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1998 Quarter 1 | Vol. 34, No. 1


by James Madison

This essay, written in 1779-80, concerns the relationship between money growth, government liability issues, and inflation. More than two centuries later, the same questions that engaged Madison remain vital to monetary theorists and policymakers.

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James Madison's Monetary Economics
by Bruce D. Smith

When he wrote "Money," Madison was a member of a Revolutionary government that was struggling to monetize a huge wartime deficit by issuing inconvertible paper money, and promising to establish a gold standard and redeem its paper currency in the future. If honored, as this (and Madison's) analysis assumes, such a promise would constitute a future "backing" of money issues that he expected to limit inflation and break its connection to the rate of money growth. The model presented in this article can give rise to equilibria that mimic general observations about what happens when governments follow these kinds of policies.

PDF file 35K

Beneficial "Firm Runs"
by Stanley D. Longhofer

First-come, first-served bankruptcy rules are typically considered undesirable because they can lead to inefficient "runs" on a healthy firm's assets. This article, however, argues that runs have a beneficial effect as well-improving lenders' monitoring incentives. The fact that lenders can run on the firm helps control its moral hazard problem, while the first-come, first-served aspect of asset distribution keeps lenders from wanting to free ride on the monitoring efforts of others. The essential point is that bankruptcy institutions should reward monitors when and only when they have performed their monitoring duties.

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Full PDF version of this issue of the Economic Review 195K


1998 Quarter 2 | Vol. 34, No. 2



Bank Diversification: Laws and Fallacies of Large Numbers
by Joseph G. Haubrich

Conventional wisdom on bank diversification confuses risk with failure. This article clarifies the distinction and shows how increasing bank size may increase bank risk, even though it lessens the probability of failure and lowers the expected loss. The key result is an application of Samuelson's "fallacy of large numbers."

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Regional Variations in White-Black Earnings
by Charles T. Carlstrom and Christy D. Rollow

The authors examine why black Americans' earnings continue to lag whites' and why the problem is especially acute in the southern states. Better understanding of the factors driving regional pay differentials can help explain some of the disparities at the national level and would also be applicable to a wide variety of other public policy issues.

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Full PDF version of this issue of the Economic Review 162K


1998 Quarter 3 | Vol. 34, No. 3



Introduction to the Search Theory of Unemployment
by Terry J. Fitzgerald

The search theory approach to understanding unemployment flourished during the 1980s and 1990s. It has provided economists with a rich set of models for analyzing unemployment and labor market issues more generally. Unfortunately, while economists have found modern search theory to be an invaluable tool, the insights provided by this approach remain largely unfamiliar to noneconomists. This review is an attempt to reach out to those readers who are interested in acquiring a modern perspective by providing an introduction to the search theory of unemployment.

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What Labor Market Theory Tells Us About the "New Economy"
by Paul Gomme

"New economy" proponents claim that favorable supply-side shocks have permanently lowered the nonaccelerating inflation rate of unemployment (NAIRU). If true, this would explain why inflation has not risen over the past couple of years, despite unemployment rates that are well below most NAIRU estimates. What does economic theory have to say about such claims? This article shows that a simple search model of unemployment predicts no long-term change in the NAIRU, although favorable supply shocks may lower the NAIRU over the short term. The key to this result is that workers change their reservation wage (the lowest wage that they will accept) in response to favorable developments in the distribution of wages. The article then considers some extensions that may allow supply shocks to lower the NAIRU permanently.

PDF file 81K

Unemployment and Economic Welfare
by David Andolfatto and Paul Gomme

The rates of employment and unemployment are measures of labor market activity that have long been used as indicators of economic performance and welfare. Comparisons of these measures across different regions are typically based on the idea that low levels of employment and high levels of unemployment are associated with low levels of economic performance and general well-being. But in the absence of information concerning the economic circumstances that determine individual labor market choices, such comparisons are not justified. In this article, the authors develop a simple model of labor market activity designed to illustrate the tenuous link that exists between labor market choices and economic well-being.

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Full PDF version of this issue of the Economic Review 385K


1998 Quarter 4 | Vol. 34, No. 4



Beneath the Rhetoric: Clarifying the Debate on Mortgage Lending Discrimination
by Stanley D. Longhofer and Stephen R. Peters

The authors' simple model of the mortgage underwriting process provides a framework within which to define discrimination and various notions of the default rate. By providing those with differing views a common framework for discussing their positions, the model clarifies and reconciles some of the most controversial issues in the debate over mortgage discrimination. It also shows how this theoretical framework can help in the design of practical policy responses to this vexing social problem.

PDF file 111K

Banking and Commerce: How Does the United States Compare to Other Countries?
by João A.C. Santos

This article begins with a discussion of the affiliation between banking and commerce throughout American history. It finds that there were important occasions when banks were allowed to invest in nonfinancial firms and that restrictions on firms' investments in banks are a recent phenomenon. In comparing current U.S. regulations on the affiliation between banks and firms to those in force abroad, the article shows that foreign countries have much more liberal banking laws. The analysis of banks' investments in equities in those countries, however, shows that such investments represent a small fraction of banks' assets. The article ends with a brief review of the literature on the implications of banks' investments in firms.

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Full PDF version of this issue of the Economic Review 221K


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