samchain/econo-pairs-v1 huggingface dataset:
And could these developments merit either a substantial adjustment to inflation targeting or even the adoption of a different monetary policy framework in the years ahead? In what follows, I will not presume to give the answers but would suggest that a careful and deliberate research review of the UK’s monetary policy framework is warranted. That’s why my colleagues and I look forward to the contributions of the distinguished group assembled here today. And it’s why the Bank will conduct a dedicated research programme over the next year, joining many of our peers around the world in similar exercises.3 At a minimum, as I advocated in my parliamentary testimony prior to joining the Bank,4 open, periodic reviews reinforce the legitimacy and acceptance of this vital component of the UK’s macroeconomic landscape. Let me begin by reviewing how inflation targeting has performed in recent years. I. Monetary “Spring” – Securing the recovery When I joined the Bank, a long economic winter of discontent was finally beginning to thaw. Throughout most of 2011 and 2012, UK GDP growth (at around 1½%) had languished well below its pre-crisis trend (of close to 3%), and unemployment was about 8%. But by mid-2013, there were signs of a nascent recovery: four-quarter growth had picked up above 2%, and the unemployment rate fell to 7.7%, its joint lowest level since early 2009 (Charts 1a and 1b). The timing and pace of the recovery had caught most unawares.

The Fiscal Compact also accelerates the application of the excessive deficit procedure by introducing sanctions when the debt and deficit to GDP ratios are excessive. Fiscal surveillance has been extended to a broader excessive imbalances procedure, which goes beyond fiscal imbalances and seeks to identify and correct a range of macro imbalances and shortcomings in competitiveness. In fact, various euro area member states ran into problems despite of their adherence to the SGP criteria, to the extent that they nonetheless manifested other types of imbalances, such as excessive private indebtedness. Preventive recommendations are provided to member countries at an early stage in the formation of imbalances. The severity of the financial crisis has also exposed the inadequacy of the current financialsector regulation and supervision. As already indicated, macro-prudential risks were overlooked and the link between sovereigns and banks was underestimated. In reaction to this, European institutions and member states have engaged in a major overhaul of bank regulation and supervision with the objective of creating safer, sounder and more transparent financial institutions. One of the major initiatives to strengthen the governance framework was the establishment of the European Systemic Risk Board (ESRB). In its first year of operation, the ESRB tackled key issues relating to the interaction between three factors: the creditworthiness of European sovereigns, the increasing difficulty of banks in raising funds, and weakening economic growth.
All else equal, the end result will be that the ECB is forced to tighten its stance a little more. In that way, a less disciplined policy in one or more member states to some extent hits all the countries in the union. In the extreme case, it is conceivable that a country might deliberately refrain from managing a debt problem and, when the crisis becomes acute, try to shift the payments onto the other countries. Problems of another type have come to the fore with the past year’s weakening of the euro. When the mood is negative, every potential problem gets an airing regardless of its weight in practice. Difficulties in small countries, for example in connection with inflation being considerably higher than in the core countries, can then be presented as a threat to the whole, with consequences for the euro’s exchange rate. BIS Review 102/2000  2  Rules and processes for promoting cohesion All the problems and risks I have mentioned were essentially well-recognised and thoroughly discussed before the EMU was formed. Various rules were therefore constructed to prevent what is called destructive diversity. The Maastricht Treaty, for instance, includes rules to prevent excessive government debt being dumped onto others. This is explicitly prohibited by the ban on government financing in the central bank. The Treaty also rules out privileged access to bank loans as well as bail-outs by other countries or the EU as a whole.

There has been a clear endeavour to counter the upward price tendency. In my opinion, however, it would have been an advantage if management of the exchange rate had been clearly assigned to the central bank, instead of the leaving the responsibility to so many. As regards fiscal policy, experience has not been entirely positive. As I mentioned earlier, in Stage Three of EMU the Stability Pact is monitored with annual stability programmes. This process has worked fairly well in exerting peer pressure on countries with large deficits: no country has yet exceeded the Pact’s lower limit. But assessments of individual countries have tended to differ without there always being factual grounds for this. Neither has particularly good use been made of the golden opportunity that Europe’s present economic upswing provides for faster budget consolidation. Countries should now be making the most of the chance of quickly turning a deficit into a surplus but that is not happening. This may prove to be unfortunate further ahead and it runs counter to the spirit of the Pact. Peer pressure has evidently not been strong enough. Examples of short-run considerations gaining the upper hand in this respect were evident when the dramatic oil price rise led several countries to cut petroleum taxes or subsidise oil-intensive industries, which is hardly sustainable in the longer run for either the economy or the environment. Before concluding I should also like to say something about financial stability in the EU area.
The cross-border production and supply-chain networks, which have been so efficient in raising Asia’s exports to the rest of the world, remains valuable but will have to be increasingly re-orientated towards raising domestic and intraAsian consumption of final goods and services. Measures to encourage new investments in the corporate sector and in public infrastructure, as well as in education and healthcare, will be necessary for most Asian emerging economies in order to realize their growth potential. The basic outline of changes is well understood, but crafting the details of these changes, and calibrating the pace of implementation, will need thoughtful work. The build up of domestic demand would probably be a gradual process, as experiences of Japan and Germany suggest that reducing a nation’s export dependence involves major structural changes that evolve over an extended period of time. Nevertheless, I am optimistic that Asia will be able to respond to these challenges, to achieve its longer term growth potential and contribute towards more sustainable global growth. Financial regulations and development Let me now turn to the third set of challenges: financial regulations and development. Financial authorities are now working intensely in various fora, such as the Financial Stability  2  BIS Review 133/2009  Board and Basel Committee, on regulatory reforms and cross-border cooperation.

From peak to trough, stock prices fell by more than 60% and a group of Asian economies contracted by an average of about 6.2%, not far from the 8.3% fall during the Asian Crisis. Exports fell by  BIS Review 133/2009  1  over 30%, and intra-Asian exports fell even more sharply, by over 48%. These are far worse than even during the Asian Crisis. There was no de-coupling. Just as the fall was swift and sharp, the initial rebound has been rapid and strong. One quarter after the trough in the present cycle, Asia’s GDP grew by 9.4% on a quarter-onquarter basis, more than twice of the 4.3% rise after the Asian Crisis. Exports have also rebounded swiftly, lifted in part by the sharp increase in shipments to China. While the outlook has improved, the sustainability of the recovery is not clear at this point. With this uncertainty, managing the cyclical recovery of Asian economies presents several challenges. A withdrawal of government stimulus measures too early risks stifling the recovery, while a withdrawal too late could result in inflationary conditions. A series of carefully calibrated actions will be needed. Moreover, many analysts and fund managers now hold the view that emerging economies, while not de-coupled, will still grow significantly better than advanced economies for some years to come. Hence, there has been a re-rating of assets in emerging economies.
It reflects the banks’ loss of confidence in conducting transactions on an unsecured basis since the beginning of the financial crisis. This trend has not been reversed, as we can see from chart 6. Activity on the money market has shifted towards the secured segment – in Switzerland towards the repo market (shown in blue). Following the substantial injection of liquidity in the wake of the SNB’s interventions, activity in this segment has also declined. However, the sizeable liquidity surplus has not reduced volume to zero. In fact, the introduction of negative interest on sight deposit accounts at the SNB has prompted banks to arbitrage their exempted amounts. In addition, banks have continued to trade in repos, in order to exchange the corresponding collateral. Collateral management tends to gain in importance in response to ever-stricter regulation. Insurance companies are likewise active in the market, for liquidity management purposes. In this changing context, the money market has performed its role as a monetary policy transmission channel to the fullest extent. Following the introduction of a –0.75% negative interest rate on sight deposit accounts at the SNB at the beginning of 2015, the various money market interest rates rapidly moved into negative territory, as chart 7 shows. The decline also spread to yields on bond and credit markets. To ensure the smooth functioning of the capital market and the effective transmission of monetary policy regardless of the circumstances, the quality of the money market infrastructure plays a key role.

6 Let me give you a concrete example of such an analysis. On 8 February 2018, the Swiss franc appreciated significantly against the euro in a matter of minutes. Chart 2 shows the limit order book for EURCHF on the interbank market between 17:00 and 17:45. The red bars represent the bid volume, and the blue bars the ask volume. The triangles denote the transactions carried out at the bid price (in red) and ask price (in blue), respectively. For each tick, the system records the volume on the bid and ask sides. The dark colours indicate more volume for a given price level. We can see that prior to 17:15, there was a liquid order book on both sides. Thereafter, a large number of EUR sell orders were executed; this was accompanied by a drop in bid volume and a downward revision of bid and ask prices. Price levels with high volume – as denoted by the darker red bars on the bid side – steadily declined to end up at CHF 1.1448 per euro. After this short-lived episode, the euro gradually recovered in the minutes that followed. Now let’s look at the trading activity and market liquidity on that day. In the two panels of slide 3, the green curve represents the spot rate for EURCHF on 8 February 2018.
François Villeroy de Galhau: Looking up to achieve a Financing Union Speech by Mr François Villeroy de Galhau, Governor of the Bank of France and Chair of the Board of Directors of the Bank for International Settlements, at the EUROFI High Level Seminar 2022, Paris, 23 February 2022. * * * Ladies and Gentlemen, It is a great pleasure for me to open this edition of Eurofi today in Paris, and I extend my warmest thanks to Didier Cahen and David Wright for their tireless efforts that allow us to gather in this beautiful Hôtel du Collectionneur. Today I will indeed be speaking about a collection – not of fine arts, but rather of national banking and financial systems. Unfortunately, such a collection is nothing to rejoice about, it is rather an Achilles heel. But let me start with a few words about Ukraine. We are obviously monitoring closely the geopolitical developments, and their possible economic and financial implications. Let me already stress that the direct exposure of French financial institutions to Russia remains limited, but the SSM called all European banks to enhanced vigilance on cyber risks. We will assess in our Governing Council in March the more indirect consequences on inflation and growth, and we will be facts driven: more than ever, optionality – about the right monetary stance – and flexibility – to guarantee the right monetary transmission – are the two names of the game for our policy.

In my view, we have to renounce a fully-fledged EDIS as a prerequisite – which is the main deadlock – and opt for an alternative set-up where national guarantee schemes would bring one another liquidity support, and where subsidiaries across the EU could be affiliated to the home deposit guarantee scheme. Other pragmatic steps are possible in a parallel approach. Resolution tools could be used for small and medium banks too, without increasing the size of the Single Resolution Fund. We could significantly improve the coordination between Supervision and Resolution, and better incorporate the cross-border dimension in our requirements for MREL (which are still significantly higher than the TLAC international rule). Having found workable solutions for worst-case scenarios, we will be able to focus on further moving beyond home/host issues in normal times. Banks should be able to make broader use of cross-border liquidity waivers, as currently allowed by the regulation. New waivers for capital requirements should be envisaged as well. On the prudential topic, I take the opportunity to underline that the Commission’s draft transposition of Basel 3 fully takes into account the specificities of European banks and provides sufficient time to adapt to the new features of the supervisory framework. The proposed exemptions will help maintain financing capacities but they have to remain temporary; otherwise, our international credibility and Basel 3 compliance would be harmed.
To the extent that the overnight RRP rate were set very close or equal to the interest rate on excess reserves (IOER) without caps, then this might result in a large amount of disintermediation out of banks through money market funds and other financial intermediaries into the facility. This could encourage further development of the shadow banking system. If this were deemed undesirable, this would argue for a wider spread between the overnight RRP and the IOER in order to reduce the volume of flows into the facility. The second issue is the facility’s potential impact on financial stability. In particular, would such a facility make financial instability less likely? And, when financial stress did occur, would such a facility amplify or dampen financial strains? On the first point, it seems that such a facility would tend to make financial instability less likely. The overnight RRP facility allows us to make a short-term safe asset more widely available to a broad range of financial market participants. The provision of short-term safe assets by the official sector might crowd out the private creation of runnable money-like liquid assets. This might enhance financial stability by reducing the likelihood of a financial crisis. However, if a financial crisis were to occur, the existence of a full allotment, overnight, RRP facility might exacerbate instability by encouraging runs out of more risky assets into the facility. That is because the supply of a full allotment facility would be completely elastic at the given fixed rate.

If, instead, economic growth disappoints, inflation stays unusually low and the labor market continues to exhibit evidence of considerable excess slack, then lift-off will likely be pushed back in time. 1 With respect to the trajectory of rates after lift-off, this also is highly dependent on how the economy evolves. My current thinking is that the pace of tightening will probably be relatively slow. This depends, however, in large part, not only on the economy’s performance, but also on how financial conditions respond to tightening. After all, monetary policy works through financial conditions to affect aggregate demand and supply. If the response of financial conditions to tightening is very mild – say similar to how the bond and equity markets have responded to the tapering of asset purchases since last December – this might encourage a somewhat faster pace. In contrast, if bond yields were to move sharply higher, as was the case last spring, then a more cautious approach might be warranted. In terms of the level of rates over the longer-term, I would expect them to be lower than historical averages for three reasons. First, economic headwinds seem likely to persist for several more years. While the wealth loss following the financial crisis has largely been reversed, the Great Recession has scarred households and businesses – this is likely to lead to greater precautionary saving and less investment for a long time. Also, as noted earlier, headwinds in the housing area seem likely to dissipate only slowly.
In particular, for the moment it is unclear – as, I must say, it is bound to be at this stage – whether the financial system can generate the expansion of credit that will most likely be necessary to support recovery. The reopening of high-grade bond markets has definitely been encouraging. But in most countries, including the UK, bank lending remains subdued. It is hard to disentangle how much of that is down to weak demand, and how much to tighter supply conditions from the banks. I would just say this. I truly believe that it is in the interests of the banks themselves to ensure that businesses get the working-capital finance they need. While one can imagine, I suppose, individual banks being tempted to sit it out in order to deleverage their balance sheets in an environment that is obviously tougher for them, there cannot sensibly be free riders. If all banks were to adopt such a strategy, recovery might end up being anaemic at best, which would feed back into the banking system itself – increasing defaults and depleting banks’ capital. Not lending would be a counterproductive business and financial strategy. I’m reasonably confident that senior bankers can be persuaded to see that themselves, if indeed they don’t already. But it will, in my view, take until the autumn at least to gauge whether tolerable progress is being made on this front. Without it, confidence could ebb away. But with it, recovery will have a fair chance of becoming rooted.

I would hope that the insurance industry, and the liquidity and investment funds you run, might be investors in such paper, whose liquidity would receive some underpinning. Certainly you will  1  For example, see Buiter W (2009), “Central banks and financial crises”, paper presented at the Federal Reserve Bank of Kansas City’s symposium at Jackson Hole, Wyoming and Tucker (2009), “The repertoire of official sector interventions in the financial system: Last resort lending, market-making and capital” paper presented at the 2009 International Conference: Financial System and Monetary Policy Implementation, Bank of Japan. 2  BIS Review 71/2009  be an important part of the Bank’s consultative process led by my colleagues Paul Fisher and Sarah Breeden. Addressing trade and working capital finance has become all the more important given the reduction in the availability of trade-credit insurance, which our regional Agents hear quite a lot about. We therefore welcomed the initiative of that relatively concentrated industry to release a code of conduct, supported by the ABI, for handling difficult cases where unnecessary firm distress could be avoided. The Bank has followed this carefully given our role as midwife for the London Approach designed to help facilitate the orderly resolution of creditor/debtor problems. In a few cases over recent months, as well as over the trade-creditinsurance code, my colleague Andrew Bailey has played a behind-the-scenes role – the traditional role of providing the Bank’s good offices where (and only where) we can help, and where help is desired by those involved.
In the US, households had to borrow if they wanted to increase consumption. “Let them eat cake” had become “let them eat credit.” Financial innovation made it easier to do so. And the ready supply of foreign capital from the global savings glut made it cheaper. Most importantly – and this is the lie – complacency among individuals and institutions, fed by a long period of macroeconomic stability and rising asset prices, made this remorseless borrowing seem sensible. After the reckoning, the ensuing crisis and feeble recovery would look very much like all others that have followed prolonged credit booms. Policymakers quickly disassociated themselves from the received wisdoms of the Great Moderation and scrambled to re-learn the lessons of the Great Depression. That process continues today as central banks contemplate current parallels with the late 1930s. The aftermath of the global credit crunch has been severe. Global output is now ten percent below its pre-crisis trend, and with global nominal growth running two percentage points short of its pre-crisis average, the challenge of deleveraging remains acute. These challenges appear more pressing as some are now questioning their faith in another new era – China’s glide path to global economic hegemony. China’s economic miracle over  2  2  For an extensive survey, see Reinhart, C and Rogoff, R, (2009), This time is different: eight centuries of financial folly, Princeton University Press.

Of course, markets only clear in textbooks. In fact people are irrational, economies are imperfect, and nature itself is unknowable. When imperfections exist (which is always), adding markets can sometimes make things worse. Take credit derivatives, which were supposed to complete a market in default risk and thereby improve the pricing and allocation of capital. Financial alchemy seemed to have distributed risk, parcelling it up and allocating it to those who wanted most to bear it. However, the system had only spread risk, contingently and opaquely, in a way that actually ended up increasing it. Risk ended up concentrated on the balance sheets of intermediaries that were themselves capital constrained. With the fates of borrowers and lenders tied together via hyper-globalised banks and markets, problems at the core spread violently to the periphery. A truth of finance is that the riskiness of an asset depends on who owns it. When markets don’t always clear, the ultimate owner may be surprised to find what they do own. When that surprise is – or is thought to be – widespread, panic ensues. The impossibility of completing markets was not the only practical problem with the pre-crisis approach. Even if markets were perfect, nature itself is unknowable. Recall that the Arrow-Debreu world relies on people being able to calculate the odds of each and every possible scenario. 6  Keynes, J M (1936), Chapter 12. 7  But economists of a more nuanced persuasion pointed out as far back as the 1950s that this logic is flawed.