabe, Natalucci, and Remache, “Overnight RRP Operations as a Monetary Policy Tool: Some Design Considerations,” February 2015. 24  It seems particularly appropriate to pay close attention to the integration of money markets in light of the increase in bank and dealer balance sheet costs that has ensued from post-crisis changes in financial regulations and other factors. 25  See Chair Yellen’s September 17, 2014, press conference. “To begin normalization, the Committee will raise its target range for the federal funds rate. The Committee expects that the effective federal funds rate may vary within the target range, and could even move outside of that range on occasion, but such movements should have no material effect on financial conditions or the broader economy.”  26  See the September 2014 Policy Normalization Principles and Plans.