10th Annual Research Conference – Day 2 transcript

Hey, hey, hey. Good afternoon everyone and welcome back to the second part of our program for today. Before we continue, let me once again apologize to our online audience for the interruption of the broadcast during this morning uh morning's panel. Uh the full recording will be posted on the conference web page as soon as possible so that nothing is missed. Before we move to our fourth panel discussion, we have a special video address from Miss Christine Lagard, Christine Lagard, president of the European Central Bank.

We are honored that President Lagard has taken time to share her thoughts with us during the conference. Please the video. It is a pleasure to address this conference organized by the National Bank of Ukraine and Narodovi Bank Pollski. I vividly remember my visit to the city of Kev in June last year. I had the honor of laying flowers at the wall of remembrance where we paid tribute to the Ukrainians who lost their lives because of Russia's unjustified war.

That moment stays with me. The poet Lesia Ukraine, whose portrait graces the 200 Gravia bank note, once wrote, "Those who have not lived amidst the storm do not know the value of strength." Her words written more than a century ago speak directly to the experience of Ukrainians today. The people of Ukraine know the storm and after years of war, they continue to defend their freedom and show the world the meaning of strength.

But we can also see that strength in the institutions that continue to serve the Ukrainian people. Under the most extraordinary circumstances, the National Bank of Ukraine has kept the country's financial system functioning while also gradually normalizing its monetary policy as the war effort continues. Most fundamentally, it has helped keep money moving. The NBU has ensured that Ukraine's main system of payments between banks has operated reliably throughout the war. and even improved it along the way, upgrading it to run around the clock.

The central bank has also continued strengthening the safeguards around the banking system. It introduced a new framework for bank capital that brings Ukraine closer to the EU standards and helps banks remain able to absorb losses. Central bank credibility is one of the central themes of this conference and here the NBU has taken important steps to make its monetary policy more credible. One of the clearest steps came at the beginning of 23 when the NBU ended its monetary financing of the state budget.

The central bank had resorted to this measure the year before when the full-scale invasion created extraordinary financing needs. But since then, the NBU has gradually begun to normalize policy. It has moved from the fixed wartime exchange rate to a regime of managed flexibility, giving market conditions a greater role while retaining the ability to intervene when necessary. And in response to elevated inflationary pressures this summer, the central bank tightened monetary policy in line with its price stability mandate.

The work of bringing inflation back down to target continues. But these decisions show credibility being strengthened step by step. Today inflation expectations remain broadly stable. While Ukraine's strength comes first and foremost from its people and institutions, it has also been sustained by strong international support, especially from its European partners. Grants and loans have helped Ukraine meet its immediate financing needs and sustain its economy through the war.

Europe's central banks, too, are playing their part within their respective mandates. Several have already found practical ways to support the NBU and its staff and that includes the ECB where we have launched a program of short-term succumbments for NBU staff to work alongside our teams. I had the pleasure of meeting some of these colleagues when Governor Pishney visited Frankfurt. These assignments allow NBU colleagues to deepen their expertise and bring it back to their work in Ukraine.

In fact, some of them might be listening to me now. Alongside these bilateral efforts, a new EU funded ESCB cooperation program is being prepared with the central banks of Ukraine and Muldova. Expected to begin next year, the program will center on bringing central bank colleagues together through training activities, policy workshops, and high level meetings. Europe's central banks will remain committed partners of the NBU in the years ahead.

Lessia Ukraine wrote of the strength revealed by the storm. Since you wrote these words, Ukraine has endured many storms. That strength remains obvious today in the courage of Ukrainians and the resilience of their institutions. Ukraine will weather this storm too. So with that, I wish you fruitful discussions over the remaining sessions of the conference. I wish you the very best and I leave you to the next panel credibility as a central bank's key assets which I hope will generate a very rich exchange of views.

I thank you very much for your attention. Thank you President Lagard for this intervention and for the ECB for the continued support of Ukraine. Uh we now move to the our fourth panel and this one is in a peer discussion format. Our panelists will engage in an open exchange sharing their experience and the topic could hardly be more central to the to this conference. It's credibility as a central bank's key asset. So I'm delighted to welcome back Brill Tano, the IMF resident representative of Ukraine to moderate this session.

Priscilla, please take it from here. Thank you Sasha. Thank you everyone. What a great way to start uh the panel on credibility as a central bank asset. So this panel is indeed dedicated to credibility uh one of the most valuable valuable assets of the central bank. Indeed, as our managing director of the IMF said before, credibility shapes expectations, influences risk risk premium. It strengthens monetary policy transmission and uh it is also an additional and existential dimension for Ukraine since Ukraine depends on exceptionally large and sustained international financial support.

And in this sense, the credibility of Ukraine's economic institutions in prim the central bank and also the ministry of finance matters not only for domestic stakeholders but also for international partners who need confidence that macroeconomic policies are coherent that financing is been used within a credible framework that difficult policy decisions will be taken when necessary and that the institutions responsible for preserving stability can deliver.

We are very lucky today to be joined by three policy makers who have spent years managing policy in environments where credibility was not only an abstract concept but also a practical necessity. Their experiences offered valuable lessons on how trust is earned, preserved and leveraged in support of monetary and financial stability. So let's welcome and let me help welcome our three panelists. uh the governor of the bank of Lithuania, Gdimas Simus, member of governing council of the Bulgarian National Bank, Mr.

Ilia Lingorski, and the vice governor of the Croatian National Bank, Mr. Michael Freland Freyland. So, I see you. I see you all on the screen. So, we we are we are ready to um to start. I would like to uh give the floor to you for some opening remarks on what credibility um of the central bank what aspects of this credibility you consider more more important but I think that maybe for the people who are listening to us maybe I can start with a very short uh biographical details of the of the three of you and I'll start with Mr.

Giminina Simus H who is the chairman of the board of the bank of Lithuania since 2021. Uh good morning. Hi Giminas. In this role he oversees monetary policy, economics and organ organizational management. He was previously a member of the board of the bank of Lithuania and director of the economics and financial stability services. He's also a member of governing council of the ECB of the European Central Bank. Our second panelist is Mr.

Lilia Lingorski, a member of the governing council of the Bulgarian National Bank Euro System and a chairman of the board of directors of the Bulgarian Mint and I see Leah also on the screen. He's also a lecturer at the department of economics at Sophia University and as pre previously served which is actually quite kind of interesting for this panel um as deputy minister of finance and head of state treasury alternate governor for Bulgaria the IMF and chief economist of the Bulgarian Development Bank.

Our third panelist Mr. Michael Fland joined the Croatia National Bank in 1997 as economist and research department. In the period from 20 2001 to 2003, he was assistant to the executive director also in the IMF. In 2013, he was appointed vice governor of the creation national bank and he was reappointed for his second term in 2019 and for his third term in 2025. So congratulations for the third term. Vice Vice Governor Fland, by the way, I hope I'm pronouncing correctly, but you will uh you will correct me when you when you when you intervene for the first time, participated very importantly in the process of accession negotiations between the Republic of Croatia and the European Union and he was in charge of the Euro adoption project in the Croatian National Bank, which can also be interesting for the path towards the EU that Ukraine chose for for itself.

So I would like to start by giving the floor to Governor Simus for some uh opening remarks and then pass to the to the other panelists and then maybe we can uh we can start a more interactive section with uh with questions and answers. So the floor is your uh is yours Governor. Thank you very much and um uh thank you for inviting me to this conference and I really regret that I cannot participate in it uh to say in a live mode and u only and only to to to take to take part in only remotely or online but um I think the topic you're raising I think first of all it's no coincidence you're raising because because central bank credibility becomes more and more relevant than actual topic of today's and uh over the last several years I would say credibility credibility has become a quite intense or even immediate issue and uh we saw different cases of a political pressure the return of inflation following energy shock and strain public finances across various countries.

So all this added to pressure on or added pressure on different policy making including also monetary policy and uh at the same time we can also observe that public trust in public institution is also on decline. As regards central bank credibility central banks also in many cases are reserve management. So I can also use this anal an analogy that credibility for central bank is like a reserve. So you build it gradually over time or and in ordinary times and this gives you as a policy maker a room to maneuver when circum circumstances worsen or change and I like seeing this uh as a case of two example examples.

So first imagine two separate central banks facing the same energy price shock or price shock and then initially inflation raises by the same magnitude and the difference is only what households foreign and financial markets do. So let's say central bank A is a credible one. So companies believe that inflation will return to target. So they are less likely to pass the shock into the prices. Workers demand smaller increase in wages.

Investors demand lower interest rate premium. So bank A, central bank A needs to tighten or to to tighten monetary policy or in other words to raise interest rates because credibility and here is important thing. Credibility cannot replace replace an action but central bank A would restore price stability with less damage to growth and unemployment. And then let's take case of central bank B which is less credible. So companies would assume that inflation most likely will persist and they raise prices more quickly.

Wage demands increase and this currency may depreciate. government borrowing borrowing costs rise. So, central bank B also needs to tighten monetary policy and raise interest rates, but actually it needs to do strongly and to keep them high for longer and then the original energy shock even if the original price shock is the same but the economic cost is higher in in case B. So credibility changes behavior and therefore changes the economic outcome.

So credibility is not just a nice word but actually it has very concrete outcome and actually this outcome is measurable and NBU research found that firms or companies which regarded the NBU policy as credible had inflation expectations closer to the target. Credibility has also market value. For instance, IMF finds that in normal times, even a slight increase in central bank independence is linked to lower five-year sovereign yields.

And Ukraine's experience shows that credibility means in practice. This month, Ukraine marks 30 years anniversary of Rivia. And I would argue that Ukraine has in sense built its n national currency twice. So first time back when in 1996 when Ghibna was replaced when Ghibna replaced the carbolet hope I pronounce this night this correct in the aftermath of the hyperinflation and actually the second time I I would argue that is in since 2022 under entirely different and far more extreme conditions during the fullscale war Ukraine moved from a fixed rate exchange rate to a managed float gradually easing capital controls and returning to flexible inflation targeting.

And this experience shows that the real test of institutional credibility comes not in normal times but the real credibility is tested under extreme conditions under under stress and actually we have a new test already arrived. New energy shock is again adding price pressures while inflation while the previous uh inflation episode is very fresh in people's minds and this matters because companies and households may react differently this time.

Research suggests that companies have become more responsive to changes in costs and demand and may not adjust the prices more quick and may now adjust the prices more quickly. Inflation dynamics are also nonlinear. So when inflation is already elevated, large shocks can spread faster for companies cost, price setting behavior, wages and expectations. And now central banks do not operate in vacuum and only their own policies and there's clear synergy between central banks credibility, wide economic environment and trust in other public institutions.

And let me refer again to VCB risk research which shows that strong real GDP growth supports positively while higher public debt wider the sovereign bond spreads and employment have a negative effect and these factors are largely outside the central bank's control. Credibility also reflects performance across all central banks responsibilities and most often uh most frequently we talk about monetary policy but I believe in many cases central bank is also responsible for reserve management for payment systems for statistics in some cases for a supervision of finance financial markets uh of financial stability and failure in any of those areas can actually affect the confidence and credibility of inst of institutions of institution as a whole.

And finally, people also do not assess each institutions institution in isolation, sustainable public finances, reliable national statistics, independent courts, predictable economic policy making making and respect for institutional mandates. All this supports also central banks credibility and uh by telling you this uh I want to convey a message that I do not look at the central bank's credibility as certain so to say isolated issue it's a mixture of many things and of everything not only so the most important thing what central bank does of course but there are much more much more different various factors that eventually lead to the instit to be to the credibility of institution of single institution but also of all public institutions as such and as for bankers we contribute to the wider institutional credibility by acting as an independent center of economic expertise with similar role to a think tank uh and to give you a concrete example so I would like to refer to our housing market so our initiative to simplify mortgage financing has helped around 50,000 borrowers refinance and re renegotiate their loans with estimated savings exceeding quarter of billion over the lifetime of those loans and our independent analysis supports better policy decision and then better results strengthening public trust in the institutions involved.

So I do believe credibility cannot build cannot be built by one institution only. We need consistent delivery across the whole policy framework across every institution and of that institution one day. Thank you. >> Thank you governor. This was a super interesting opening remarks and thanks for reminding us how multifaceted the this this issue is. I mean credibility and also for quoting you know some research both in house for you and for us for the MF on the particular impacts that credibility can have on economic outcomes and also for mentioning uh the housing market which is actually very very interesting um part or part of of research or experience that you have uh in Lithuania.

So thank you very much for that. I'd like I' I'd now like to give the floor to uh Miss Ilia Lingorski for some opening uh remarks and I you can uh you can connect you can say yeah what what what you have prepared or you can connect to what the governor said. I leave I will leave the floor to you. Thank you. >> Thank you. I hope you can hear me and that microphone works. Okay. Well, dear Priscilla, uh, Governor Simus, Michael, thank you so much for the privilege of joining you today at this outstanding conference.

Uh, cordial, thanks to all our colleagues and Governor Pishny for organizing in these very difficult times, this superb event. My deep regret is that uh uh unfortunately due to Russia's unjustified and unprovoked war against Ukraine, I'm unable like all the others to be with you in Kiev today. But I look forward to the earliest opportunity uh to to be able to join you in person in Kiev and um and continue our cooperation.

We were very very pleased and honored to welcome Governor Pishni and Vice Governor Sergei Nikolaiuk in Varna earlier this summer for the IMF constituency meeting. And again on behalf of uh my governor Radiff and all my colleagues from the Bulgarian National Bank uh I express our deepest uh and unrivaling support to all our friends and colleagues at the uh Ukrainian National Bank and and and the people of Ukraine. So after two days of excellent speakers and research at the frontier of economic and policym economics and policym forgive me that uh I have to return to the I already already covered on the importance of issues of credibility in in in central banking.

I want to speak about something our community tends to take for granted. If I can add something to the discussion. Uh and I believe uh it will be decisive in the decades ahead and it is merely the intellectual capacity and potential of the central bank as an institution as source of credibility uh a source which must be built enhanced and grown every day. This particular conference in its 10th edition and our hosts of the National Bank of Ukraine above all are a shining example of what could be done on the merits of that.

First and foremost, central banking really is an activity which is very much knowledge based and it comes to no surprise that even the Nobel prize for economics is by no coincidence called the risk bank. uh Nobel Prize for economics being supported and sponsored by our colleagues at the Swedish central bank. So when I speak of intellectual capacity, it is not the academic in me referring to talent or education. These are foundations and uh what I want to address are four things that turn that talent into institutional strength and credibility.

Before all I have to mention freedom, democracy and within that the central bank independence. Without freedom of expression and independence from political command, no amount of talent or research budget will help enough. The potential is suppressed and it fails to inform policy precisely when it matters most. In times like these, many of us here, Bulgarians and Ukrainians alike, as well as my colleagues on the panel, come from countries that spent decades after the Second World War under totalitarian rule.

And we do not know this from the textbooks. So without independence, a central bank's credibility is only ever that the government of the day or the political regime of the country commands. Second, it's the institutional quality and inclusiveness of institution. These two grow out of freedom and democracy. A social fabric in which every citizen matters, everyone is equal before law and property rights and that is something I really want to underline.

Property rights are protected. We haven't seen any other system but the inclusive capitalist system based on sound institutions which allows for that and I think we should take certain pride in it especially when we hear so much attack on the fundamental institutions which make the valued system and what the European Union today is. History gives us no example of intellectual potential flourishing where property is not secured.

And here independence matters even more because the fastest and hardest to resist way a supreme power can destroy the value of property is through money. As James Robinson, Professor Robinson, we had the pleasure to hear him earlier, and his fellow laurels have shown, making institutions better and more inclusive has been at the center of human progress since the industrial revolution. Thirdly, innovation, which brings us back to the first two points, and moving from behind the curve to ahead of it.

Earlier this summer, I also had the pleasure of hosting here in Sophia uh Philip Aagon. His lesson is easier said than done. Growth comes from creative destruction, new ideas, firms, and technologies displacing the old orders. Wherever institutions allow it rather than shield the incumbents, an economy that grows this way is anti-fragile. and Governor Pishny put a lot of stress on why we need to be antifragile in these current times.

It does not merely withstand shocks, it learns from them and comes out stronger. That quality rests on intellectual capacity, not only talent, but an institutional order that allows and mobilizes it. The same is true of a central bank. And for an institution whose purpose is stability, the point is subtle. In protecting stability, we must never end up protecting the status quo. With artificial intelligence dominating any conference room these days as a topic, the digitalization of finance, tokenized asset, an instant settlement being ahead of the technological and knowledge curve has become a question of sovereignty.

That is why the euro systems, digital euro and the rails and guard rails we are building for tokenized markets are so naturally part of our commitment to the citizens of Europe to safeguard European and national sovereignty in a time that has brought war back to our continent. We have long seen ourselves as evidence-based datadriven institutions and rightly so in monetary policy that is the source of our predictability and our credibility.

Looking ahead of the curve, discounting the future was the business of private markets. That division of labor no longer holds particularly when it comes to the technological progress. The future is already today and in knowledge, research and technology we expected as central bankers to lead. Fourth, and last, but definitely not least, partnership, integration, and belonging to a rules-based community of central banks.

Whom you cooperate with, integrate with, and struggle alongside matters no less for an institution's intellectual potential potential, and for its credibility. Creative destruction is driven by competition, but intellectual potential depends on free and voluntary cooperation. Perhaps even more than on competition alone. Knowledge is the one asset that grows when shared and it is only ever shared by those who choose to.

The euro system which Bulgaria joined this year, this conference and the international cooperation the National Bank of Ukraine has built are again shining examples. We have spoken uh this past few day two days about learning from each other. But in a prolonged geopolitical struggle when often existential challenges are had, it matters even more whom you built the future with. And I cannot stress enough how much institutionalized intellectual capacity we will need for one of Europe's hardest problems, integrating our financial markets and building the savings and investment union.

The innovative potential of our economies depends on it and that responsibility is ours as central bankers and policy mayors, policy makers to bear as well. Let me conclude. Credibility is not only a mandate and a track record. It is an institution able to think freely, to think ahead and to think together with others. No central bank has demonstrated that under harder conditions uh that better than the National Bank of Ukraine.

I look forward to saying so in ke in person. Thank you. >> Thank you very much Helia. I really like that you started from reminding us that um part of uh credibility is also rooted in freedom, democracy, independence of the central bank. Actually um probably these are the values that keep all this community all the people in this conference together. If I if I had to think about something it is very fundamental but it is also very interrelated.

As for the intellect in intellectual capacity of the MBU uh we have uh a direct experience of that and it's uh it is truly remarkable. Uh I started that uh in Kiev a couple of years ago and uh I am actually I am constantly impressed by the level of the human capital of the MBU and the professionalism and the resilience under these conditions of stress and u on partnerships. Uh I think they are also doing very very well as you as we see in this panel like they have a lot of friends like you like from different member states like supporting and learning together.

So thank you very much for this opening remarks. Helia I'd like now to give the floor to Mr. Michael Fland. You can also do justice to your surname Michael maybe because in when when you start with with your comment the floors is is yours. Thank you very much. >> Uh Priscilla thank you very much. You can pronounce my surname as Fland. it's easier but if you continue pronounce it pronouncing it in a way that you started I'm also completely fine with it.

So please uh let me first thank the organizers in particular governor fishni and deputy governor Nikolai for this organizing this conference for inviting us. uh for me personally it's also a kind of a regret that I couldn't come uh irrespective of of uh good intentions and there I join all my colleagues here at the panel of Mr. Leorski and also Governor Shinkus uh that we cannot meet in person and and have this nice discussion in life. uh when it comes to credibility, let me say uh let me say that I completely agree with with my colleagues what they already put on the table. uh I I may add a couple of things uh uh in particular the fact that basically credibility when you look it's also kind of a regime specific because when we ever whenever we talk about the credibility we basically look how much uh central bank is successful in achieving the inflation target in in principle of course that uh At the end of the day, uh, one would say also that the credibility is regime specific because certain monetary regimes which are inflation targeting regimes have one way of achieving it while another regimes like exchange rate targeting regimes have another way of achieving uh low and stable inflation.

But at the end of the day irrespective of the regime uh credibil credibility is built over the time and it really depends on the success of the central bank to achieve this uh low inflation and stable inflation and on top of that through this credibility what is built is confidence uh which is then seen in ex expectations about inflation. So if inflationary expectations are well anchored this is the uh I would say a key proof that the central bank has delivered on its mandate.

There is one other thing that I would also put on the table and that is financial stability. uh financial stability in particular at B central banks are also in charge of the uh banking supervision which means they have to keep an eye on the stability of banking system uh is an additional key element of uh achieving central bank credibility. uh if I just go through Croatia's experience if I may put it that way uh and if I if I just look at the periods when the inflation was elevated or even when inflation was in a hyperinflation because Croatia was one of a few countries which did have in a history hyperinflation that happened during our time when we were part of former Yugoslavia in the 80s but also in the very early 90s we had one episode of hyper inflation.

So when I when I observe this these episodes of hyperinflation and then I also on the other side observe the episode of banking instability because we also unfortunately went through a small banking crisis in late '9s. So it is many years ago. uh I can clearly tell you uh that a weight of a banking stability is much higher than inflation stability. So people around us uh value our job uh much more through the lenses of a banking stability than through the lenses of price stability.

So if something happens with the banking, if there is any kind of kind of instability, this is much stronger pain to the population uh than inflation itself. This is at least the kind of a practical experience that I uh that I noticed. But that doesn't mean that inflation is not important. It's far from that. But this is just one element that I also wanted to put on the table and this is in particular finial stability.

Thank you. >> Thank you very much Michael. So so you actually gave us an operationalization of the credibility but what you said is like credibility can be defined as the ability of the central bank to reach the target. It can be inflation, it can also be financial financial stability. So I would like to connect maybe to this opening remarks to ask the first question to uh Governor Shimus. So governor in today's environment what do you think poses the greatest threat to central bank credibility?

Is it the failure to meet the target as Michael was saying before inflation financial stability? Is it political pressure? Is it is it misinformation? How do you see uh the biggest threat to central bank credibility uh today? >> Thank you. Thank you. This this is great question. But um the way I look to it so I look in a way what you can control what's so what's in the within the mandate of a central bank and what is beyond and of course uh if to choose something from what you have said the most important thing this is the mandate and how successfully or not you are delivering.

So I would go for this u uh if I think about the biggest threat to credibility. So this would have been resistant failure to restore price stability. And uh and um yeah here I do not mean a single miss of uh inflation target whatever is the reason no matter this is a war or energy or any other supply shock uh especially when in today's environment where geopolitical fragmentation energy and commodity shocks climate change even war repeatedly move inflation through supply chain.

So let's not treat every shock as a proof of failure. But what's important in my mind is is for how long and how far inflation could move from the target in the longer term perspective or in the medium terms if we want or public losses the trust in the central bank and uh inflation expectations diverge from the from the uh substantially and demarkably diverge from the from the inflation target. And this is something what what the credible central bank needs.

So so so first first of all so the biggest threat uh or actually the biggest success if to to put into a positive way to the credibility of the central bank is actually its ability capability uh determination focus of the delivery what's required from the central bank. So this is price to bill. >> Thank you, Governor. Um very very interesting reply. I would like to continue on this threat um and ask to Mr. Lingorski.

So the governor just said that uh in his opinion the threat to uh central bankability is indeed not delivering on the mandate and uh uh in uh uh in the central bank law of Ukraine the mandate is indeed price stability right I mean as we said but considering your experience in monetary policym but also fiscal policym and considering that Ukraine is currently facing a war. Do you think that uh uh this price stability objective should be uh linked with uh competing priorities which are necessitated by the war?

Do you think that that to preserve credibility inflation should always come first or should the central bank show uh some flexibility? Certainly uh conditions and current environment, the context of uh of challenges within which you have to deliver on your mandate uh matter a lot and perhaps there is no better example than our uh colleagues from the Ukrainian National Bank who managed to preserve the payment system operating uh flawlessly during extreme conditions of war and uh uh attritions to the civil and energy infrastructure more and more within the euro system although it's never explicitly mentioned within the mandate of of the European Central Bank and the and the national central banks we call ourselves national central banks but we are in fact really national reserve banks as uh other speakers mentioned earlier but more and more sovereignty uh is uh reason as a major topic and that is why we have engage so actively with the development of the digital infrastructure for the euro not anymore as a future infrastructure but infrastructure of the present day even uh when there is so much pressure coming from hostile uh as well as unpredicted uh environments and events which may pose risk to sovereignty and functioning payment system, bank stability.

These are also very important issue. Michael mentioned earlier that particularly in our recent history of emerging economies and even till till now the stability of the banking system perhaps is considered by the public as the most instrumental uh foundation of credibility of central banks. And yes indeed our mandate and the mandate of our central bank the ECB is price stability. But perhaps it becomes the less challenging mandate to deliver as we have accumulated over the last 70 years plenty of knowledge and instruments with which we uh tackle the challenges when it comes to price stability.

Yes, we are faced with supply side shocks uh frequently and repeatedly over the last seven years when our instrumentaria has been largely developed for uh delivering our mandate to the demand side. But the Ukrainian central bank has really shown what it is uh to protect the sovereignty of your country and to make sure that your payment systems work, that your banking system operates and that you protect it from cyber as well as kinetic attack on your payment, banking and financial infrastructure which if made vulnerable will propagate this vulnerability with a difficult to predict consequences through the entire economic uh system and the social fiber of country as such.

So my short answer is yes. Our mandate is our mandate and we are primarily focused on delivering but we deliver on mandate in the with the midterm horizon and that is explicitly mentioned every time at the press conference governor Shinkus votes unlike us on those decisions. Sometimes there are conditions and cases upon which you have to act today. There is no midterm horizon and the Ukrainian central bank and their experience will be studied for years and decades uh in terms of institutional capacity, in terms of operative competence but also innovation and making sure that uh one of the core systems which defines the sovereignty of a nation particularly when attacked by an atrocious war uh from a neighboring country can be preserved. and that deserves no less credit than uh adhering strictly to the price stability mandate. >> Thank you very much for that.

Uh if I can just follow up very briefly on your reply Ilia. Um so basically what you're saying is that we have a mandate which is you know defined by the law defined by the central bank but then obviously there are other things which are which are intervening. Also, Michael mentioned financial stability before. Um, but and I wouldn't want this question to be too philosophical, but like is there in your opinion as a practitioner a limit in which uh showing too much flexibility actually counteracts uh preserving credibility?

Like how much flexibility can a central bank show while preserving credibility at the same time? like you can also make maybe some examples or I realize the question is is is theoretical. I'm not saying you know to there is clearly not a clear a clear threshold in which flexibility counteracts credibility but like I'm interested in the fact in this clash because nowadays uh like during a war obviously the the entire state is mobilized for the war not only the you know payment system financial stability also the ministry of finance everything enters in Ukraine as a sort of force to to to fight this war and I've been wondering for myself like what is uh that that it is difficult to maintain a clear division of mandate in this context and so I was wondering if you have any hint or any one of the panelists has has hinted to say how much flexibility can it can a central bank show while preserving credibility >> I would even go further by saying that there are conditions and cases and we witnessing that over the last few years within the euro system as well as our colleagues on the other side of the pont at the fed that sometimes it islex flexibility which uh is a more important source of credibility than rigidity.

Uh hence we don't speak of rigidity that much anymore and we speak much more about resilience or anti-fragility uh which are much more qualities of adaptability rather than uh maintaining a rigid uh unchanging environment and uh the the the very obvious example uh is the fact governor Shimus could say much more about it than I being a policy maker directly involved with those decisions is that uh the practice of forward guidance by the large central banks including the Fed and ourselves here in the Euro area has actually uh given away to a much more uha case byase datadriven approach in which no forward guidance is uh is given basically to preserve that adaptability and flexibility in order to react to much faster changing environments geopolitical risks which uh then create supply side shocks directly propagating either via energy prices or other or other transmission mechanisms into economy and uh and uh having profound impact on inflation and the core mandate.

So there are times when in fact flexibility is what is expected in order to give greater credibility to you to central bank and we live in times like this just now. What I said is uh not even an example. It is the new normal in which we live now. And uh the policy maker deciding on reference interest rates always has the very difficult task to find the right balance not just for the day but for the months and maybe year to come especially when the conditions are changing so rapidly.

Hence, we have reserved our policy decisions when it comes to price stability via the monetary policy uh to to being uh able to adapt and not pre-announce directions. Uh another aspect the European Central Bank and the Euro system as such has gained a lot of credibility over the last 20 years particularly having had to struggle through very systemic crisis like uh 2009 the global financial crisis then the Euro bond crisis 2010 and 11 again it was flexibility and introducing non-conventional monetary uh instruments uh and uh balance sheet operations uh which allowed the system not only to mature but in fact to deliver with much more scope and power on its mandate.

Hence nobody will forget perhaps the words of Mario Draggy uh in London in 2012 which has in a way defined the way we do our job whatever it takes. I'd like to finalize. Thank you very much with the words of Mario Draggis. So, thank you very much. Very nice reply. Michael, back to you. And on another topic on Croatia, one of the most recent countries to join the Euro area. So, uh Croatia even joined the Euro area. As you know, Ukraine's ambition to accession to the European Union.

Most many people consider that this is the real is going to be the real security guarantee for Ukraine. The accession to the EU is also one of the pillar of the IMF program. I wanted to ask you looking back uh what was the most important source of credibility that enabled Croatia's successful adoption of the euro and how can the Ukraine central bank the Croatian central bank help Ukraine uh actually sorry so what is the most important source of credibility that you take from your Croatia experience also because you led this accession yourself and then how can the central bank of a country in this case how can the central bank of Ukraine help this the the country Ukraine achieve its own European path.

So basically what did the central bank of Croatia do uh to uh support the Croatian accession to the to the euro? >> Thank you very much for for the question if you allow me just half of a minute to address the previous issue that Mr. Lingorski was addressing. >> Of course >> I fully agree with with what he said. I would just add one additional issue. Uh you put on the table this flexibility deviation of a policy target etc.

I think what is a critical to keep credibility in check there is consistency of a policy. So if the market sees that you are consistent irrespective of different kind of shops which are happening around uh this will basically protect the credibility in the end irrespective of whether you really achieved the target or you didn't huh at least you were on the path I think this is this is important point coming now back to to the question that uh that you put in front of me so Indeed, I mean, Crocious adoption of of Euro was one very successful episode and one very successful story and I would say that credibility of the central bank uh paved the way uh to this to this success and uh in in in this particular thing uh I uh differentiate or distinguish uh credibility built in-house when I say in-house I mean inside the country and also credibility built externally with European institutions over the time but also uh not only European institutions you know that the IMF is very important institution uh and there are basically these two avenues so one is internal one the other one is external one uh of course that we were talking also beforehand And how you build this credibility?

You basically build this credibility through your policies over a long term uh long term. Uh so going back since '90s uh we really had a extremely good inflation record track record. Uh having said that uh I also perhaps because of the broader audience have to mention that we were not country or central bank which had inflation targeting regime. We had exchange rate targeting regime. I don't want to go to this history but through this regime we were achieving very low and stable inflation rates since 1993.

In 1993, Croatian National Bank in Croatia started stabilization program uh as an answer uh to attack basically the hyperinflation that we had. And since then since this stabilization program we really had inflation rate which was fully comparable to the Euro zone uh uh Euro zone inflation rate. Uh so this is one track record. The second track record was basically uh our success on the on the financial stability on the banking system stability.

I mentioned in my opening that Croatia had a mini banking crisis in '90s. This was a mini banking crisis but we learned a lot uh on that crisis and thanks to that we were basically one of the pioneers in microcredential policym. So Croatia already in very early 2000s started to develop different kind of tools uh to in a way uh make resilient banking system more resilient uh than many other countries uh did at the time.

And thanks to that the real test came during the global financial crisis that was 2008 2009. The success of our measures was such that we had no bank failures and our government did not need to intervene. So basically zero taxpayers money was spent for the stabilization of the banks in Croatia. uh this gave us a huge credibility domestically but also internationally and of course that both of these elements then helped us once we started our talks with European institutions uh that we would be interested in uh entering into the into the Euro zone. uh you know I mean it when you talk to institutions you need to when I say institutions I mean their ECB and European Commission in particular when you talk to these institutions you need to have this kind of a positive track record otherwise I don't know I don't want to say that things are impossible but they are much much harder and also to enter into the Euro zone especially uh after uh after the uh sovereign indepth crisis in Europe that is the time of 2012 13 etc. you know that the completely different architecture was was made in Europe uh with the banking union etc.

So a newcomer country without a extremely stable financial system in particular banking system and a strong supervision simply couldn't uh approach uh into into into this uh euro zone uh which is which was much different to what was the case before the global financial crisis and and the and the sovereign debt crisis. This is this is regarding uh uh this credibility. Uh when you ask about our role uh our role um in helping the central banks helping the country on the on the European path.

I would say that uh you know EU is in general about strong institutions uh uh sound policy making etc. So this is one angle of things. Uh and of course central bank being there is one of the key uh institutions. uh but I would say that central bank's role goes beyond analytical work and also uh beyond the u uh uh pure provision of critical functions or operations be the payment system stability of banking etc. Our role is there that we are also ambassadors.

So just having a number of meetings with the uh technical level stuff or high level staff in European institutions basically these people in these institutions make a picture of a country through the lenses of a central bank. uh so it is not irrelevant of what uh impression uh experts from the central bank be it on the operational expert level be it on the bio level leave at the end of a day because this is basically paving the way for a country to join number one EU and later on also also the Euro zone. uh I think that in this game it's also very important to have good coordination between the central bank and the ministry of finance because these are two critical institutions of a country uh which are having this kind of engagements with the EU institutions and once EU institutions notice kind of an energy positive energy which exists between a national authorities be it central bank be ministry of finance.

It also sends a right picture and signal that this is a reliable responsible country you can talk to. >> Thank you very much Michael very insightful and I think Ukraine is a case where we have this positive energy and we'll try to keep it up and leverage it to do exactly what you're saying. I would like to go back to governor uh Shimus. First of all, I would like to yeah make this session as interactive as possible. So many things have been said.

So governor, if you want to comment on anything uh please do. But then I have a bit more personal uh question for you since actually you are a governor of the central bank differently from us and so I wanted to ask you was there a moment when you realized just how valuable uh central bank credibility is in your in your in your career in your own career a moment when uh trust and credibility uh either made your policym easier or its absence made it harder.

Yeah, >> thank you. Uh, if I may come back then to the question Mr. Lingorski was answering on the on the on the on the data dependency and meeting by meeting approach. Uh, uh, my colleague mentioned word flexibility but actually in this regard I like more word which is also very popular nowadays. agility and where I see the difference because being agile you keep focus on the same target and this is for the euro area of course 2% inflation target in the medium term but you are more so so to say agile in the actions uh you are you are taking in the meanwhile uh with a focus on the target and uh and this is particularly important and um in this very uncertain environment.

So here on this I have two points. So in this very high uncertainty you risk ending up uh with two things. So first uh so first you I mean what we learned by now is that they live in this uncertain uncertainty for the last five or six years starting in 2020 with a co then with the unjustified war uh of Russia against Ukraine and u and uh different uh energy and commodity shocks uh trade wars and etc etc. So many many shocks uh in many cases supply side shocks and uh and uh and uh and huge uncertainty.

So what the risk is that you may end up thinking that uncertainty by itself is a factor of taking or not taking a decision and uh and uh and uh I think that's not okay because at some point you need to admit that uncertainty is here with us and we need to take decisions no matter how big uncertainty is. The other thing is that what we are actually taking back from old days where uncertainty was lower and uh grounding or taking confidence too much on the central forecast as if they are so to say they are pointing to one specific uh potential or possibility of truth or economic outcome outcome somewhere in the future.

But uncertainty means that there might be uh different outcomes and actually what is important is not only this central forecast at least this is the most plausible I would say guess or estimate but actually a wide range of uh maybe not wide but I mean you choose your number but of tests or scenarios or sensitivity test and the importance is that you take the credible decision uh in you take a decision which is prudent in let's say in the majority of the scenarios. uh and therefore to take this credible and prudent decision means that you need to take into account the best available moment at the time of the decision and actually forward guidance this is exactly your pre-commitment to the future uh interest rate path is a risky way because situation is changing very quickly.

So just a quick reaction of this on this and you ask about let's say personal touch on the central bank credibility. Of course I had many cases where in a way you need to leverage on the institutional credibility which actually you are building over time building and using as res as I was referring in my first intervention uh as I said many cases but I would uh recall very vividly my so to say first experiences. So I became in governor five years ago in 2021 and actually Just little bit than a year later, we encountered we face this major inflation shock and uh and actually the fastest tightening cycle in Euro area history and uh of course objective was very clear is to bring inflation under control and prevent inflation expectations from being uh deankered.

Uh so that's for Euro area that's clear but uh I am governor of the Lithuanian national central bank and of course you come back and you come back to this uh to this national environment and what specifics is uh about the train that inflation here was exceptionally high so inflation was well above 20% or so uh more than twice bigger than than the average in Euro area. The other thing what's very specific for Lithuania actually for for for our Baltic countries that we have mortgages with variable interest rates and this means that ECB's policy decisions you know we are passed very quickly to the economy through the through repricing of loans through mortgages through household mortgage payments and actually from also business loans.

And the point is that you need to explain these decisions very openly and uh and uh and uh very very very clearly why the actions are necessary because the concept because because as I this this passful is way quicker than in in our countries and people feel you know quite immediate reflection of a decision on on on on today on their savings or on their interest rate payments and actually what you need to explain not only the action itself why it was necessary but also the consequences of inactions what it could be like if the decisions uh were not taken and actually and actually my colleagues they used this very I would say this very very nice comparison so they compared uh uh all this policym as a turning a ship away from Eisenberg well not well before a crash becomes inevitable and decisive actions of cotly had to be taken before all this had fully materialized and uh and credibility of the central bank of Urania which were building over time so uh it did not make the decisions somehow or explanations more or less popular or more or less painful or painless.

But uh it did keep or let me to explain why the things are needed and actually to bring understanding to a to a wider public more easily. And the lesson I took that credibility actually has to be built well before the crisis begins. And they need to build that beforehand for consistent action, very clear and open communication and willingness to respond to willingness to take responsibility uh for difficult decisions. >> This is really a fascinating reply.

So thank you very much for that. Uh I'm also happy that you mentioned this the importance of having a central forecast but also a distribution of uh of outcomes because actually this allows me to say that uh the innovation of the IMF program in Ukraine is that differently from any other program before we do have to have this sort of baseline scenario and downside scenario and we have to show uh to I mean the sustainability of the program in in a range in in a range of scenarios identified by these two.

So um this is actually something that happened for the first time for Ukraine. So I thought I took the I take the opportunity to say because many people in the audience may not know it. So we are perfectly on time I think because it's uh 1 hour after we started. Now I would like to open to uh potential questions to the audience which I'm not sure how I should take but I suppose in the chat if someone if someone has questions I'll wait to see them in the chat but otherwise while we wait for the question for the potential questions from the audience maybe I just wanted to um to to conclude this wonderful panel uh by giving you the possibility to say some final words of wisdom maybe to the to the bank of Ukraine or on the subject of credibility uh or on your own personal experience um before before concluding and in case uh we don't have uh questions but let me check I don't see anything coming up um no questions so thank you uh Sasha for for for confirming so in a very in the in the spirit of this panel which was very free flowing and um and and very interesting actually.

Um I would just like to give you the opportunity to say any final word if you want uh before before saying bye. So I'll maybe change the order and Michael maybe I'll start from you uh if uh if if you want or uh >> it should be. >> Yeah. Thank you. >> So very shortly uh uh my message is uh very simple. just keep up the the good work that you have been doing for for many years now. Uh and you have been performing uh this job in a very difficult circumstances and through these difficult circumstances you became very strong uh and resilient. uh your experience is uh uh incredible in a way and I think that all of us uh we can learn a lot how to do monetary policy making uh in such an adverse uh conditions.

So uh you are kind of inspiration for all of us uh that the central bank really can uh in very difficult circumstances perform all its duties including uh organizing uh this kind of a nice conference like this one. Thank you very much. >> Thank you Michael Ilia. Back to you. >> Well joining Michael uh in his very kind words. What do you say to a central bank which has acquired a hero status uh next to the Ukrainian vess?

Uh I only want to say that uh your friendships grow uh your friendships are there and we are only privileged to help with whatever you can. You may be surprised that in the years to come perhaps you will be helping us more than we we could on many issues. uh but uh it is extreme privilege to have started building things together and looking forward towards the integration of Ukraine within the European Union and in all its institutions.

I'm only eager to continue together with my colleagues uh uh in Bulgarian National Bank and across the Euro system to work together and to build together with our colleagues at the Ukrainian Central Bank. Thank you very much and maybe then final words for you governor uh Giminas the floor is yours. >> Thank you very much. I would like to add uh something to what colleagues said. U so first of course it's a huge privilege uh for me personally but also I can speak on behalf of the all bank of Lithuania to have to take to take part in this conference and uh for me uh you know talking on these very actual as we began topic central bank independence credibility and uh inflation targeting uh and mandate is very important.

But uh this this is at most important because we talk about this in the conference of the central bank which is of a country which is in war and uh and uh and uh and uh and here for me is this very very nice reflection of the strength of the Ukrainian people which at the same fighting and at the same time having this broader broader a broader view onto life in general. So I think this is this is very very very very important thing.

The other thing that uh we talked about credibility but u but u credibility cannot be achieved without resistance because credibility as I said is something like a reserve you're building over time but you always distracted by different things views approaches attitudes utes whatever uh from what you are supposed to do. So being resilient implies that you're persistent on your mandate persistent very focused and and uh sustainable on what you need to deliver and uh for me this resilience also I'm going to think about this you know and about this word resilience actually this brings me again to the central bank which has wider mandate than just monetary policy and what we learn through our very close collaboration between Ukrainian central bank, how to build resilience in different fields and mandates of the central bank and uh how important is to deliver and how important is to deliver on your mandate not only in normal times but also then the days are not so so to say not so bright and and as in the case of Ukraine when you have a war so so my full support to what Bank of Ukrainian is doing.

Uh the all the central bank uh we wish you very best and u and uh and to the victory of Ukraine and Slavoc. >> Thank you. I don't think I can add anything more to to these words. It was fantastic to have you in this panel. I enjoyed I learned a lot. Thank you. And also thank you from my part as well to the central bank of Ukraine. Thank you. I'll close the panel and Sasha back to you. Thank you very much. >> Thank you Priscilla.

Thank you. >> Yeah, thank you Priscilla. Thank you to all of the panelist for a very wonderful discussion. We are truly sorry that the security situation did not allow us to meet you here in person in Kiev, but I'm really sure that we will have this chance in the in the future. Thank you very much. Uh and now I guess we have uh several minutes for break. Uh so let's take this short break and we'll be back in five minutes.

Thank you. See you later. Heat. Heat. Welcome back everyone. We are ready to mo move on to our next session. This will be research session titled new shock same mandates central banks under pressure. I remind you to use our AI assistance to ask questions to the speakers. I will pass this questions to our moderator. But before I hand over, I want to say a couple of personal notes about this session. This is a personal for me. uh when we uh we originally uh planned to organize this session in a fullyfledged uh in-person format in Kiev but when we decided to move the conference online the moderator actually he he decided to come anyway and we could not talk him out to taking extra risk.

So Joani Rico now is here in Kev uh together with me in the shelter um will moderate the session. I also know that Giovani has recently been appointed as a program director for monetary economics and fluctuations at the center for economic and economic policy research. So our congratulations and I give the floor to you. Thank you Giovani. >> Thank you very much for having me here and good afternoon to everyone. Uh welcome to research session five.

New shock, same mandates, central banks under pressure. Uh this morning, the governor of the National Bank of Ukraine closes remarks by reminding us that the context might change profoundly. However, the central bank's mandate does not should not. This is indeed uh in essence the title of the session. The three papers speak up from there and share a common question. How should the central bank um think about and react to disturbances its framework was not built for?

Maxima Solareno asks what happens when the cost of providing a fixed quantity of defense rises under fire and whether central bank should accommodate uh or tighten. This is the case of the MBU, the dilemma of the central bank of Ukraine. Indeed, Valeria Tishakova uh with Alexander Tala asks how central bank themselves talk about geopolitical risks and they show that market price those risks um that are brought to the four uh by the central bank speeches.

Uh David Weiss asks what the pre whether the press pays attention to um uh fiscal and inflation coverage and whether the two are linked or crowd each other. Um he founds out that indeed the coverage of inflation and the fiscal news may crowd each other and shows that this has consequences for consolidation and potentially for the price level and then the central banks. Each speaker will have 18 minutes. I will signal when they got 15 minutes and they have only three minutes left uh and they will stop them uh after 18 minutes.

A participant can type their questions online and they will try to read them out. Uh Maxim the floor is yours. Um right so um the paper that I'm about to present is called central banking under fire. Um let me say a couple of words why such title um this paper is going to be about two institutional choices. One made by the government and another one made by the central bank and what those two choices do to monetary policy the central banking. uh when a country is under the attack thus under fire.

The usual disclaimer applies. Uh the view the views represented here uh are my own. They're not necessarily um of both of my uh employers, neither of the National Bank of Ukraine and uh or KE School of Economics. With that said, let me start with a simple fact. According to the Stockholm International Peace Research Institute, uh Ukraine's own military spending has uh risen from about 3% in 2021 up to 40% of GDP in 2025 and it keeps rising.

A change of that size clearly does something to uh an economy and uh there's already quite a wide literature uh asking what exactly happens there, right? in 2011, overangenko in 2012, Medivian papa in 2017, all of them ask um the same question. What happens when the state buys more defense? However, I would like to argue that um in case of Ukraine, a country that fights on your own soil, it's not necessarily a choice of the quantity, right?

You do not just choose how much of the front to defend, you defend all of it. So what moves for us it's not necessarily the uh quantity of the defense but more of a of its cost of its price right um so as I said literature asks how much a defense buys whereas I'm trying to ask what the same defense costs when the adversary tries harder uh and that distinction matters quite a lot because of what kind of good defense is so take an ordinary good right households decide how much they buy um and uh when it when the good becomes more expensive they just simply buy less and the price uh clears the market as the quantity adjusts.

Security is quite different because no households can produce its own defense. Only the state acting for all of them together can do that. So security is procured rather than bought and there is no demand curve to slide along. So um which means that when the cost of defense rises nothing clears the market. Somebody like an actual person or an in fact actual institution has to decide are we buying like are we paying more for the same protection or are we paying the same and thus getting less protection and that's somebody who makes that decision is the state right is the government and it makes that decision before the central bank can do anything about it at all.

So the primary question that um I'm investigating in my paper is when the cost of defending a country rises, what should the central bank do? To answer that uh I need three things. Uh and uh before I introduce those three things, let me set up the uh the model um where where those things sit in. So the model represents uh two sectors. Uh both of them produce their their own kind of goods. a civilian sector produces the goods that households actually buy like consumer goods um and a defense sector uh whose output only the state can procure.

Households supply labor to both of them and they consume uh the security that the state provides. The government funds this defense uh from taxes and debt uh and the central bank sets uh one policy interest rate. So uh underneath that simplified picture there is a quite complex model uh like a two sector newian DGS small open economy model but uh I'm going to disregard all those technical details and just focus on the uh main story.

Now back to those three objects that I need. The first one is going to be the shock. So the same protection takes more resources to deliver when the adversary is trying harder. Right? That gap between what defense costs to produce and what the state pays for it is exactly the shock. Think of it as an overuse of production resources, right? More goes in for the same output to come out. Uh the protection that arrives at the other end is identical, right?

Because here what matters is not how like it's not the amount of tanks we produced, it's about that feeling of security that households uh get. So what has changed here is how much of the economy's resources it took to deliver the same amount of protection. Right? So the price that the state pays is actually a wedge here in uh return uh times what the defense actually costs to make. Um this wedge this shock is set by the adversary.

Nobody inside the economy chooses it and um and it persists. So uh it is modeled as a persistent process uh just because the state uh has to live with it. Yeah. Um the gap that this um wedge opens is actually consumed right those uh ammunition expended equipment lost uh the destruction of warehouses um which is why it is booked as not just consumed it is booked as destroyed um and is booked as destroyed rather than as income.

Calling it an income would say that a struck warehouse made somebody richer. It did not. It just means that in order to provide the same amount of goods that that producer has promised, they need to use twice more resources, right? To rebuild that warehouse and to rebuild all goods within it. So when that warehouse is struck, it is destroyed. Those resources simply disappear, right? So that what's uh that's what the adversary does.

The second object that I need for my question is what the state does about it. So every government writes uh their defense budget line before the year begins before they know what would be the shock to the uh price of security. Uh in Ukraine we write it in rea but you can easily interpret it in whatever nominal terms you have. And we write it before anybody knows what this year is going to cost. So here the primary question is what happens to that line when defense does get more expensive right?

So the actual budget that is delivered is the planned budget adjusted by the change in price of defense and uh then of course it's the choice of the government by how much we adjust the actual budget depending on that uh difference in price. So that term here is represented by the kai parameter here. So let's take a look at the range of options. So on one end of it, the line is topped up in full. Meaning that as the price of the defense increases, the budget line increases or tries to uh increase one for one such that the state delivers the same defense no matter what is the cost of it.

On the other hand, the line is fixed in Rena, meaning that whatever was written in the budget is exactly what gets spent. So as the price rises, the same money buys less protection. So that parameter Kai here is the dial between the real and the nominal reading of a set budget line. Notice what it is. It's a choice. It's not a shock, right? It's more of a planned reaction to that shock. It's a stand that state uh takes when the budget is written, which means everybody in the economy knows it well in advance uh of any shock arriving.

Now finally the third object that I need for my question is the central bank. Um so the usual mandate for the central bank is to uh stabilize prices, right? Is to stabilize uh inflation. Um so the central bank here operates by a deliberately simple rule. When the price index it watches runs above target, the bank raises the rate. When it runs below target, the bank lowers it. And the policy rate moves in steps rather than um all at once because policy rates are inertial.

Right? That is what the central banks actually do. However, the key choice here is how do we interpret that mandate? What kind of prices are we stabilizing? So the first option is to track the civilian index, right? So it looks only at what households actually buy uh and track those prices basically like a shopping basket. The second option is to track the total index uh which tracks the whole economy both civilian and defense sectors together and it carries what the state pays for defense on top of the civilian prices at about 15% weight.

So it's near a GDP deflator rather than a shopping basket. Right? So this total index uh is um something closer to what a statistical office would call a uh deflator. It asks what the whole of the economy's output costs including the part that uh only the state buys. Normally those two indices move together. So nobody cares that much uh which one the bank watches. In most economies in most years usually the defense is a small enough share that the two barely differ and uh the choice between them is close to immaterial.

So in my paper I'm trying to catch a case where those two disagree in sign meaning that if the central bank tracks one index uh it would tell to tighten the policy another one would tell you to ease. Right? So altogether I have a shock a dial and a rule. That's everything I need to uh start asking my uh primary research question. So let me run the um the experiment. Suppose uh the wedge opens by 5% and then gradually decays.

Think of it as if something has changed on the adversary side, a new strategy, a new uh technology advancement. Uh regardless, it now costs us 5% more to deliver the same defense. So that 5% is a normalization right uh this wedge has no observable counterpart in uh in the wartime data and uh everything here is in its uh equilibrium response meaning when all the prices for the uh labor and capital are adjusted. So observe that here a 5% shock to the wedge does not come through as a one one uh one for one uh ch change in defense inflation.

Actually a 5% shock to wedge produces 6.22 uh percentage points of defense inflation. So where does this extra 22 come from? So when we pay uh when the government decides to pay in full um the defense sector keeps competing competing for the same workers that bits up what it costs to make defense by about a point on top of the wedge itself. Uh which exactly gives us this 6.22. Um so notice an uh interesting point here that while we have a large inflation happening in defense sector the civilian sector um also has some increase in their inflation but by a smaller amount of only 28 um so because defense sector carries only 15% of the of total GDP the total inflation is up 1.17 so uh the bank tightens by about one point at the bottom of the dial uh where the budget line is already fixed, meaning that the government uh does not respond to of increasing their budget, they just keep uh the same amount.

The uh defense inflation is still positive. Uh why? Because u regardless of the amount of the defense goods we buy, we still need to pay a higher price for it. So um it ends up with an inflation of 2.98 almost a 3% increase. Civilian inflation on the other hand actually goes into negative territory at minus0.64. So total inflation ends up being um only minus.1 uh point. So uh it is slightly falling and the policy rate also uh barely moves.

So in here we see this uh basically policy content of uh of um of my speech a bank watching the total index moves by one point on one end of the dial and basically doesn't move on the other end. Right? So the same shock, same economy, just a different response from the government. So if you pay in full, this is an ordinary cost push shock. Um, and if you fix the budget line, the very same shock is disinflationary. So, nothing changed between those two columns. >> Minutes left. >> Um, I cannot hear you.

Sorry. >> Uh-huh. Cool. So, um, nothing changed between those two uh columns except that one decision by the government. So, let me uh quickly discuss why those two behave so differently. So hopefully here with these three panels I'll I'll manage to tell a a story. So on the horizontal axis uh it's the stance of the government's uh response to that uh price shock. So first of all observe that uh as we move to the left part of uh each dial we observe a lower amount of deal defense which obviously makes sense.

If we fund less defense we get less defense. uh but the interesting part comes from um what gets sacrificed here. So as the government funds less defense they in effect fund less defense hours about 10% fewer if we go for the extreme case uh on the left right I want to be clear here so nobody here is discharged it's basically a decrease of labor hours in defense sector so the defense sector competes less less hard for uh those same workers um therefore Four, as labor gets cheaper, civilian firms use more of it and civilian marginal cost falls by um about the same 1.4%.

So civilian inflation goes from plus.0.28% here up to minus0.64. Um so basically it tells you something that is um not that expected that even though the shock affected only the defense sector the change in the total inflation actually comes from the change in civilian sector rather than defense. In defense sector we would observe a positive inflation regardless of the policy stance of the government. Now let me move to the uh primary result here where I at least try to show that the um the choice of the central bank matters a lot for the final outcome of the economy.

So this is the same experiment uh that I run at 21 different settings uh of that same government dial. uh horizontal axis as us as in previous um panels shows how far the budget tracks the defense price whereas the horizontal one tell us the response of each inflation measure uh to the same 5% shock. So this red shaded band is exactly the thing to focus your attention on. This is where the two indices disagree in sign total inflation in red is positive whereas the civilian inflation is negative. uh same economy, same parameters under the same shock and it covers about twothirds of the range.

So what does that mean? That means that anywhere inside that band, a bank targeting a total index would see inflation rising. Therefore, they would tighten their policy while a bank targeting the civilian index would see this inflation falling and thus they would ease their policy. So two central banks facing one economy moving the rate in opposite directions. Right? So um the bank's own choice of target price index decides the direction of this policy.

Um one small caveat and it matters here. I'm not trying to locate uh Ukraine on on this axis. Um the dial here just maps a mechanism and points the attention that these two choices uh what the government does and what the central bank does, they matter for the uh final outcome. Right? So let me wrap up uh with uh three main takeaways here. Firstly, I recommend uh modeling the security shock as a cost wedge on quantity that nobody chose, right?

Um it's it's a completely different object from the spending shock. uh I've tried to deliberately specify it as a reusable one so that any economy under the attack or the one that is fighting on its own soil can uh can use that not just limiting to Ukraine. Secondly, the government's uh budget line stands sets the sign of inflation, right? So, it tells us in which direction inflation would go. And finally, across two/irds of that range of the government's uh budget stance, um two indices disagree and sign, meaning that the central bank's mandate sets the direction of the response.

So um a simple conclusion here is that a security shock has no monetary prescription of its own. The government's budget line stance and the central bank's mandate are what makes this prescription together. With that I conclude. Thank you. >> Uh wonderfully on time. Uh thank you. Um let me ask you a quick question. Um so your easing result when the central bank targets the consumer price index um if I understand correctly um stands on the assumption that um the wage uh will fall defense wage will fall and the quantity is fixed.

However, in practice in Ukraine, defense pay rose uh which is in fact what you obtain once you add a labor scarcity uh shock and that flips the prescription to a tightening even under the targeting of the consumer price index. Uh would you like to comment on that? So um here here it's a good observation and the uh important point here is that uh the model does not uh does not take into account the human cost of of this response.

Like of course economically speaking if we fund fully full defend it would raise an inflation. Uh therefore it would also mean that we need to either raise taxes to fund this um unplanned um increased expenses uh or get into more debt or ask for more help from our foreign partners. Um so of course economically speaking the obvious decision would be to try to lower that coverage but as I've said it does not account for the human cost and the cost of the future economy depending on the rule of law that what happens if the um if the country decides to you know defend less.

So um in here basically if I'm if I'm understanding your uh question correctly um it's quite important to try to account for that moral uh dimension of uh of this model in order to see what happens to the uh actual wages and uh inflation. >> Thank you. Thank you very much indeed. Um let me move to uh Valeria. Uh Valeria please whenever you're ready uh the floor is yours. Thank you so much. I hope you can see my presentation.

Let me know if that's the case. >> We do. Yes. >> Yeah. Perfect. Uh thank you so much. Um good um good afternoon everyone and I'm very thankful for the opportunity to present this study today uh at the NBU NVP annual research conference. uh so I'm looking to a nice discussion afterwards and any feedback uh that you might have. This work is jointly written with Alexander Telivera about geopolitical risk in central bank speeches.

So let me start with the quote and this quote is from Philip Lane who is the member of the executive board from European Central Bank. This quote is retrieved from the speech uh that was in Paris 31st of March uh 2022. So that's roughly 5 weeks after the full scale uh of invasion uh of Ukraine. And uh as we can see this is a great sign for us that job politics is on the central bank's agenda and that's exactly what we are interested in.

So we measure how where and what follows uh from that. What's the motivation for central banks to talk about geopolitical risk? Right? So it's increasing nowadays. We can all see that wars, sanctions, nuclear standoffs is back at the center of the macro outlook. And why it matters for central banks is for several reasons. In the first place, of course, it moves inflation and trade capital flows directly within the mandate.

Here we're talking about price and financial stability. However, the effect is quite ambiguous. So tension can rise inflation, lower it, or just add another uncertainty. And that's why central banks must judge it and therefore communicate the reading. We know that geopolitical risk can be measured from the newspapers. Uh we pretty uh know pretty much about calara and index but this is still journalist lens right. So governor and editor see the same world but they talk differently.

So when editor writes about the war it's because of the news but when governor talks about the war and mentions it it's because it has influences basically on the policy. So what a governor chooses to say is itself a signal and if central banks interpret rather than merely transmit then markets may also price this interpretation later on. So this led us to two main questions of this study. First one is do central banks respond to global geopolitical risk in their communication and secondly does that communication eventually move markets?

We contribute to several strands of the literature. We were able to identify three of those where geopolitical risk actually sits. So firstly we already know that we can measure geopolitical risk from text uh from newspapers from earning calls. Uh Calara Naov is the uh standard one well known. So this is our benchmark. Um second one is what central banks attempt to and why. So what central bank chooses to talk about uh depends on how it's designed.

So it depends on independence um depends on um different aspects of supervision and that's what we are trying to understand as well and certainly is um what's done so far for monetary um aspect is that geolytics is priced and central bank talks move markets uh but so far we saw it for tone and speeches that they repric assets uh but once again for monetary context so are so where our contribution actually lies. Um the first one uh we construct geopolitical risk uh with both measures.

First measure is fine-tuned classifier and the second one keyword index more robustness checks uh for over 35,000 speeches from central banks uh specifically from 131 uh and to the best of our knowledge this is the first crossount measure uh on the speaker side. Uh secondly we were able to identify not only that global geopolitical risk raises geopolitical talk everywhere but also that it depends on the supervisory scope so of how central bank uh is involved in supervising banks and financial system in whole and third one is speeches move volatility.

So we extended that to the market response question. Um and we were able to identify that in the war years uh so specifically 2022 and 2023 there is a shortlived effect. Uh this is our results preview. So firstly we were talking about um how well our index is tracked and we were able to set the correlation of 58%. uh basically the share of speeches with geopolitical content spies on every major shocks and tracks uh the newspaper index at the same time also we were able to identify that increasing central bank's involvement in supervision also drives more of the geopolitical talk specifically by 68%.

And on top of this when governor talk to politics in wartime markets also move. So this we were able to identify in the war years 2022 and 2023 abnormal equity volatility rises on the speech day but also on the day after the speech date. We started with the data uh so we had more than 31,000 speeches and also 131 central banks um for the following time period from 86 to 2023. And as we can see roughly the descriptive statistics of those speeches uh before let's say 2000 we had uh lack of the data so not much of central bank speeches per se uh but the peak was around 2018 where it was more than 1,600 and it stayed roughly the same u for the last decade.

For this study we needed um several different data sets. So we started from speeches uh specifically CBA's data set and Compilio and colleagues uh where we retrieved all of the text from all of the central banks. Uh on top of this we were able to add news information. So newspaper geopolitical risk index both daily and monthly and some of the institutional context. So central banks independence supervisionary score inflation output gap and private credit.

Uh we also had some of the moderators so military expenditure, fuel experts, democracy level um and we later on focused on 15 advanced economy equity indices where we tracked this abnormal volatility in the end. So how did we construct this model based measure? We started with debert model uh which is zeroot uh model but uh it had one flow. It was trained on Wikipedia and news before. So never on central bank speeches.

And when we looked in the how well this model was performing, basically it was able to identify uh 51 out of 96 uh different geopolitical passages. Um as far as those geopolitical passages are pretty long. Uh we needed to divide them into different chunks and um of course it's roughly 50% that it was able to identify uh in the first term. So that's why we wanted to train this model to fine-tune it and for that we needed to establish the golden truth.

So gold standards uh we chose 200 uh passengers from two coders and uh we had a written rule book uh where we agreed with coders on 74%. Um that's how we established right on the context how do we define uh this geopolitical risk. On top of that we had our teacher model. So we chose Gemma as a large language model. um in order to obtain more of a gold standards. Uh so we had eventually labeled 2,000 um more than 2,000 passages.

Um and this model needed to train the student ones. So a student learned from teachers labels and scored all of our passages uh more than 200,000 um to in order to find this geopolitical risk from central bank speeches. So as a result we can see that it's uh improved um a lot compared to what uh initially we started from and that's uh for our model based measure for the keyword index we chose uh what's already well defined uh from calara and pillars um however we fine-tuned uh that a little bit as well because central banks still uh talk about that differently from the news so we had initially those seven pillars but we added also an economic uh geopolitics in the end.

Uh so you can see some of the examples of the words that are used here more of robustness checks uh geopolitical risk as a risk or threat tension and economic geopolitics is a trade war tariffs decoupling so more of a central bank stock um that's how they perceive also geopolitical risk. So now the question is how exactly uh did we want to measure this geopolitical talk? Um and we came up with five different aspects from five different angles.

So we started from the count by simply questioning how much geopolitical talk uh there was. Uh we continued with the hit uh just of how many speeches um did it touch any. So did the bank talk about it at all? uh the rate itself, so how concentrated uh the speech was and the salience, so how dense per word. Uh in this way, we tried not to focus only on one, but we tested all five of them um in order to be able to identify whether the results still stays the same for all of them.

Um so we had um roughly uh 7.9% of all speeches uh carried geopolitical passage. As we can see from this graph, uh most come from uh of course the war times. So by combining both of 2022 and 2023, uh we have 54% of all geopolitical passages and specifically half of it also come uh from 2022. If we look more in detail uh for those wartime uh years uh we see that uh some of the central banks that um had and the percentage that of the geopolitical passages accordingly and we see that more than in every u second speech there appears u geopolitical passage for all of them we can see here Ukraine uh it's taking top one place and European central bank uh also carries for instance 57% uh we I've heard also Canada and Japan, Chile.

Um so this is top 10 um central banks that used some of the geopolitical context in their speeches. When we tried to validate our index, we needed to look at the newspaper uh index per se and um here the first model is our model based measure together with newspaper index. The second one is keyword and newspaper as well. Um so as we can see for the major um shocks um it has identical spikes at the beginning. So roughly before 1995 uh we had some of unexpected um spikes but we also had lack of the data.

So we are thinking that um of just some noise happening there. Um however overall it has the correlation of 58% for model based and 40 for keyword. um because model based measure still captures more of the context uh keyword was used just a robustness check. So our first question is what drives how much central banks talk about geopolitics. Um and we can see here that uh we have our first uh model for model based measure.

Again, we tried to uh take into account all of the count um heat and um all of this uh different aspects of how do central banks talk about topolytics and one of the main determinants. So the global uh GPR index uh also supervis supervisory score which we were interested about also central bank independence and all the other controls were also included and uh we can see that increase in global geopolitical risk in the news drives also more geopolitical talk so specifically by 93%.

In this case as well increase in degree of central banks involvement in supervision is also associated with more of the geopolitical talk. So by 68% uh there is again uh more of the involvement um of the central banks if of talking uh for geopolitics we perform the same um analysis for keyword um again as a robustness check um we find identical results just with a smaller effect uh however all of this stays the same so we can just assume that uh results are pretty robust.

Now we tried to look uh in which countries respond most. So we had different um moderators. First one was military expenditure um fuel exports, democracy and inflation targeting. Um so we can see here different um variations of military expenditure starting with low, medium and high. Also different fuel experts whether they are dependent or moderate or high. Uh different democracy level and inflation targeting as well.

And we are looking more precisely into whether some of the countries do respond indeed most um to uh those shocks. Um so we can start with military expenditures and we see here that um it's not dependent really on uh what what is it low or medium or high. It's still with increase in global geopolitical news. Uh still central banks do talk more. Maybe the effect is still higher for um higher quartile but the effect is pretty much the same for democracy level.

We see here that um once countries are more democratic then um the increase in newspaper also global index will result in higher um geopolitical uh risk talk from central banks and now involvement in supervision. uh we see here also higher effect for higher involvement in military expenditures and the same effect for uh democracy as well. And now the second question is do markets react to geopolitical talk. So here we had um different days after the speech happening and also we um concluded about abnormal volatility.

So we estimated that we can see here that on the speech day and the next day after the speech we see only then the significant effect um that abnormal volatility actually rises after that we didn't track any effect. Uh we also looked into returns and uh returns um in terms of the prices they did not drop. So we just assume that there is information um so central banks do trans transmit this information and that's how do markets react uh but not in terms of panic um just in terms of uh receiving the information and basically um increasing their volatility uh on the market.

So um as a conclusion we now have uh three main uh takeaways from from this study. uh firstly we were able to identify that central banks indeed do talk about job politics and uh it can be measured. So this index tracks indeed news at 58% of the correlation and on top of this um we also uh were able to identify that institutions also shape of how much um do central banks talk about jobytics. So it depends on their involvement in supervision.

So the more they involved in supervision of the whole financial system uh then the more they talk also about geopolitics. And lastly when governors talk geopolitics in wartime also markets move. So we saw that abnormal uh equity volatility rises by 1.4% on the speech day and 1.2% on the day after. So as a result in a tense world central banks find the words and uh in wartime markets react. Thank you so much. >> Uh thank you very much indeed.

And this brings us hide or shed to the Q&A part of your presentation. Um let me ask you a a couple of questions and then perhaps we see whether any of the participants want to to add. Um the first question I would ask you is whether you uh thought or had time to think about whether the direction of the market responses depends on the content or the tone of the speech. um and not just whether you looked at the frequency or the mention of geopolitical risks affect volatility.

Um why this um may be of importance uh because we talk often uh of the um risk management role of the central banks and um and your research u may sort of open an important sort of u um um path into that question into understanding better that role. uh in the sense that uh you could show us whether central banks just reveal risks to markets and therefore markets react some sort of information channel uh or whether instead what the central banks say modulate risks that are perceived uh by the market and therefore might increase or decrease risks condition on whether markets perceive the central bank to be responding correctly and addressing correctly risks that are um material realizing um uh let me pass that to you and uh um I look forward to hearing to hearing your thoughts. >> Yes, thank you so much for your question.

That indeed is a great point. Uh we saw that from the monetary um aspect uh the measures of the tone um and specifically tone in the speech. Uh that's a great point maybe to extend uh this paper still uh ongoing uh process of that. Um however for now we did not measure I agree that it might have some of the impact later on on in terms of the context. For now we were just focusing on whether the context itself is geopolitical and whether that drives abnormal volatility.

However, the tone might give us also some insights. What in what tone do they specifically talk about that? So that's a great point. Um yes, thank you for that. >> Uh thank you. Let me uh move to Victor first and then Maxim for two uh quick questions. >> Okay. Thank you. Thank you Valeria. Very interesting to hear you very interesting very topical paper. I have uh two questions. Uh the first very simple uh what is the explanation for supervisory involvement?

Why uh supervisory involvement demonstrate so strong influence of propensity to speak about geopolitical risks? What is your vision? And second one uh is related to your dependent variables. uh do you consider that some kind of them like distance to geopolitical events are important or let's say uh vulnerability or how central banks perceive their vulnerability from geopolitical risks that may potentially affect the economy.

So the more they vulnerable the more they speak or not. Uh please it would be nice to hear from you about that. Thank you. Uh perhaps we can also hear Maxim question then I'll give the the floor back to Valyria. >> First of all, thank you. Thank you very much Valeria for the presentation. Quite quite an interesting uh topic and uh it opens up a plethora of more research questions with this new data set right with the index.

So one of the like ideas that I had during uh during your speech is have you tried a lacked version of the model to the central bank speech effect right basically whether the central bank reacts immediately in their next uh speech to the effect or whether there is some lag and uh like um one example that comes to mind is uh in Ukraine uh the buildup of the Russian military happened actually far before February 2022. So uh the the question of course is whether there was a reaction immediately uh in the autumn uh you know central bank speech or was it later in the in the winter.

Um so yeah whether like if you run it were whether any interesting results that you haven't shared with us. >> Thank you Valeria you have three minutes. >> Yes thank you so much for all of the comments I will try to address them one by one. So first was about uh supervision scope and the explanation u behind that. So we have different versions for that. One is that uh supervisor sees cholitics on balance sheet. So we see that from sanctions from um exposures to Russia some cyber attacks and of course it has more reasons to talk about that and also maybe to the higher audience.

So this is the first explanation. Um second one is that probably it's of the board itself um with the higher uh number of people involved uh because the bank itself is involved uh in the of supervision of uh the whole finance system. So we have different versions probably more promising for us is that of course it sees uh different aspects on the balance sheet itself. Um and of course it has more reasons to talk about that especially if it comes to um financial stability of the whole uh system.

That's that's what we found so far. The second one was about vulnerability as far as I understood that question. So if they are more vulnerable then um they can talk more. That was kind of an idea behind that. Um we didn't I assume that that depends also on different central banks. So in different um countries let's say uh some of them might be indeed more vulnerable. Uh some of them they just uh talk about that we did not look specifically at each of those.

So maybe emerging markets or uh any any of those uh might give us a hint but we just took them in uh total and just to see the whole effect. Uh but also that's a question of how to maybe perceive this vulnerability itself. So what do we consider here? um how how we can measure that, how it can be tracked, how indeed they are vulnerable if not dividing just by uh different countries and different markets. Um and the last one was about legged version.

That was the first point that we um tried to estimate and try to track because that's indeed the first question arises whether the effect is indeed immediate or it carries some of the effect from from the past and uh we indeed might confirm we indeed confirm that uh the effect is immediate. So we tried different liked versions out of that and uh the effect was not significant. So only after um the speech um basically for both of the days the speech and after uh that that was only uh the one significant effect that we found but yes we tried different like versions of this. >> Thank you a fascinating research indeed.

Um let let's move now to uh David Vice. Uh David the floor is yours whenever you're ready. >> Thank you so much. Thank you. >> Are you able to uh see my screen now? >> We are. Thank you. >> Excellent. So, um I'd like to start by full screen if you if you can. >> Full screen. Uh did that work? Great. So, I'd like to start by thanking the organizers for including me. I was very honored to be included with this conference and uh to say how how much I was looking forward to coming to Kiev to be able to stand with the people of Ukraine and get to meet the people of the National Bank of Ukraine um due to circumstances.

I guess that will have to wait for another time. I um I admit that I wasn't able to come up with Giovani's rather elegant solution to the problem. So I I hope that at some point in the future I'll be able to come to to Ukraine. Um so this is is the media the medium the macroeconomics of the news. This is preliminary and incomplete. So I'm very open to comments and suggestions and questions that might arise. So my point of departure is to ask the question, how does a media govern government finances and inflation and does that question even matter?

So where I'm coming from is that macroeconomic theory puts a strong connection between government finances and inflation. But sort of the dirty secret of macro uh theorists is that we don't always agree on what that connection is. is and in fact there are many mechanisms the interaction between them is is quite complicated sorry to interrupt you um it seems that you we don't have your slides ex exactly the same that you are presenting can you please share the the slides one more time >> share them how with >> yeah here in zoom >> in the chat >> no we we see now we see no slides in um in zoom can you can you share your slides >> all right Yeah.

So go on. Sorry. >> Okay. So, uh, great. So, macro theorists don't agree with one another about how the connection between government finances and inflation. And therefore, it shouldn't be that surprising to us that recent research has shown that the public doesn't really understand the connection between government finances and inflation. Um, and so the question I'm coming with into this paper is where does the media stand on this topic?

And the general idea is is that if people including the media don't really understand the connection between government finances and inflation, then rather than these things being covered at the same time and discussed together, maybe they kind of compete for attention. Either we're talking about government finances or inflation rather than putting them together. So, um, my way of addressing this problem is to take, uh, newspapers from 1950 to 2025.

Today I'm mostly going to be talking about the New York Times but also the Wall Street Journal and I'm I have some preliminary results on Washington Post as well and the Vanderbilt TV News segment. So for those of you who are not aware of this, this is um um a data set covering TV news clips by the minute over a variety of channels from 1968 to 2025. Now um and I'm going to use analysis of these segments and um articles.

Now, what I'm going to show you today is based off of article snippets, not the full text article. I'm currently working on the full text article analysis as well. I'm sure you can imagine that during the days of um uh training AI models, the people who have access to the full text models are very very careful about how these the these data get accessed. So, working with the full text is is a little bit slow, but so far everything that I show you is actually showing up in those as well.

So let let me tell you um oh before my preliminary results let me just give a little bit of more motivation where this comes from. So one of the big um political scientists of the last century Bernard Cohen said that the press might not be so successful in telling people what to think what to think but it is stunningly successful in telling what pe people to think about. Simultaneously, John Maynor Kane's one of his more famous quotes where he's talking about inflation, he ends with my bold added is that not one man in a million is able to diagnose.

So my my point here is that people don't understand inflation. That's what Kanes was saying even a century ago and Bernard Cohen is pointing out that the press really gets people to focus on various issues. So given this, what am I finding? I have two findings and an implication. So the first finding is that what I said before really does come out in the data. Government finances and inflation compete for attention in the news.

When there's an increase in interest cost to the government, so interest over debt um that the government is paying, we're going to see more fiscal salience in the news. That is more discussion in the news about fiscal issues facing the government and less discussion about inflation. the opposite direction of actually inflation increasing, crowding out government um coverage of government finances is a little bit less clear here.

We have to get into some nuances about the difference between surprise and expected inflation, but perhaps that's not too surprising. Um, so once I show you this, and I'm I'm not going to go through everything that I have today for the sake of time, but once I show you this, I'm I'm going to say, great, look, it seems that things crowd each other out. The news is paying attention to either finances or inflation. Then I'm going to ask the question does this matter?

So the second result is that attention on government finances is actually associated with future consolidation of government finances. So that is when we see the news starting to pay attention to government finances more that the debt is going up that interest that the news is covering interest payments much more that we see future taxes going up and government spending going down. Now you'll see on my slide I ask the first thing and I'm saying is causal with a question mark.

That really is a question mark because you could very easily say hey David the news is just covering the political process. How do we know that this is a causal association that when the news covers we see consolidation? And my answer to that is I um to take the approach of a macroeconomist of saying it's really hard to know. It's hard to do a a convincing analysis. So, what I'm going to do is a battery of very creative tests to try to tap this problem from a bunch of different angles.

And what I'm hoping is not that I convince you 100% that I nailed this, but that I moved your prior enough such that you think that this is actually a reasonable mechanism that should be something that we take into account when we're talking about inflation and the news. If you take my results at face value, what my estimates suggest is that when we increase interest rates by 100 basis points, that increases debt to interest payments to GDP.

As a government rolls over its debt, it's paying higher interest rates on its debt. And so interest payments to GDP go up. The news starts covering that more. And then we get a consolidation of about a half a% of GDP within 5 years. So that's somewhat substantial. Um so again that's taking the results at face value. Now interestingly and I'm going to show you this graph in the data as well. If we see the news talking about inflation, we do not get this inflation afterwards.

Maybe that's surprising, maybe it's not. Maybe you think, oh, if the news is talking about inflation, it's because inflation is about to happen. And indeed, that's what we see. Or maybe you think if the news is talking about inflation, the system gets uh kicks into gear and we solve inflation, we get this inflation. That's not what we have in the data. But what we do have in the data is something interesting. When the news starts talking about government finances, we get a disinflation afterwards.

So this is very consistent with the idea of when the media is covering government finances, the government is then follows by increasing taxes and lowering spending, which allows for disinflation. So, up until this point, um, I I hope that I move your prior. I make you think that this is a potentially important mechanism. Now, I'm going to say, let's really believe this for a second. I'm going to cast aside all the questions of whether I showed you it was causal or not.

Um, and I'm going to say, look, if I moved to prior and you think that there's a 50% chance that I'm right about this, then this is actually kind of important because it's a new mechanism for monetary policy transmission. In particular, it's a new mechanism for monetary policy transmission that would work under fiscal dominance or under the fiscal theory of the price level. So all the discussions that we were having before lunch about the error of fiscal dominance that we might be going into right now or seems that we probably are going into right now, this mechanism can help the central bank influence inflation in a monetary in a fiscal dominant environment.

So how does that work? So suppose that the the the Fed or the central bank raises interest rates. Then as government debt rolls over, interest rates, interest payments on the debt relative to GDP go up. This is exactly what's going on in the US right now. And we see more fiscal salience in the news. In the US right now, people are talking about this more and more. If you then believe my second step over here, that this attention allows for future consolidation.

Well, that's what allows for disinflation under a fiscal dominant environment. Um, so what I told you right now is just sort of a nice story was part of the paper and I hope to have time to get towards the end of my slides is there are a bunch of questions about how to think about this and how one would put this into an economic model. Um, so I'm going to try to address some of those questions and clarify the thought process that I have when we get there.

So anyway, first things first, I want to talk about this first result of how the news covers these two topics, finances and inflation, and how there's crowding out. So, first let me tell you about my data collection process, particularly for the New York Times and and Vanderbilt TV. So, start with a raw archive. I'm going to pick on the New York Times for a minute of about 8 million articles over this time period. If you just do a basic keyword search, so I want to screen out all the articles about baseball and about the weather and things like that.

We knock it down to about 1.3 million. Then I use two passes of an AI model to really classify things. So first I ask is this really about US fiscal or inflation stuff and not prices in China? And then within the US is this about inflation in general? Is this about particular prices of certain goods going up and down? Is this about fiscal at the federal level or about state? And do they link between these causes? And that's the classification process.

So let me skip the summary statistics and I'm also going to skip for you guys examples of the articles and how they get classified. The thing I'm going to ask you to trust me on unless you ask me about it later and I'll come back to this and show you is that very few articles make the connection between fiscal and inflation. So the first um main result is this table that looks scarier than it is. So if we look at the top panel I'm looking at an annual basis rather than the next panels are quarterly and monthly.

And the first column is I'm looking at the percent of articles in the New York Times that are talking about fiscal issues facing the federal government. and I run a regression of that against actual interest rates to GDP, actual interest expenses of the government to GDP and CPI inflation. So you see clearly that when the government is spending more on interest expenses on its debt relative to GD GDP, the news talks about fiscal issues more.

It does not respond when inflation goes up. So this is where I said there was a bit of an asymmetry over the crowding out. The second column is the same thing, but I'm restricting attention to what I call prominent fiscal stuff. So, this is fiscal articles that are either on the front page of the New York Times or on editorials, op-eds. Then I switch the dependent variable to be are we looking at articles about inflation or not?

And here you see the