Economic Research and Data

Economic Review

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2000 Quarter 1 | Vol. 36, No. 1


Dual-Currency Economies as Multiple-Payment Systems
by Ben R. Craig and Christopher J. Waller

Monetary search models are valuable for studying how a second currency’acceptability arises endogenously in an economy that lacks a stable domestic currency and other more sophisticated payment systems. Search models’basic assumptions (absence of credit, lack of smoothly functioning banking systems, reliance on currency as the sole medium of exchange, and primitive trading environments) are not necessarily consistent with modern financial systems. They do, however, provide good descriptions of transitional and developing economies, particularly in the countries of the former Soviet Union, and may yield helpful policy prescriptions.

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New Results on the Rationality of Survey Measures of Exchange-Rate Expectations
by William P. Osterberg

In light of research questioning the usefulness of economists’models of exchange-rate determination, this paper investigates the rationality of survey measures of expectations for deutsche mark/dollar exchange rates for 1989-97. Using Liu and Maddala's (1992) ‘cointegration’test, the author cannot reject the assumption that survey measures are unbiased exchange-rate forecasts. This finding is related to market participants' anticipation of the impact of economic policies.

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The Fiscal Theory of the Price Level
by Charles T. Carlstrom and Timothy S. Fuerst

A traditional function of the central bank is to control the price level. The fiscal theory of the price level challenges this assumption, arguing instead that the fiscal authority’budgetary policy is the primary determinant of the price level. The authors provide a critical review of the fiscal theory and its implications for monetary policy.

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2000 Quarter 2 | Vol. 36, No. 2



Understanding the Fiscal Theory of the Price Level
by Lawrence J. Christiano and Terry J. Fitzgerald

I. Introduction to the Fiscal Theory of the Price Level

What Distinguishes the FTPL?
Assessing the FTPL
Other Issues Addressed by the FPTL
Frank Ramsey and the FTPL

II. Fiscal Theory in a One-Period Economy

Sargent and Wallace’s Unpleasant Monetarist Arithmetic
The Fiscal Theory
Interpreting Ricardian and Non-Ricardian Fiscal Policy
Is the FTPL Sensible? An Analogy to Microsoft
Is the Non-Ricardian Assumption Empirically Plausible?
The Price Level in a World with No Government-Provided Money

III. Fiscal Theory in General Equilibrium

Is the Price Level Overdetermined in the FTPL?
Is the FTPL Fragile?
FTPL with Stochastic Fiscal Policy
The FTPL and the Control of Average Inflation

IV. Fiscal Theory and the Optimal Degree of Price Instability

The Model
The Ramsey Equilibrium
A Numerical Example

V. Conclusion

VI. Appendix: The Logical Coherence of Fiscal Theory

The Lucas–Stokey Cash/Credit-Good Model
Constant Money Growth
Fixed Interest Rate Policies


Full PDF version of this issue of the Economic Review 506K


2000 Quarter 3 | Vol. 36, No. 3



Will Electricity Deregulation Push Inflation Lower?
by Mark E. Schweitzer and Eric C. Thompson

Deregulating electricity generation will offer consumers many advantages, including dramatically lower energy costs. From a macroeconomic viewpoint, electricity purchases are interesting because they are a major component of consumers' budgets (and thus of the CPI) and a large factor of production for many companies. This raises the possibility that electricity deregulation could create a substantial shock to the overall price trend, comparable to other recent energy shocks. However, the evidence presented in this article points to limited or no effect on the price trend. Even so, the benefits to consumers and producers identified here strongly support legislative efforts to increase competition in one of the last strongholds of regulated profits.

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Optimal Use of Scale Economies in the Federal Reserve's Currency Infrastructure
by Paul W. Bauer, Apostolos Burnetas, Viswanath CVSA, and Gregory Reynolds

Could the Federal Reserve lower its overall currency processing costs by reallocating high-speed currency sorting volume among its processing sites? Scale-economy estimates suggest that consolidation might permit some processing-cost savings, but shipping currency can be very expen-sive because of security and insurance requirements. These costs increase rapidly the farther currency is transported. Given estimates of currency shipping costs and scale economies for high-speed sorting, the authors' model minimizes the Federal Reserve's overall costs by optimally distributing sorting volumes across possible processing sites. The cost savings they find are achieved while maintaining services to depository institutions at roughly their current level. To explore the sensitivity of the results, they use a range of estimates for shipping costs and scale economies. Their key findings are that most of the potential savings can be achieved without closing any existing processing sites and that a new site located in Phoenix would help lower System processing costs.

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2000 Quarter 4 | Vol. 36, No. 4



Productivity and the Term Structure
by Joseph G. Haubrich

The recent record-setting economic expansion and the accompanying record-setting bull market in stocks are often attributed to Federal Reserve interest rate policy and increased productivity. But if interest rates behave differently when productivity changes, interest rate policy may need to change as well. This Review examines how productivity changes affect the entire term structure of interest rates, from short-term rates to long-term rates. The article works out a model based on a representative agent framework, which considers one person as a price taker who makes investment choices depending on prices, and these choices are used to determine the prices that will clear the markets. The person decides how much to consume and how much to invest in each of two assets--a short-term, risk-free, real bond, and a risky productive investment. A key feature of the model is that risk and return change over time in a way that is directly related to productivity. The results show that productivity plays a crucial role in how various interest rates interact, but its effect is not simple. Productivity is not a single factor that affects interest rates uniformly, and parameters of the productivity process, such as the duration of a productivity increase or the speed of adjustment, affect the term structure differently. These parameters, which might otherwise be overlooked, must be specified before the appropriate interest rate policy can be identified.

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The Search-Theoretic Approach to Monetary Economics: A Primer
by Peter Rupert, Martin Schindler, Andrei Shevchenko, and Randall Wright

The authors present simple versions of the models used in the search-theoretic approach to monetary economics. They discuss results on the existence of monetary equilibria, the potential for multiple equilibria, and welfare. They consider models where prices are fixed as well as models where prices are determined endogenously by bilateral bargaining. After discussing the frictions necessary to construct a model with an essential role for money, they conclude the paper by reviewing many extensions and applications in the related literature.

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