samchain/econo-pairs-v1 huggingface dataset:
Transparency and regular evaluations are necessary to maintain the legitimacy of the central bank's operations. They also give the central bank stronger incentives to fulfil its mandate and motivate the central bank to develop the monetary policy analysis in the best possible way. It also appears that detailed evaluations of monetary policy are becoming increasingly common. In Sweden, the parliamentary Committee on Finance conducts an annual evaluation of the monetary policy conducted over the last three years. An external and more comprehensive evaluation of the monetary policy conducted in Sweden between 1995 and 2005 was carried out on behalf of the Committee on Finance by professors Francesco Giavazzi and Frederic Mishkin. The Committee on Finance has decided that Swedish monetary policy should be evaluated by external experts every fourth year. Norges Bank (the central bank of Norway) includes an evaluation of its monetary policy in its Annual Report. On behalf of the Norwegian Ministry of Finance, an annual evaluation is also carried out by Norges Bank Watch, which consists of a group of independent experts. I myself have taken part in two evaluations – an evaluation of ten years of monetary policy in New Zealand on behalf of the country's Minister of Finance in 2001 and an evaluation of monetary policy in Norway as Chairman of Norges Bank Watch in 2002. 1 Evaluations of monetary policy are thus important and appear to be becoming common practice. One must therefore ensure that reasonable principles and appropriate methods for evaluations are developed and applied.

Figures 8 and 9 show the Riksbank's forecasts for inflation and the output gap since the beginning of 2007 and the sum of squares for the inflation-gap and output-gap forecasts. 9 It is apparent that the initial situation for the forecasts can be very different. If, for example, we compare the forecast in February 2007 with the latest forecast from February 2009, it is obvious that it was much easier to make the earlier forecast "look good". The forecast at that time indicated that the deviations for the inflation target and the output gap were small – the sums of squares were close to origin. This can be contrasted to the situation in early 2009 when the fluctuations in both of the forecasts were considerable and the sums of squares were far up to the right in the figure. Finally, before I move on to discuss the evaluation of monetary policy after the event, I would like to say that ex ante evaluations have the major advantage that they can be carried out on an ongoing basis in real time and that you do not need to wait several years to see the outcomes for inflation and the real economy. I would like to see competent ex ante evaluations become a lasting feature of the ongoing public debate on monetary policy so that they could constantly encourage the central banks to improve their analyses and their policies.
Sustaining recent progress is a key priority for the Bank of England as I know it is for the SPE. People often ask me what my professional responsibilities in the Bank are. The most formal description is contained in the Bank’s Senior Managers and Certification Regime return. The SM&CR is a critical element of the post-crisis regime for accountability in the whole financial sector, ensuring there is a clear public line of sight running from the senior leadership through to every key function carried out by a financial institution. 2  The SM&CR is an essential part of the soft infrastructure underpinning improved conduct and therefore fairer and more effective financial markets in the UK and globally. 3  The SM&CR entry for me is long, and so I will just flag a few of my key responsibilities. What these boil down to is that among the Governors I have operational responsibility for the Bank of England’s balance sheet. It is the Bank’s balance sheet that is going to be the focus of my talk today. The balance sheet is integral to the operations undertaken in the areas I oversee, Markets and Banking, Payments and Financial Resilience. And it is central to the Bank’s mission for monetary and financial stability: the balance sheet is the hard infrastructure that supports much of the Bank’s policy activity. For most of the time it may not be as newsworthy as some of the tools it supports, like Bank Rate, QE or “lender of last resort”.

But the moves are still small relative to those we saw ahead of the Referendum. On a day-to-day basis, we continue to use our balance sheet in support of monetary policy and financial stability. Our regular market operations will continue to keep market rates anchored to Bank Rate, and we will continue the programme of gilt reinvestments that maintains the stock of APF purchases at its target level for as long as the MPC choose to maintain it there. And our monthly Indexed Long-Term Repo liquidity facility continues to see regular usage, with £ allocated in September’s operation. Looking further ahead, the TFS is now closed to new drawings, and will gradually unwind in the coming years as banks repay their loans. In June the MPC gave updated guidance that it will not reduce the stock of asset purchases until Bank Rate reaches around 1.5%, and any decision on what happens then will of course be a decision for the MPC of the time and will depend on the economic circumstances prevailing at 28  the time. As and when our balance sheet shrinks, it is likely that its size will return to being determined by the level of SMF participants’ demand for reserves (as well as the amount of banknotes in circulation), rather than by the quantity supplied.
Our interest in bank funding, as central bankers, stems also from the fact that it touches upon the very essence of our respective mandates. Money, remember, is the liability of the banking system. Central bank money represents but a fraction of broad money. To ensure that money is sound, and, in the euro area, that it is “single”, we need the banking system to be equally sound, and importantly, single. It is against this background that I will devote my remarks tonight to the latest development in European policy, specifically the decision to proceed with a banking union to complement monetary union in the euro area. I will discuss the desirable components of a banking union, towards which a single supervisory mechanism represents the first step. The establishment of a banking union is a key factor in the completion of monetary union, and probably a turning point in the current crisis, with profound repercussions for the financial sector and the real economy alike. Over the past few years, the mounting pressures in funding markets have led to a growing fragmentation of the banking system of the euro area along national lines. Links between banks and sovereigns have grown tighter, and in some countries the credit supply has been negatively affected. The conduct of a single monetary policy has become increasingly difficult as the transmission channels have become heterogeneous.

All in all, we can say that the renationalisation of the credit supply, coupled with funding pressures on both banks and sovereigns in certain countries, has weakened the impact of monetary policy, as partly unjustified domestic spreads keep rates applied to households and non-financial corporations higher than what would be consistent with monetary policy rates. Why does financial integration matter so much for monetary policy? In order to clarify why financial integration is crucial for monetary policy, let me use a metaphor drawn from agriculture: ever since ancient times farmers have watered their fields through a complex network of canals fed by wells or rivers. Whenever a canal was blocked, the farmer had to act quickly to unblock it in order to save his crop. The practice of irrigation was in fact first described in the Epic of Gilgamesh in the second millennium BC. Credit is the water of the economy, and for the economy to run smoothly it needs to reach all its parts in the same way. Central bank money is the well, banks are the canals and we are the farmers. Whenever a canal of this kind is obstructed, we must find a way of restoring a smooth supply and we must act rapidly, as without adequate credit the dynamism of an economy quickly fades. And I should add that the Epic of Gilgamesh also describes the damage caused by a flood, a reminder that liquidity can become destructive if it gets out of control.
What often then emerges is a “popular narrative”. These narratives have been found to be an important driver of collective behaviour in financial markets and the economy.6 Behavioural biases at times of existential risk, spreading contagiously, can result in pessimistic popular narratives detached from reality. At times of stress, a global game of Chinese Whispers can generate unduly negative expectations. 4  See Haldane (2015) See Gigerenzer (2004) 6 See Akerlof and Shiller (2009) 5  7  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  7  I think the prevailing popular economic narrative, among businesses and households currently, is unduly negative. It has emphasized recession and risk over recovery and resilience. It has resulted in good economic news (of which there has been plenty) being discounted too readily, and fearfulness about the future being accentuated. Let me give a few simple examples. Chart 5 plots a simple Google search of the relative incidence of two words – “recession” and “recovery”; it is an economic pessimism ratio. Before the Covid crisis, the pessimism ratio was steady. As the crisis struck there was a predictable and sizable spike upwards, by a factor of roughly 8. Since then the ratio has fallen somewhat, as we might expect as the economy has moved from recession to recovery. The dynamics of this sentiment indicator are nonetheless revealing. The drift down in the ratio has been very gradual. It remained elevated well after economic recovery had commenced and recession ceased.

At the same time, it would be very unfortunate, particularly in the light of the challenges facing the Swedish economy, to be forced to manage contagion effects from the energy price rise with interest rate rises. If one looks at the economic climate, I consider the similarities between the present situation and this time last year to be more striking than a comparison with 2001. Here I am mainly referring to the fact that economic prospects were at that time very uncertain with regard to how far the adaptation process had come after the over-optimism of the previous years, which had led to abnormally high share prices  and overly large investments by companies in the USA. Let me go back in time roughly one year and see what conclusions can be drawn from last year and what implications they might have for future developments. Developments 2002 to 2003 At the beginning of last year there were signs of a light at the end of the economic outlook tunnel. I wasn’t working at the Riksbank then, so don’t be surprised if parts of my historical description differ slightly from that of the Riksbank, as expressed in the Inflation Reports. The signs of a turnaround were most pronounced in the USA, but there were also some signals that Europe was on the threshold of a recovery. The reduction in stocks appeared to be well on its way, which is usually the first requirement for an upturn in production.
For me, the reason is that we have more work to do to develop the best tools to ensure continuity of access to critical insurance services. 2  BIS central bankers’ speeches  Why do I think we are short of tools? To explain my view on this requires some background on the resolution of banks. Statutory special resolution regimes for banks like the one adopted in the UK in 2009 have at their heart the power to alter property rights, the power to separate the business of a company from its owners, albeit with safeguards against unfair expropriation. It is a very powerful tool, and one that should be used carefully for that reason. For banks a typical use of the resolution regime is because depositors can lose confidence in their ability to have access to their funds, and thus a run can start which brings down the bank. A resolution regime can bring order to that process. For insurers, policyholders are less likely run in the sense that they can withdraw their contract and take it somewhere else, though it is possible for some life contracts to be surrendered without penalty. Unlike money, insurance contracts are not fungible because the cover is specific to the contract. In the limit, a bank depositor can exchange their claim on the bank (commercial bank money) for a risk-free claim on the central bank (by requesting bank notes). An insurance policyholder cannot do this.

And, we are putting more emphasis on senior level contact in the new approach. We want to deliver key messages very clearly to senior management and boards, and we want to know how your governance works in practice. I will give one example of this approach in recent months, returning to Solvency II. It was clear to me by the end of last summer that we were facing a long delay in the directive on top of a bill that, as I have said, was indefensible and ever rising. We have had extensive contact with chief executives and the Association of British Insurers in recent months, with the overarching objective that this cannot go on. I think we have reached a sensible conclusion which at least makes the best of where we find ourselves. Where possible and sensible we will use the work done on Solvency II to date to bolster our existing ICAS regime, though I should stress that we are quite comfortable with the core of ICAS and believe that we can use it as the framework to build the PRA approach until such time as Solvency II appears. I hope that this change of approach both alleviates the costs and helps to create a less pressured environment in which we can seek to obtain a better framework for prudential supervision of insurers in the future than would otherwise be the case. There is too much at stake for the industry and the economy to compromise on this objective.
The number of countries that have adopted an inflation target for their monetary policy implementation has increased sharply after New Zealand introduced such a policy in February 1990. In all, 21 countries have now moved onto a formal inflation target, including Canada, the UK, Norway, Sweden, Switzerland and Australia. In most countries this has greatly stimulated discussion of monetary policy; central banking and central bank policies and measures are more in the spotlight and public debate than before, although of course opinions about them are divided as ever. One consequence of this policy is that exchange rate stability is no longer the anchor of monetary policy. This is not because the exchange rate of any currency is a lightweight factor in economic developments; rather, experience has shown that in a climate of unrestricted cross-border capital flows, central bank instruments are inadequate for maintaining a stable exchange rate. When crossborder capital flows are unrestricted, a central bank’s primary instrument is interest rates, which in the long run can only attain a single macroeconomic goal, i.e. ensuring price stability. It has turned out that other countries have benefited from adopting such a framework. It was in light of this international experience that the Central Bank of Iceland’s monetary policy framework was changed two years ago and formal inflation targeting was adopted.

Operation of a new aluminium smelter will also lead to a higher equilibrium exchange rate for the króna than would otherwise be the case. A sizeable currency inflow will obviously take place in connection with the aluminium projects and domestic interest rates will be higher than otherwise. All these factors have affected market expectations and caused the króna to strengthen. In effect, the economy has already begun this year to accommodate the pending investments. In recent weeks the exchange rate has depreciated once more. The króna had clearly overshot, as is common in foreign exchange markets. More factors have contributed to the weaker exchange rate. These include increasing uncertainty about hydropower development in connection with the Norðurál smelter extension, a deficit on the current account, and greater foreign portfolio investment by Icelanders which amounted to 14.5 b.kr. during the first six months of 2003 compared with 6.8 b.kr. over the same period the previous year. Central Bank currency purchases have had some effect, as I mentioned earlier. Such fluctuations are always to be expected and it should be reiterated that the Icelandic króna has by no means shown any more volatility than we see in other currencies. Let us briefly consider what lies ahead. Four times a year the Central Bank produces macroeconomic and inflation forecasts which it publishes in its Monetary Bulletin. Inflation forecasting plays a vital role for Central Bank policy. Each inflation forecast is projected two years ahead, quarter by quarter.
In the realistic case when the state variable affecting the probability of a financial crisis is a vector that includes not only leverage but, for instance, maturity mismatch and liquidity mismatch, it is even more the case that additional financial-stability instruments such as restrictions on maturity and liquidity mismatches are superior to the policy rate in achieving and maintaining financial stability. BIS central bankers’ speeches  5  for many years for several reasons, including global imbalances, fiscal policy, and shocks to aggregate demand and supply. This confusion means that the conclusions from this work for monetary policy are not clear. Monetary-policy instruments The standard monetary-policy instruments are the policy rate and communication, including statements and the publication of forecasts of inflation, the real economy and (by some central banks) the policy rate. During the financial crises, in particular when the policy rate is at or close to the zero lower bound, we have seen other more unconventional instruments being used to implement more expansionary policy, as noted above. There is a lively debate and a considerable body of research on the effects of the LSAPs undertaken by the Federal Reserve. Estimates based on a number of recent studies, as well as Federal Reserve estimates, suggest that, all else equal, the Federal Reserve’s QE2 program launched in November 2010 lowered longer-term interest rates by 10 to 30 basis points.

Liquidity management in the Islamic financial system and the institutional arrangements for resolution are among the other areas that need further development. Of critical importance is for the board and management of Islamic financial institutions to institute higher standard of leadership and a comprehensive governance culture and framework. Mutual recognition in Shariah and human capital challenges On this occasion, I would like to touch on two areas confronting Islamic finance firstly on, the issue of mutual recognition in Shariah and secondly the human capital development in the industry. Malaysia takes cognisance of the diversity of Shariah views within the region and among jurisdictions. Although Islam welcomes diversity of views, there is also a need to promote greater harmonisation among jurisdictions on the specific issues relating to Islamic finance. Such convergence is important for the long-term sustainability of the sector. Malaysia has taken the initiative to organise Regional Shariah Scholars Dialogue in 2006 and 2008 as part of the efforts to foster greater engagement among the Shariah scholars in the region. Indonesia has been active in these dialogues. Moving forward, the newly established International Shariah Research Academy (ISRA) has been entrusted to intensify the regional Shariah Dialogues as well as to enhance further the international engagement among Shariah scholars in our pursuit for Shariah harmonisation. Most encouraging is the greater appreciation and understanding that has been achieved in these deliberations of the Shariah practices that are peculiar to the respective jurisdictions.
•  In these cases, the “certainty equivalence principle” (Poole, 1970) calls for policy to respond to the best estimate of variables in the same way that it would to perfectly measured variables, were they to be observable. b. Be cautious  •  This is an approach popularised by Brainard: “parametric” uncertainty gives grounds for addressing economic disturbances cautiously, supporting a gradualist approach (Brainard, 1967). Furthermore, transmission uncertainty related to the fact that, according to Milton Friedman, “monetary policy works with long and variable lags”, cautions against trying to “fine-tune” the economy through monetary policy intervention. •  Moreover, a central bank should not adjust policy simply because the market expects it 1 : -  the behaviour of financial markets is mimetic whilst central banks are very cautious;  -  markets are sensitive to speculative bubbles while central bankers focus on fundamentals;  -  markets are short-term oriented whereas central banks are medium- to long-term oriented. •  However, erroneous decisions may be made in private markets if monetary policy does not match the policy anticipated. This requires the central bank to be intertemporally consistent. A usual policy guideline in this context is to gradually adjust the policy rate. •  Thus, from a practical point of view, gradualism has many advantages: -  it reduces the risk of having to quickly reverse policy decisions;  -  it reduces the probability of financial market disruptions;  -  it is particularly beneficial in the face of major risks.

He urged writers to “throw away anything that is false, no matter how much he might love that page or paragraph”. In a similar vein, Malaysia’s microfinance journey has been one of trial and error, as we continuously strived to increase the social and economic impact of microfinance, sometimes working against the tide of popular thinking. This has led to a more nuanced approach to the development of microfinance over time, and an ongoing process of rethinking norms which we may take for granted today. Today, I would like to talk about three perspectives that have shaped the way we approach and implement microfinance in Malaysia. First, technology when used in a clever way, can be of great use. While technological advancements hold great promise for expanding access to financial services for the poor, we need to invest time and resources to understand the factors that affect the poor, and the suitable approach to generate income and create wealth. These insights are what will determine whether technology is central or peripheral to the inclusion agenda. Second, the tradeoffs between financial stability and inclusion requires smart management. A microfinance strategy that focuses largely or wholly on providing credit to the unserved is almost destined to fail, potentially leaving communities worse off from excessive debt burdens. Instead, implementation strategies should ensure that the provision of credit are complemented by the necessary safeguards and financial education.