samchain/econo-pairs-v1 huggingface dataset:
The chart shows a subset of a larger model, which also includes equity volatility, house prices, bank capital and macroeconomic control variables. The second standout from the chart is that developments in debt prior to the 2008 financial crisis would have been sufficient to make an economic earthquake 2% more damaging. As it was, almost 4% of output was lost in the three years between 2008 and 2010. Why did output fall so much more than might have been expected? Was it bad luck? Was the economic earthquake off the Richter scale? Our research concludes that the 2008 recession was not the result of an unusually severe earthquake. The UK’s current account deficit and debt run-up prior to the crisis meant we were closer to the fault line. As important was the fact that the banking system did not have the strength to reflect that. As a result, it collapsed, tightening financial conditions for the economy and adding to the damage. Once we account for these factors, the depth of the 2008 recession is consistent with a 1-in-20 economic earthquake (Charts 14 and 15). It wasn’t that we were hit by a seismic event of unprecedented scale. The scale of the economic damage was avoidable.

The UK’s current account position creates some additional vulnerability, but recent developments in overall corporate debt are neutral (though with a caveat I’ll come on to explain), and household developments slightly offsetting. Rather, the underlying level of economic vulnerability has returned to a standard level after a long period in the aftermath of the financial crisis in which it was subdued as debt levels fell back. That’s consistent with the Financial Policy Committee’s judgement that the degree of underlying economic vulnerability is at a standard level. That judgement drives our assessment of how resilient the financial system needs to be, in particular how large should be the buffers of capital banks run with. 10  All speeches are available online at www.bankofengland.co.uk/news/speeches  10  Chart 13 ‘Adding up’ the impact of debt vulnerabilities on the possible damage caused by a 1-in-20 economic earthquake  Notes: Figure based on Aikman et al. (forthcoming). The black line ‘adds up’ the combined impact of each vulnerability indicator at time t on the 5th percentile of real GDP growth cumulatively over the next three years. For example, the point labelled 2005q1 shows the estimated impact of these vulnerabilities on the left tail of GDP growth over the period 2005q1-2008q1. The decomposition uses full sample coefficient estimates (based on 16 advanced economies 1980-2017), applied to the UK data. Each indicator enters relative to its UK historical average, so that if credit growth and the current account deficit were at their average levels, the bars would be zero.
Our housing market has indeed a lot of growth potential: it is true that mortgage lending has yet to become as common as it is in many other countries. However, we should bear in mind, first, that mortgage debt has been taking years to accumulate there and, second and most important, the accumulation of this debt should tally with a rise in household incomes. Hence the need to prevent the emergence of a bubble in this market and the real risks this bubble would carry, in order of priority, for people, developers and banks. This sector needs a long-term development 1/4  BIS central bankers' speeches  plan based on market principles. I cannot agree more with the Speaker on this subject: the government’s concessional lending programme indeed helped stave off market failure at times of crises. At this point in time however, we are seeing that demand for mortgage loans is in a way increasingly translating into a stampede, leading to unjustified price growth in several regions. Ultimately, developers and banks stand to take advantage of this programme, rather than consumers. It would do no harm to support them; however, our key objective is the availability of housing. We should focus increasingly on targeted support programmes, which includes the efforts to support the overall supply and demand balance. Let me explain: there are more and more consumers willing to make use of low rates and take out mortgage loans. They could service the debt, but they have no money for the down payment.

These are: •  The public announcement of medium-term numerical targets for inflation with due advance notice. BIS Review 95/2000  2  •  The recognition of price stability as the sole objective of monetary policy without other nominal targets. •  Increased transparency of the monetary policy strategy through communication with the public and the markets about the plans, objectives and decisions of the monetary authorities. •  An independent central bank both in the context of the institutional and operational arena. •  Development of appropriate policy instruments and a clear understanding of the underlying monetary policy transmission mechanism or at least a reliable model for forecasting medium to long-run inflation. The announcement of inflation targets communicates the central bank’s intentions to the financial markets and to the public, and in doing so helps to reduce uncertainty about the future course of inflation. Many of the costs of inflation arise from this uncertainty or variability rather than from its level; for example, uncertainty about inflation exacerbates the volatility of relative prices and increases the riskiness of non-indexed financial instruments and contracts set in nominal terms. By making explicit the central bank’s medium-term policy intentions, inflation targets improve planning in the private sector, enhance the public debate about the direction of monetary policy, and increase the accountability of the central bank.
The government therefore controls banks that account for about 50% of bank lending in Norway. The stake in the two largest commercial banks is to be reduced to a third. State ownership of banks constitutes, in my opinion, a structural weakness in the Norwegian financial system. There is a risk that the ownership function is not exercised actively enough. A lack of control on the part of active owners may give the board and management excessive influence in these banks. In the long run this could lead to less efficient operations and lower profitability. Private owners with lower capital stakes may also wield a disproportionately high level of influence if the state as owner is too passive. The political parties widely disagree on the issue of government bank ownership. This may be a disadvantage when decisions on mergers and other structural measures are to be taken. When there is a profitable basis for growth, which requires increases in capital, the state-owned banks must pose the following question: is it possible to gain political support? They cannot merely ask: will investors find this profitable? It is important to reach political consensus on the question of state ownership. One example of a case where the political parties reached agreement on structure and ownership in the 1980s is the petroleum sector.

Euro area banks’ CET1 capital ratios remain at a solid level of about 14%, whereas profitability has stabilised on the back of the strengthening recovery. Some weak banks have been successfully resolved with the impact on the rest of the euro area banking sector being well contained. Notwithstanding these positive developments, important challenges remain, including the still subdued profitability, structural challenges in some parts of the euro area banking sector, such as the presence of excess capacity and cost inefficiencies, as well as – in a few countries – the persistently high stock of non-performing loans (NPLs). On aggregate, however, further progress has been made with respect to resolving NPLs, and a comprehensive action plan to deal with legacy asset quality issues was adopted by the Council of the European Union and is now being followed up by EU and national authorities. The ECB has published guidance to banks on NPLs and a draft addendum, currently subject to public consultation. With respect to financial stability, we observe that at the current stage the euro area’s position in the financial cycle is consistent with the ongoing economic recovery. There are no indications of widespread asset price misalignments and credit developments remain modest. Nevertheless, relatively buoyant real estate dynamics and high household debt levels in some countries warrant careful monitoring. We expect the national macroprudential authorities in the euro area to remain vigilant and ready to use the macroprudential policy instruments at their disposal to counteract the any emerging risks when necessary.
There are national and international arguments for a country to adhere to the Core Principles. The domestic argument is the one of avoiding or reducing the impact of bank problems, not least because they are costly to the macro economy. While the Principles are not intended to prevent single banks from failures, effective regulation and supervision should reduce potential risks and make them easier to identify at an early stage. The international argument for compliance is that other countries will require this before they open their financial markets. The fear of contagion, implying that problems of one country spread into others, remains strong. Conducting an evaluation of compliance towards the Core Principles is especially helpful when a country is in a stage of modernising its financial sector, such as Sri Lanka. The result of the evaluation will identify weaknesses and can serve as a guide to reform measures. It is also the experience of other countries that the result of the evaluation may be a useful tool for the supervisory authority in convincing the politicians of needed legal and regulatory amendments. Conclusions I have touched upon a number of aspects of supervision, all in one way or another related to lessons learned during the last ten years. I shall make no attempt to summarise, just return to my first point that a high quality, risk-oriented and flexible supervision will create credibility for the financial sector 7  BIS Review 66/2000  and make it prosper.

Either new capital must be put into the bank before the transfer of assets or it must be injected into the AMC when the real value of its assets becomes obvious to everyone. Putting the money straight into the bank speeds up the restructuring process. 5  BIS Review 66/2000  Consolidated supervisory authorities I mentioned that supervision should be conducted on a consolidated basis, covering activities in different financial and non-financial sectors. Should also the organisation of the supervisory authority be “consolidated”? Several countries, including the UK, Korea, Australia and others have recently moved in the direction of creating an “FSA” which is responsible for the supervision of banks, securities markets and insurance. In Sweden, we have had an FSA since 1990. Is such a consolidation necessary and useful in all countries? In my view, the optimal structure of the supervisory authority depends on the structure of the individual country. In many countries, banks conduct the most important financial activities while securities markets are less important. Here at least bank supervision must be independent, have adequate resources and skilled staff. This is crucial. In many countries, bank supervision is a part of the central bank. This has benefited bank supervision because the central bank usually has legal independence, adequate resources and can attract qualified staff. Combining bank supervision with securities and insurance supervision will probably imply that supervision will move outside the central bank, since securities and insurance supervision is not normally a task of central banks. In this sense, bank supervision may become weaker.
Modelling the desired behaviors sets a powerful example and serves as a form of behavioral risk mitigation. All of these actions reflect choices that a firm makes, either implicitly or explicitly, that can build cultural capital. On the other hand, cultural capital can also decline or deteriorate as a result of internal choices. For example, overt incidences of misconduct such as a trading scandal or a legal issue, deviations between employees’ actual experiences and a firms’ stated values, or observations of 2/5  BIS central bankers' speeches  inappropriate behavior that is tolerated or even rewarded can all contribute to the depreciation of a firm’s cultural capital. This decline can be self-reinforcing as certain behaviors are rewarded and individuals advance in an organization, or the composition of the workforce changes as employees choose to work at firms with higher cultural capital. The Pandemic’s Impact on Cultural Capital While the discussion so far has focused on how internal choices that a firm or its employees make can impact cultural capital, it is equally true that external factors have the potential to have a similar impact. For example, changes to social norms around what constitutes acceptable workplace practices can alter behavioral norms inside a firm. The nation-wide racial justice movement is another example of an external factor that could impact the internal culture, based on the choices a firm makes in its response. The current COVID-19 pandemic will also surely impact cultural capital in unpredictable and enduring ways.

This assessment is also reflected in the September 2010 ECB staff macroeconomic projections for the euro area, according to which annual real GDP growth will range between 1.4% and 1.8% in 2010 and between 0.5% and 2.3% in 2011. Compared with the June 2010 Eurosystem staff macroeconomic projections, the range for real GDP growth this year has been revised upwards, owing to the stronger than expected rebound in economic growth in the second quarter as well as better than expected developments over the summer months. For 2011 the range has also been revised upwards, reflecting mainly carry-over effects from the projected stronger growth towards the end of 2010. In the Governing Council’s assessment, the risks to this improved economic outlook are slightly tilted to the downside, with uncertainty still prevailing. On the one hand, global trade may continue to perform more strongly than expected, thereby supporting euro area exports. On the other hand, concerns remain relating to the emergence of renewed tensions in financial markets and to some uncertainty about growth prospects in other advanced economies and at the global level. In addition, downside risks relate to renewed increases in oil and other commodity prices, and protectionist pressures, as well as the possibility of a disorderly correction of global imbalances. With regard to price developments, euro area annual HICP inflation was 1.6% in August, according to Eurostat’s flash estimate, compared with 1.7% in July. The small decline in inflation is likely to reflect base effects in the energy component.
The inflation target has had considerable benefits... Apart from this criticism, there is also a line of reasoning that states more clearly that the target definition should be different. It is above all this part of the debate that I will concentrate on in my discussion going forward. I would like to go deeper into two specific areas: wage formation and the exchange rate. It was failures in these two areas in particular that caused, or rather forced, Sweden to  9 It is, for example, worth noting that the terms of reference for the recently presented Riksbank inquiry made it  clear that the baseline should be that “the objective of price stability shall remain central” (Swedish Ministry of Finance, 2016, p. 1). 8 [17]  switch over to the monetary policy regime we have today with a floating exchange rate and inflation target. To provide some background to my continued discussion, allow me to describe the situation prior to inflation targeting. Since the early 1970s, Sweden had been stuck in what could be called a devaluation cycle. Pegging the exchange rate, at least in theory, is the same as setting a target for domestic inflation. The idea is that the domestic rate cannot exceed (or fall below) inflation in the countries to which the domestic currency is pegged, at least not for any longer periods of time. But in order to make the commitment of maintaining a fixed exchange rate credible, it must be supported by other policies.

For example, argued Stack, they like to deliver something they regard as perfect straight away, and they do not like it when their boss finds fault with what they deliver and firmly believe is perfect from the very beginning. They are essentially very disciplined, and that is the gospel truth. As an American, Mr Stack had an unbiased view and a great eye and feel for this sort of thing. And he was in many aspects right and revealed what was hidden to many of us. I can confirm that these similarities between Czechs and Austrians are particularly visible in Central European and international teams. I have been reminded of them on many occasions. The last time was fairly recently, when we were negotiating the new position of our countries in the mighty International Monetary Fund with colleagues and friends from the Austrian central bank. This year we achieved an incredible outcome: Austria, the Czech Republic and Hungary will have the right to appoint an executive director – one of the 24 executive directors in the IMF – each country for a fixed term. As a group of Central European countries we will therefore have the same representation as far larger and more populous  BIS central bankers’ speeches  1  countries.
The MPC is, and must remain, watchful for any sign that higher deficits are pushing up funding costs for companies exposed to them or in any other way inhibiting corporate investment. Nor do I want to pretend that monetary policy has no bearing on these deficits. But it’s important to get any such effects in context and, in this respect, I do want to make one particular point. What really matters here is not, in and of itself, the drop in the yield on bonds (i.e. the rise in their price), but one that’s not been matched by a similar appreciation in pension funds’ assets, equities in particular. However, an independent easing in monetary policy tends to push up the prices of all assets, equities as well as bonds. So it seems an unlikely candidate for the divergence that has been the key problem for DB schemes. Let me explain this a little further. Though their liabilities are discounted purely by the yield on bonds, pension funds tend to hold a broader-based set of assets. In particular, they hold significant quantities of equities. In general, that may well be a reasonable strategy. As the riskier asset, equities have tended historically to outperform bonds. The extent of the outperformance, the so-called “equity risk premium”, is  7  (a) Taken from King and Low (2014). Shows the average 10-year yield of inflation-linked bonds in the G7 countries (excluding Italy) over the period 1985-2013. Between 1985 and 1992 only data for the UK are available.

This will add to the information we already collect from surveys, official sources and the Bank’s Agency network 5  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  5  Chart 5: Uncertainty indicator well correlated  Chart 6: Better correlated with investment than  with GDP growth  consumption  Source: ONS and Bank of England calculations  Source: ONS and Bank of England calculations  Chart 7: Rising uncertainty tends to shift new hiring  The first two speak for themselves: aggregate  towards temporary jobs  GDP growth is strongly correlated with uncertainty; on the demand side, the share of business investment is more sensitive than that of 6  consumer spending . The fourth is interesting. Although employment decisions are more easily reversed than most capital spending, permanent appointments do involve at least some degree of commitment and therefore might be susceptible to changes in uncertainty. The data seem to bear this out. Chart 7 plots the change in the uncertainty measure against the ratio of temporary to permanent job hires (as measured by the REC job market survey). The correlation is clear, including in the Source: REC survey, ONS and Bank of England calculations  most recent data. 6  Charts 5-7 display the bare correlations with uncertainty and don’t necessarily tell you about causation – it’s quite possible that weaker growth increases uncertainty about the future. But even after you attempt to control for this reverse effect, the impact of exogenous changes in uncertainty still appear very significant.
House prices increased further this summer, and the twelve-month rise moved up to 17.7 per cent in August. Residential construction is still high. In 2005, the number of housing starts was the highest since the beginning of the 1980s. As the interest rate level gradually normalises, household interest expenses will increase. Combined with projected lower employment growth and higher inflation, this might reduce growth in household purchasing power in the years ahead. Higher wage growth would have the opposite effect. Overall, moderate growth in household purchasing power is expected to result in lower consumption growth ahead. A gradual increase in the interest rate will probably curb activity in the housing market. Housing investment is expected to grow through this year, albeit less rapidly than last year. Housing investment growth will thereafter moderate further, and may fall somewhat towards the end of the projection period. House price inflation is expected to slow. Household indebtedness has increased in tandem with high activity in the housing market. Growth in household debt (C2) has abated somewhat in recent months, but remains at a high level. Higher interest rates and lower house price inflation will gradually reduce household debt growth in the next few years. Growth in credit to mainland enterprises has also shown a sharp increase over the past year, partly reflecting increased fixed investment. With prospects of continued high capacity utilisation in the Norwegian economy, solid profitability, ample liquidity and a high level of optimism among enterprises, strong growth in investment is expected again this year.

Consumer price inflation among a number of our trading partners is high as a result of rising energy prices, but the increase in prices for other goods and services remains moderate. Continued solid growth among our trading partners is in prospect. As global capacity utilisation increases to a more normal level, demand for Norwegian exports might remain buoyant. More export enterprises are facing capacity constraints. Export growth in the years ahead will probably occur in industries such as the engineering and shipbuilding industries. Production growth is now high in these sectors, and employment is rising after declining for several years. High growth in the global economy has also pushed up prices for non-oil commodities. Rising commodity prices and buoyant activity in markets that are important for Norway have generated growth impulses to the Norwegian economy. Since May this year, commodity prices have varied widely, but on the whole edged up since end-June. International equity markets have stabilised since the turbulence in May, and have edged up since the previous monetary policy meeting. The benchmark index on the Oslo Stock Exchange is now at a good 12 per cent higher than at the beginning of the year. Interest rates are still low among many of our trading partners, in spite of the increases in several countries as a result of rising energy prices and higher consumer price inflation.