samchain/econo-pairs-v1 huggingface dataset:
When interest rates are increased, demand falls and inflation is kept at bay. If demand is low and unemployment rises, there will be prospects of lower inflation. The interest rate will then be lowered. In the long run, output is determined by the supply of labour and capital and by the ability to adapt, but in the short and medium term monetary policy can also have an impact on the real economy. The economy grows over time. Output moves in waves. Output will in some periods lie below long-term trend growth and in others above trend. The difference between trend output and actual output is called the output gap. Stabilising output growth means seeking to maintain actual output near trend. We have had pronounced economic cycles in the Norwegian economy. The downturn at the beginning of the 1990s was followed by an upturn from 1993. This upturn peaked in 1998. The economy then shifted from an upturn with high growth rates to an expansion with lower growth but low unemployment, labour shortages in many sectors and strong growth in labour costs. Since 1998, output growth has been low. Growth stalled in winter 2002 and was well below capacity in the first half of 2003. Growth in the Norwegian economy has since picked up. BIS Review 23/2004  1  Norges Bank has not defined an exchange rate target. Nevertheless, developments in the krone are of considerable importance to interest-rate setting because exchange rate developments have an impact on inflation and output. The krone fluctuates.

Such low real interest rates would normally lead to GDP and inflation abroad being unreasonably high. If reality and models differ, it is in my opinion reality that applies. In the current abnormal times, models and historical patterns do not work so well and should to a great extent be replaced by judgement. In my opinion, the forecasts for inflation and GDP abroad under the current abnormal circumstances are compatible with the low interest rates abroad. Monetary policy alternatives in October I would thus claim that the assumption in the main scenario that policy rates abroad will be high is unrealistic, and that it is more reasonable to assume a forecast for policy rates abroad that is compatible with market expectations of interest rates abroad. This also means assuming the prevailing actual long interest rates abroad with regard to the effect on the exchange rate. Figure 9 shows monetary policy alternatives, all under the assumption of a forecast for policy rates abroad in line with market expectations, that is, a forecast for policy rates abroad that follows the grey curve in Figure 7. Figure 9a shows different interest rate paths. The red broken curve, called “Main scenario repo rate path”, is the main scenario’s repo rate path. The blue broken curve, called “Riksbank’s reaction function”, shows the repo rate path arising from the Riksbank’s historical reaction function when policy rates abroad are compatible with the prevailing market expectations. The yellow broken curve, called “Market repo rate path”, shows the prevailing market expectations for the repo rate.
9 At the same time, it may be worth pointing out that our forecasts for the repo rate will not normally deviate very much from market expectations. This is essentially the background to why we are now choosing to go over to using our own interest rate forecast when forecasting inflation and other macro variables. Although I am convinced that this means increased openness and clarity in monetary policy, it has not been an entirely self-evident step to take. This is because we have been forced to manage a number of practical problems. These are primarily related to the fact that we are six persons on the Executive Board who together must agree on what could be considered to be a reasonable repo rate development in the future, while safeguarding our responsibility as individuals for how we vote. 10 To make a forecast for the development in the repo rate, we Executive Board members must together make an assessment of what would be a desirable path for the repo rate during the forecast period, even though our interest rate decision only refers to the level of the repo rate applying until the next monetary policy meeting. The different members of the Executive Board may have differing opinions on, for instance, the current situation in the economy and at what pace inflation should be brought back on target, giving consideration to the real economy and various risks. It goes without saying that  5  See, for instance, Alsterlind, J. and H. Dillén, (2005).

We left most of these problems behind us when we began making forecasts based on market expectations, as reflected in the so-called implied forward rates. This was because market expectations in most cases provide a much more realistic forecast for the future development of the repo rate. The changeover from a constant repo rate to the markets’ expected interest rate path was also a natural step on the route to publishing our own forecast for the repo rate. We then began talking more systematically about future interest rate developments by commenting on the plausibility of the interest rate path given by market expectations. In my opinion this was when we took the major step towards increased clarity with regard to our view of future interest rate developments. The method of basing forecasts on market expectations is not without its problems, either. One problem concerns how expectations are measured. Other problems are related to communication regarding the interest rate path. Let me explain what I mean here. Changes in the policy rate have a direct effect on the shortest interest rates in the economy. Monetary policy can therefore also affect financial market expectations of future short-term interest rates. It is these expectations that the implied forward rates are meant to capture. The implied forward rates can be interpreted as the financial markets’ ”average” forecast for the future repo rate.
In the UK the share of mortgage lending in Scotland has been essentially flat through the crisis period (chart 9), suggesting that there has been little if any divergence in credit conditions between the UK and Scotland. 21  This downward spiral of confidence can be most acute in countries with large banking sectors relative to their economies – Iceland, Ireland and Cyprus all had banking sectors exceeding 600% of GDP in 2007 (table 4). In the extreme, doubts about the sustainability of a nation’s membership of the currency union can only be relieved by massive external support. 22  In theory these could be pre-funded. For small countries with large, concentrated banking systems, pre-funded schemes are unlikely to be realistic in the short-term. Protected Scottish retail bank deposits are over 100% of GDP, compared to around 50% for the rest of the UK. New European rules mandate deposit guarantee funds to be built up only slowly over a decade and even then only to less than one per cent of insured deposits. 6  BIS central bankers’ speeches  Fiscal arrangements While banking union requires common fiscal backing, there are two broader justifications for shared fiscal arrangements within a currency area.

The Committee expects to cease or commence phasing out reinvestments after it begins increasing the target range for the fed funds rate; the timing will depend on how economic and financial conditions and the economic outlook evolve. The Committee currently does not anticipate selling agency mortgage-backed securities as part of the normalization process, although limited sales might be warranted in the longer run to reduce or eliminate residual holdings. In the longer run, the Committee intends to hold no more securities than it will need to implement monetary policy efficiently and effectively, and that the SOMA will consist primarily of Treasury securities. Given the $ trillion in large-scale asset purchases (LSAPs) conducted since September 2012, the level of reserve balances in the system will be significantly higher during normalization than was envisioned when the 2011 principles were adopted. In light of this, as I just outlined, the FOMC has judged it appropriate to operate with a framework for interest rate control that is based primarily on administered rates rather than reserve draining tools. Given the unprecedented nature of this framework, the Committee has made clear that it is prepared to adjust the details of its approach in light of economic and financial developments. The FOMC has consistently adapted its policies as needed in recent years and will no doubt continue to do so as necessary throughout the normalization process in order to foster conditions consistent with its dual mandate.
And, when we rebound from the shock of the pandemic, the Mittelstand will have to be one of the drivers once again. The coronavirus is a double economic shock. Its effects have hit activity extremely hard, with GDP falling by 6.8% in the euro area last year and 5% in Germany. But it has also accelerated structural changes that will transform our lifestyles and our economies. According to some estimates, the pandemic has brought forward the digital transition in Europe by seven years. [4] And it is estimated that 20% of work hours will move permanently from office to home. [5] This will lead to new patterns of demand and new ways of living. So, our challenge will not only be to recover from the crisis, but also to adapt to the changes it has set in motion. And the Mittelstand – thanks to its agility, its focus on innovation and its commitment to competing by adding value – will have to be at the heart of this process. For now, however, the pandemic is still weighing heavily on our economies, and especially on firms in the services sector. While manufacturing has recovered quite well since the first lockdown last year, buoyed by solid global demand, activity in the services sector has remained subdued owing to the social distancing measures that are still in place today.

[11]  The upshot is that more firms have been protected and more jobs have been saved. Without the ECB’s policies, we estimate that over one million more people would have lost their jobs. [12]  But we are not out of the woods yet. With the tremendous progress made on vaccine technology, we can now see the light at the end of the tunnel. But we still cannot see exactly how long that tunnel is. We will continue to face a period of high uncertainty until more people have been vaccinated against the virus. In this setting, it is crucial that the bridge for SMEs remains in place for as long as needed. The ECB will help ensure that firms and families can access the finance they need to weather this storm – and that they can do so in the confidence that financing conditions will not tighten prematurely. That commitment is the best way to provide certainty to all sectors of the economy and to bring stability back to the euro area swiftly. And this, in turn, is the best contribution we can make to delivering on our mandate of price stability. 5/8  As Goethe said, “Im Idealen kommt alles auf die élans, im Realen auf die Beharrlichkeit an.”[13] Reality is currently hard for many firms and the future remains uncertain. And so we will persist and persevere until the pandemic emergency has passed.
The assumption underlying both reports was that the Central Bank’s key objective would continue to be price stability, as is mandated by law, and that the exchange rate of the króna would remain flexible, although it would not need to be entirely free-floating. I will not explain the grounds for these assumptions here, as they have been discussed widely, except to point out that it is unrealistic to entrust monetary policy with objectives other than those it has the chance to fulfil using the available instruments, and that adopting a fixed exchange rate would eliminate the advantages of an independent currency and independent monetary policy without eliminating the disadvantages. Therefore, policy formation lies in finding a framework that can work under the above-described conditions. There were a number of drawbacks to Iceland’s pre-crisis monetary policy framework. A major flaw was the lack of an adequate response to the excessive capital inflows that contributed to credit and asset price bubbles and domestic residents’ significant foreign exchange risk, which was to a large extent unhedged. Furthermore, monetary and fiscal policy were not well enough aligned, and the same can be said of other Government decisions that affected demand. The burden on monetary policy was therefore greater than it would have been otherwise, which further stimulated capital inflows. This, together with strong demand, pushed the real exchange rate higher than it would have been otherwise and exacerbated macroeconomic imbalances, as could be seen most clearly in a sizeable current account deficit.

According to the Central Bank’s forecast from February, GDP growth will be robust in 2016 and above its historical average for the two years thereafter. This certainly entails an increase in the positive output gap this year, but that tension will subside as the forecast horizon progresses, owing in part to a tighter monetary stance. Inflation will also rise with a larger positive output gap and reduced deflationary pressures from abroad as the year progresses, but monetary policy will counteract it. According to the forecast, inflation will peak at just over 4% in 2017 and then taper off over the remainder of the forecast horizon. Unlike in many previous forecasts, the strong current account surplus will persist for the entire forecast period, which extends until 2018, in part because national saving will remain above the historical average. In this context, we must bear in mind that things can change quite suddenly. It is also worth noting that numerical economic forecasts, by their very nature, have a tendency to be much more stable than historical reality. In the recent past, we have reaped the benefits of developments abroad, but we do not know how long this will last, and tailwinds could turn into headwinds. History also tells us that we have a tendency to make economic policy mistakes during booms and mistake temporary positive shocks for permanent improvements. If history repeats itself, domestic demand and inflation could increase more than is assumed in the forecast.
So, referring again to one of the purposes of the IMF, as defined in its Articles of Agreement, there is a clear need “to promote international monetary co-operation” through “consultation and collaboration” on these “international monetary problems” that we now face in the Asian region. The Way Forward 40. I would like now to spell out how I think monetary co-operation in this region should proceed. In order to have effective monetary co-operation, we must have clearly defined and realistic goals. Over-ambitious goals may not be credible, and may even be counterproductive. In any case, they may not be politically acceptable to the individual economies. Monetary co-operation, and indeed any type of co-operation, is meaningless when you do not have common goals. 41. Notwithstanding increasing economic integration, one has to accept reality, and this is that the economies in Asia are a very diverse group. There are dramatic differences with regard to political institutions, economic systems, basic infrastructure and any aspect you care to think of. In terms of economic structure, for example, they range from some of the largest agricultural economies in the world to the most urban economies. In terms of economic philosophy, they range from some of the freest economies in the world to economies where there is considerable central planning. In terms of the stage of economic development, they range from economies with the highest per capita incomes to those still with a large part of their population living in poverty.

To this end, the Bank continues to spearhead the Financial Sector Development Plan, which is aimed at strengthening the Zambian financial sector as well as guiding efforts for realising the vision of a stable, sound and market based financial system that would support the efficient mobilisation and allocation of resources necessary for economic diversification and sustainable growth. In concluding, I wish all entrants to this competition, the best of luck. I further with to congratulate in advance the ultimate winners of this inaugural business plan competition – VentureComp 2010. I thank you. 2  BIS Review 5/2010
Fluctuations in house prices and lending can in this way reinforce fluctuations in production and employment. In short, rising property prices often go hand in hand with an increase in lending. This means that problems in the property market often have greater effects on the financial system and the economy as a whole than do problems in, for instance, the stock market. And it is therefore important to be particularly vigilant with regard to the property market when discussing monetary policy and asset prices. I should also add that it is mainly commercial property, and not residential property, that usually causes this type of problem. “Lean or clean” – act sooner rather than just later? Let us say that property prices and credit volumes are increasing at a rate that does not appear sustainable. How should a central bank react? This is an “old” debate that has been given new life by the recent crisis. And it mainly concerns how the central bank should act when asset prices rise. In these situations it is often difficult to assess whether the current developments are reasonable or whether they are the result of over-optimistic expectations and speculation. It is also difficult to estimate the effects on the real economy and inflation. Moreover, it is difficult to judge when a potential bubble might burst. When property prices fall heavily, the real economy is often weaker and inflation lower. In this type of situation it is more obvious how the central bank should react.

In doing so it is contributing to strengthening international interlinkages between financial markets and systems that is more widespread and inclusive. The number of Islamic financial institutions worldwide has increased to more than 300 spanning over 75 countries. Total assets of the Islamic financial system are estimated to exceed one trillion US dollars. It is among the fastest growing financial segments in the world with an estimated annual growth in the region of 15 to 20 percent. There is now a growing strong demand for Islamic financial product in the global market, far exceeding the current availability of financial products and services being provided by the Islamic financial institutions. The global development of the Islamic financial system has become particularly important in this more challenging financial and economic environment. As the international financial system becomes more diversified and as this new form of financial intermediation develops, it has presented businesses with alternative means of raising funds while investors are presented with new asset classes. It has contributed towards greater diversification of risks. More importantly, the very fundamental requirement of Islamic finance is that it requires an underlying economic transaction thereby avoiding emphasis on speculative purposes. It also prohibits the commoditisation of risks, which leads to its proliferation through multiple layers  2  BIS Review 94/2007  of leveraging and disproportionate distribution. Islamic finance as a form of financial intermediation will also contribute towards enhancing the efficient mobilisation and allocation of funds across regions.
Under a scenario consistent with the Banco de España’s March 2022 projections, the exercise included in the Financial Stability Report estimated that firms’ interest expenses as a percentage of gross operating surplus would begin to increase from 2023 onwards to stand, by the end of 2024, 1 pp above 2021 levels. In any event, the subsequent upward revision to market expectations of future interest rates means that the estimated share of firms’ interest expenses as a percentage of gross operating surplus is likely to rise by a further 1.8 pp by end-2024, increasing by a total of 2.8 pp on their 2021 level.16  16  Given that business income may be expected to fall under this scenario, the increase in the weight of interest expenses should be considered to be the lower bound of the total impact of the rise in interest rates. Meanwhile, every additional 100 bp increase in short and long-term interest rates above the levels currently priced in to market expectations is likely to add an additional 1.7 pp to the weight of interest expenses in 2024. 12  For households, moderate interest rate rises would have a relatively small impact on their debt repayment capacity, partly because of the increase seen in recent years in the proportion of fixed-rate mortgages, which accounted for 24.9% of the outstanding amount at December 2021.

In the case of bank lending and pricing, uncertainty in cash flows from the projected carbon credit, and the slow process of local approval, is seen as a major risk to banks. Lack of understanding of CDM and carbon trading market by financial institutions is also a factor weighing on its progress. In the case of investment fund, this is an area that has the strongest potential for private investors’ participation in supporting clean technology and energy-efficient companies. Again, clarity beyond 2012 is needed for evaluating the longer-term economic payoffs, and whether carbon credit is considered securities legally is an issue in some countries. What I have mentioned are some of the practical issues that have emerged in emerging markets, and need to be addressed in order to be able to speed up the process. To conclude, climate change is a big deal for the financial system for a number of reasons that I have mentioned. As for the response, the overall direction of the financial sector’s response to climate change so far is positive, but still very much in an early stage. The progress, however, is more limited in Asia. To promote greater engagement of the financial system, the issues of incentive and availability of tools are important.