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Economic Review

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1995 Quarter 1 | Vol. 31, No. 1


Restoring Generational Balance in U.S. Fiscal Policy: What Will It Take?
by Alan J. Auerbach, Jagadeesh Gokhale, and Laurence J. Kotlikoff

What are the magnitudes of tax increases, transfer cuts, or reductions in government purchases required to restore a generationally balanced U.D. fiscal policy? Under the author's conservative baseline of updated generational accounts, income taxes would have to be raised permanently by 43 percent, federal transfers cut by 33 percent, or government purchases lowered by 32 percent beginning in 1996. The required policy changes will be larger if their implementation is postponed. The authors also find that the outlay reductions in nondefense and non-Social Security spending that Congress recently considered would still leave an unsustainably large imbalance in the generational stance of U.S. fiscal policy.

PDF file 696K

Vagueness, Credibility, and Government Policy
by Joseph G. Haubrich

This article examines the econmic reasons why it may be in a government agency's -- and society's -- best interest to be vague about policy objectives. The author uses the recently developed concept of "cheap talk" to explain that when an agency faces a trade-off between precise and credible announcements, its best move may be to provide truthful but limited information.

PDF file 447K

Federal Funds Futures as an Indicator of Future Monetary Policy: a Primer
by John B. Carlson, Jean M. McIntire, and James B. Thomson

Unlike most futures contracts, which are drawn on commodities or financial instruments whose price or yield is determined in competitive markets, the federal funds futures rate is essentially determined by a deliberative decision of the Federal Open Market Committee (FOMC). As such, the fed funds futures market is a place where one can place a bet as to what future monetary policy will be. The FOMC can thus assess in fairly precise terms what markets expect it to do. In this paper, the authors examine the predictive accuracy of the fed funds futures market and consider some policy implications. They find that accuracy clearly improves in the two-month period leading up to the contract's expiration and that the largest prediction errors occur around policy turning points.

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1995 Quarter 2 | Vol. 31, No. 2



An Introduction to Currency Boards
by Owen F. Humpage and Jean M. Mclntire

The usefulness of money lies in its ability to reduce transaction costs, but this in turn depends on the public's confidence in the stability of money's purchasing power. Governments that lack an established reputation for price stability must adopt strong institutional constraints on their ability to inflate if they hope to achieve monetary credibility. Recent events in Mexico, and the movement toward market-based development strategies in Eastern Europe, Latin America, and Asia, have kindled an interest in the pros and cons of currency boards as an institution for providing monetary credibility in developing countries -the subject of this article.

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The Seasonality of Consumer Prices
by Michael F. Bryan and Stephen G. Cecchetti

In reevaluating the evidence of seasonality in prices, the authors find that seasonal price movements have become more prominent in the relatively stable inflation environment that has prevailed since 1982. They conclude that the amount of seasonality differs greatly by item, making it difficult to generalize about seasonal price movements. That is, seasonality is predominantly idiosyncratic in nature, a result that contrasts with studies demonstrating a common seasonal cycle in real economic variables. Given the statistical criteria used by the Bureau of Labor Statistics to selectively seasonally adjust component data, the likelihood of noise appearing in the aggregate Consumer Price Index at a seasonal frequency is increased. For economists interested in a high-frequency inflation statistic, this argues in favor of seasonally adjusting the index after aggregation.

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1995 Quarter 3 | Vol. 31, No. 3



Inflation, Unemployment, and Poverty Revisited
by Elizabeth T. Powers

Most of the research that uses income to measure economic well-being shows that while unemployment has a strong positive effect on poverty rates, inflation has very little effect. This paper considers the impact of inflation and unemployment on poverty, using a poverty rate based on goods and services actually consumed, rather than on income. The findings suggest that increases in unemployment are associated with increases in both the consumption poverty rate and trie conventional income poverty rate. However, inflation seems to have a robust and relatively large positive influence on consumption poverty, indicating that inflation may harm the poor more than was previously thought.

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Scale Economies and Technological Change in Federal Reserve ACH Payment Processing
by Paul W. Bauer and Diana Hancock

Since 1979, the cost to the Federal Reserve of processing an automated clearinghouse (ACH) transaction has fallen dramatically. The authors of this study find that three factors-scale economies, technological change, and lower input prices-each contributed significantly to this price decline. Their results also show that substantial scale economies could still be achieved in ACH payments processing. This research should be of broad interest to economists because the data provide a rare, detailed glimpse into the workings of a service industry.

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1995 Quarter 4 | Vol. 31, No. 4



A Conference on Liquidity, Monetary Policy, and Financial Intermediation
by David Altig and Charles T. Carlstrom

In September 1994, the Federal Reserve Bank of Cleveland and the Journal of Money, Credit, and Banking sponsored a conference aimed at facilitating research on the structural context of U.S. monetary policy. The eight papers covered three broad topics: the macroeconomic effects of price rigidity and limited financial market participation by households, the interaction of inflation and financial intermediation, and the "deep structural" generation of empirically useful money measures. This article provides an overview of the conference.

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Marriage and Earnings
by Christopher Cornwell and Peter Rupert

That married men earn more than unmarried men is now a fairly well established fact. However, the source of this earnings premium remains debatable. In this paper, the authors use various econometric techniques to shed more light on the controversy, and find that much of the observed differential can be traced to the correlation between marital status and some unobservable individual effects. In other words, married men who earn more on average than single men would have earned more even if they were not married.

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Absolute Priority Rule Violations in Bankruptcy
by Stanley D. Longhofer and Charles T. Carlstrom

Violations of the absolute priority rule in both private workouts and Chapter 11 reorganizations have been enigmatic for financial economists. Why do such violations exist? Do they promote or curtail economic efficiency? This paper demonstrates that the answers depend on the specific contracting problem that a firm and its creditors face. As a result, an optimal bankruptcy institution should allow contract participants to decide ex ante whether such violations will occur.

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