samchain/econo-pairs-v1 huggingface dataset:
Here we must show ability to take action, and I shall return to this at the end of my speech here today. Some of the difficult considerations to be made concern when and how quickly central banks, governments and other public authorities around the world will withdraw the strong economic stimulus they have been providing during the crisis. Now that the financial markets are more stable and the recovery in the economies has begun, it is time to move towards a more normal situation, not least with regard to monetary policy. We must make the transition from monetary policy during a crisis to monetary policy in an economic downturn. For the Riksbank and many other central banks, the question of when to begin raising the policy rate, and how quickly, is a fairly difficult balancing act. BIS Review 25/2010  1  I intend to begin by talking about the considerations behind our most recent policy rate decision and our forecast – the policy we consider necessary for inflation to be close to the target of 2 per cent, at the same time as providing support for production and employment. Transition from crisis interest rate to monetary policy in an economic downturn At the most recent monetary policy meeting three weeks ago the Executive Board decided to hold the repo rate unchanged at the historically-low figure of 0.25 per cent.

During the 1990s crisis employment fell more than GDP, but during this crisis the situation has been the reverse. Many companies appear to have chosen to retain existing staff, perhaps because their assessment has been that demand will return fairly soon. Many wage agreements will be renegotiated this year, but we are expecting the weak labour market situation to contribute to holding back wage increases during the forecast period. This contributes to lower cost pressures in the economy. As the companies have considerable spare capacity, they can manage to meet increased demand abroad and here at home  8  BIS Review 25/2010  without their production costs rising significantly. This has a strong impact on productivity, which is now expected to increase after having fallen for three years in a row (Figure 8). Figure 8 Lower cost pressures and increased productivity Annual percentage change  Sources: The Riksbank and Statistics Sweden  The krona has been weak during the crisis. It is not unusual that small, open economies like the Swedish one are affected by a depreciation of their currency in times of turbulence in the international financial markets. The krona has strengthened considerably since its weakest point and we are now assuming that it will gradually strengthen further, as we put the financial crisis behind us. This will help to reduce inflationary pressures in the period ahead.
In the same vein, we do not have previous experience of structural changes of this magnitude, which also require a very long term perspective, and where the presence of non linearities and irreversible tipping points are likely. In this regard, national and international regulatory and supervisory authorities have an important role to play to fill in these data gaps regarding banks’ exposure to climate risk, by collecting more granular data by location, sector and also at the firm level. And, in parallel, we have to use all our research capabilities to better quantify the climate change consequences on risks to financial stability, and the effect of potential mitigation measures. And these efforts must be coordinated globally to ensure adequate standards and comparability across regions. From the purely central bank perspective, I think it is also important to frame our actions in this field taking as a basis our price stability objective. Here again I think that, in our pursuit of price stability, we cannot ignore the transition and physical risks that I have mentioned before. Insofar as they affect the macroeconomy, the transmission of our monetary policies or the inflation outlook, then such risks are bound to affect the conduct of monetary policy.

And when analysing the potential existence of gaps to the current framework, we are taken a very comprehensive approach, meaning that we will look in detail to the regulatory, supervisory and disclosure dimensions. I think we all agree that the topic of climate change is all-encompassing when it comes to the potential impact on banks, and therefore requires a holistic approach when considering potential responses. On disclosure, we are conscious that there are a lot of initiatives underway focused on developing a globally consistent approach to sustainability reporting. But across these initiatives, we still need to bridge gaps so as to build a common disclosure foundation. Given the evolving initiatives and uncertainties related to the measurement of climate-related financial risks, we will consider in near term an appropriate Basel Committee response to support these initiatives. The Pillar 3 framework is a powerful instrument when it comes to disclosure. It is designed in a modular way and can therefore can be easily updated and adapted to reflect additional risks. On supervision, both the Basel Core Principles and Pillar 2 framework are flexible to accommodate any additional supervisory responses. The Committee is also exploring sound supervisory practices associated with climate-related financial risks. The target is to prepare a report for discussion with the Committee in Q3 and publish the report by year-end (subject to the Committee’s approval).
18  Productivity measured in heads (i.e. output per worker) is relevant in computing unit cost growth using wage or labour compensation measures also expressed in per head terms. 19  The Minutes of the MPC meeting held on 13th January 2016 noted that “In the year to 2015 Q3, a measure of total unit labour costs based on the MPC’s backcast estimate of GDP had grown by 1.6%. Growth of unit wage costs had been somewhat stronger over the same period, at 2.3%, though both rates were likely to have eased back slightly in the fourth quarter of last year.”  20  Analysis by Bank staff suggests that a simple principal component (PC) measure of core inflation – which summarises the broad trends contained in a large set of measures – is a better predictor of subsequent headline inflation than is current headline inflation. In other words, gaps between core inflation and headline inflation tend, on average, to be resolved by total inflation moving back towards core inflation (rather than vice versa). However, although smaller, the root mean square error from core inflation-based forecasts for future inflation does not seem statistically significantly smaller than forecasts using current headline inflation. Additionally, the summary PC measure of core inflation forecasts headline inflation 1-year ahead more accurately than a simple assumption of 2%, such that core inflation provides useful information for near-term inflation trends.

Using model (7) produces the fitted values for wage growth shown in Chart A1, from which the following narrative emerges. For much of the pre-crisis period, low unemployment and around-target inflation contributed to wage growth of around 4% (quarterly annualised). At the onset of the crisis, unemployment rose while recruitment difficulties and productivity fell, pushing down on wage growth. In the years that followed, above-target inflation supported nominal wage growth despite elevated labour market slack. Wage growth began to fall back around 2013–4, which is “unexplained” by the simple Wage Phillips Curve model, but which likely reflects positive shocks to labour supply, as emphasised by the MPC. Since then, wage growth recovered into the start of 2015, before falling back, despite lower unemployment. Some of this fall back is interpreted by the model as reflecting the fall in inflation itself (green  26  Adding quarter dummies to capture possible seasonal effects leaves the estimates unchanged. BIS central bankers’ speeches  19  bars disappear over 2015). In the most recent quarter, wage growth has fallen despite rising recruitment difficulties and falling unemployment, which appears as a negative residual in the model’s interpretation of the data.
Our use of early warning indicators is precisely because we have learned the hard way with banks that excessive reliance on modelled capital requirements lends itself to cutting capital levels too low. In banking supervision we are playing catch-up by working to raise capital levels from ones that were too low. We can avoid that outcome for insurance by acting now to introduce sensible backstops. Turning finally to the broader global environment, the financial crisis has led to a great deal of debate around whether insurers contribute to systemic risk in the financial system. The IAIS has been considering whether there are insurers which can be classed as Globally Systemically Important. In doing so, it has developed a methodology to identify insurers whose distress or disorderly failure, because of their size, interconnectedness, and the nature of their activities would cause significant disruption to the global financial system and economic activity. This work is at an advanced stage and we should hear shortly from the Financial Stability Board on a list of global systemically important insurers. The implications for being labelled as a GSII will then need to be considered. The PRA recognises that insurers are not systemic in the same way as banks. However, we strongly believe that failure of some insurers could have the potential to pose risks to the stability of the financial system or to directly disrupt economic activity through the availability of risk transfer.

There is therefore a common feature of banking and insurance in terms of continuity of access to critical financial services. The PRA has the general objective of ensuring the safety and soundness of the firms under its regulation. Safety and soundness is defined in terms of the resilience of the financial system, which in itself is closely linked to the access of users to critical financial services on a continuous basis. But for insurance we have a second objective, namely the protection of policyholders. Why do we have a second objective for insurance? For me, the reason is that continuity of insurance protection – of risk transfer and long-term savings products – requires a greater assurance that the policyholder has access to their contract – in other words, it is quite contract specific, and in some cases those contracts are long-term in nature. For banks, depositors want continuity of access to funds, but they have less need of access to the exact contract – deposits can be moved. Put another way, most of the underlying risks to banks arise from their assets, whereas for insurers they arise from liabilities and assets. So, we need somewhat different objectives for prudential supervision. The traditional model of supervision has been quite industry specific. The FSA regime introduced in 1997 created a single authority, but within the FSA the framework of rules  BIS central bankers’ speeches  1  applied to insurance supervision was unique to the industry.
Despite swift efforts to set up a European Banking Union there were in fact three major differences between the euro area and US in terms of the environment facing monetary policy: the sluggish recovery of the banking sector, the fragmented fiscal framework of the euro area and the structural rigidity present in many euro area economies. The necessary process of banking sector repair proceeded much more slowly in the euro area than in the US. Indeed, here in the US it was more or less completed by end-2011, but in some euro area countries it is still ongoing, even today. US authorities exerted pressure on banks (and non-financial corporations) to recapitalise with public money, via the Troubled Asset Relief Program. In the euro area, there was a preference for recapitalisation through organic growth. Recapitalisation in the United States was bolstered by the early and effective use of stress tests in the US to restore confidence in solvent banks, reinforced by a credible backstop. By contrast, early attempts at stress tests in the euro area were hampered by splits among national supervisors and, with only national backstops available, the tests proved unsuccessful at 2/7  BIS central bankers' speeches  restoring confidence in the banking system. US banks were also encouraged to recognise nonperforming loans (NPLs) more quickly, freeing up capital for new lending. The third difference was the ability to efficiently resolve insolvent banks and prevent the emergence of “zombie lenders”.

So, let me first express my gratitude to the ECB, with which we jointly initiated and organized this collaboration, to the national central banks of the European System of Central Banks and to their experts who participated and were directly involved in the implementation of the project, as well as to the EU Delegation in our country for their support throughout the project duration and of course for providing financial assistance to ensure the implementation of the project. Also I would like to stress the benefit for the NBRM from the extraordinary collaboration with the representatives of the ECB and of the national central banks of the Eurosystem. Considering the role of the central bank in the country's accession to the EU, the National Bank of the Republic of Macedonia has initiated this project in order to prepare for future membership in the European System of Central Banks and the Eurosystem. The road to the EU is a process that requires from us to build strong and effective institutions. This project has exactly that aim: strengthening the institutional capacity of the National Bank and harmonization of the standards for the national central banks in the EU by means of revising the current legal framework, the adoption and implementation of new policies and practices and staff training. The implementation of European standards and best practices in the operations of the NBRM is not an end in itself.
A simple rough estimate can provide an impression of the effects on prices of a 15-per cent depreciation in the krona. Let us assume a pass-through to import prices equivalent to half of the change in the exchange rate. This means that they will rise by 7.5 per cent. 9 If one assumes that these prices constitute 30 per cent of the consumer price index (CPI), this means that consumer prices will rise by just over 2 per cent as a consequence of the change in the exchange rate. According to this rough estimate, the pass-through from the nominal exchange rate on the CPI is thus around 15 per cent. 10 As the exchange rate fluctuates substantially, it may nevertheless entail fairly large effects on inflation, although the calculations in the example can be taken with a pinch of salt. 11  9  We assume here that prices of imported goods in the consumer sector rise by 7.5 per cent. 10  A 50-per cent impact on import prices, which comprise around 30 per cent of the CPI, gives a 15-per cent exchange rate pass-through to the CPI. 11  See also the article “The path of the krona and inflation” in IR06:1  4  BIS Review 3/2010  The effects of the exchange rate on the real economy One can usually expect a weakening of the exchange rate to lead to a positive effect on net exports.

As such, a key lesson from the financial crisis is the need to expand the range of instruments available to policymakers, so they are better equipped to ensure the resilience of the financial system. This missing instrument problem provides the backdrop to the Government’s announcement earlier this year that it intends to create a new policy committee in the Bank – the Financial Policy Committee – which will have responsibility for conducting macroprudential policy. In 2010, quantitative easing was entered into the Oxford Dictionary of English, along with chillax and defriend (don’t ask!). I predict that 2011 may be the year of macroprudential policy. The legislation determining the precise tools and objectives of macroprudential policy is still to be enacted. But as the Governor recently emphasised, the over-riding objective is to ensure the resilience and stability of the banking system. 4 If successful, macroprudential policy will represent a significant advance. As we have seen repeatedly through history and across countries, banking crises come hand-in-hand with deep and costly recessions. Promoting the resilience and smooth functioning of the financial and banking system in bad times as well as good would contribute greatly to our future economic stability. But it would be wrong to conclude from this that macroprudential policy is likely to solve the missing instrument problem entirely. That is for at least three reasons. First, macroprudential policy is not the instrument that will solve the problem of global imbalances.
For this period of time, it is particularly helpful to consider monetary factors. For the monetary analysis, I shall deal with the development of the money stock M3. When interest rates were last cut on 6 March 2003, short-term interest rates in Switzerland fell to a very low level. Since the opportunity costs for holding money were consequently reduced to practically zero, the demand for liquidity increased markedly. Immediately following the interest rate reduction, annualised monthly growth rates of more than 15% were observed for M3. Once the demand for liquidity by companies and households has reached the desired higher level, liquidity should only increase in line with nominal gross domestic product and should not pose a threat to price stability. In actual fact, the growth rates of M3 have fallen recently, but nevertheless the economy has more liquidity at its disposal than is compatible with price stability in the medium term. According to our last forecast published in March, given an unchanged monetary policy and a threemonth Libor of 0.25%, inflation could have climbed to 3% in the fourth quarter of 2006. The current forecast shows that - on the assumption that the three-month Libor will remain stable at 0.5% in the next three years - inflation will only rise to 2.7% by the end of 2006. At the end of the new forecasting horizon in the first quarter of 2007, inflation would slightly exceed 3%.

To be more precise, this higher capital requirement will be applied on those which have less than 20% of their share capital or voting rights with third parties and that have wholesale funding of more than 20%. These institutions are not the globally active ones, but they are the locally oriented ones that have created the highest risk for financial stability in Spain during recent times. While our largest banks have been more a support factor than a problem, and part of our savings banks sector is sound and profitable, we have faced serious challenges regarding a number of the local savings banks. Our experience in this crisis illustrates that we should be careful not to establish over-simplistic solutions to be applied generally. Instead, we should concentrate on solving the problems where they really originated. This is precisely the goal of the measures we have adopted in Spain during the last two years. We are currently dealing with a deep restructuring process that will end up by transforming those savings banks into larger commercial banks that, in the future, could also become global banks or a part of a global foreign bank. In conclusion, we should not demonise global banks for being global. They can play an important role in the international economy. Provided they are safe and soundly managed, they can facilitate the internationalization of non-financial firms, and they can bring greater competition, efficiency and stability to the markets in which they operate.
One very obvious provision is the Dodd-Frank Act’s Section 604, which amends the Bank Holding Company Act to direct the Federal Reserve to consider, when it evaluates an application for approval of a proposed acquisition, merger, or consolidation, whether it “would result in greater or more concentrated risks to the stability of the United States banking or financial system.”10 In commenting during a recent press conference about the Federal Reserve’s objective as a consolidated supervisor of the holding company of many systemically important financial groups, Chairman Bernanke said “the primary goal of the consolidated supervision by the Fed is to make sure that the firms – the firm doesn’t in any way endanger the stability of the broad financial system.”11 Today, both the penumbra of the Federal Reserve Act and the express terms of the DoddFrank Act place financial stability within the Federal Reserve’s legal mandate. During the crisis, the Federal Reserve needed to restore financial stability so that the Federal Reserve could work to achieve price stability and maximum employment. The effort at restoration caused us to explore techniques we had never used before, and, as Chairman Bernanke exhorted us, to do “whatever it takes.” To succeed with this mission, lawyers at the Federal Reserve needed to interpret our authority in new and different ways, and we did so. I hope that my remarks today reflect on that important function of counsel. The role of counsel, of course, does not end with interpreting legal authorities to address new and unanticipated challenges.

It may be more difficult to sell goods in a falling market, and prices for domestically produced goods may fall. Second, turbulence and weaker growth prospects may increase uncertainty among Norwegian households and businesses. As a result, new projects and investments may be postponed, or enterprises may be reluctant to recruit new employees. Third, the financial market turbulence has a more direct impact on the business sector. Banks and investors now apply a higher premium and higher prices for providing capital for  BIS Review 18/2008  3  acquisitions, restructuring and investment, and highly leveraged companies have to pay high loan risk premia. We still do not know what the full impact of the turbulence will be. The US authorities have taken measures. It remains to be seen whether they will have an impact. At the same time, growth in Norway has been strong and inflation is on the rise. Monetary policy in Norway is oriented towards keeping inflation low and stable. The operational target is annual consumer price inflation of close to 2.5 per cent over time. The inflation target is an anchor for expectations in the foreign exchange market, the social partners and price-setters in NOK. Buyers and sellers of NOK, businesses and households, price-setters and wage-earners can expect inflation to be close to 2.5 per cent over time. There is a division of responsibility in economic policy: •  Monetary policy steers inflation in the medium and long term and can also contribute to smoothing fluctuations in output and employment.