Economic Research and Data

2002 Economic Commentary

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Answering the Challenges of Creating Economic Opportunity top
by Roger W. Ferguson, Jr.
December, 2002

What can be done to promote economic opportunity for all citizens and help communities prosper? Roger W. Ferguson, Jr., vice chairman of the Board of Governors of the Federal Reserve System, discussed this issue when he addressed members of the Commercial Club and the Commonwealth Club at the Commercial Club of Cincinnati on October 10, 2002. This Commentary is based on his remarks.

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Three Myths about Central Banks top
by Geoffrey P. Miller
November 1, 2002

Do central banks control the business cycle? Should price stability be their only monetary policy goal? Do politicians give up a degree of power and gain nothing personally when they grant central banks independence? This Commentary argues that none of these widely held notions is true. The Commentary is based on a speech presented to participants at the conference on the Origins and Evolution of Central Banking, sponsored by the Central Bank Institute of the Federal Reserve Bank of Cleveland, in May 2001.

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Dollarization: What’s in It for US? top
by David E. Altig
October 15, 2002

Should the United States care if other countries abandon their own currencies and adopt the dollar? Dollarization imparts benefits to the United States as well as costs, and these ought to be weighed as we decide what to do about the growing number of countries turning to dollarization or considering it.

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Options and the Future: What Do Markets Think? top
by Ben Craig
October 1, 2002

We're used to hearing analysts make predictions about where the economy is headed based on changes in the prices people are paying for stocks, futures, or other assets. Now, recent research is showing how we can analyze the prices of sophisticated new investment products, like options, to also gauge the probability assigned by the markets to possible future events. In short, we can calculate how likely market participants feel it is that an event will take place in the future.

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What You Should Know about Identity Theft top
by Paul W. Bauer
September 15, 2002

Identity theft—appropriating someone else's identity for illicit gain—is the fastest-growing financial crime. It can cause considerable financial losses, and cleaning up a trashed credit history can be time consuming and frustrating. This Economic Commentary examines the identity theft phenomenon: how it works, how lawmakers, regulators, and financial institutions are combating it, and what consumers can do to protect themselves.

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Free Trade and Tariffs — An Uneasy Mix top
by Paul Gomme
September 1, 2002

When U.S. steel corporations began declaring bankruptcy and laying off thousands of workers, tariffs on foreign steel seemed a reasonable way of preventing further damage to the industry. But why do most economists favor free trade?

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Stock Prices and Output Growth: An Examination of the Credit Channel top
by Charles T. Carlstrom, Timothy S. Fuerst, and Vasso P. Ioannidou
August 15, 2002

When stock market values fall, we know it means investors expect lower economic growth in the future. But can stock market declines actually affect future growth? There is some evidence that they can — through the credit channel.

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Speaking of Accounting Scandals. . . top
by Jagadeesh Gokhale
August 1, 2002

The better the information stockholders have about a firm’s prospective finances, the better their decisions on investing their money productively. The same is true of lawmakers’ decisions on how to allocate public funds. As the Enron–Andersen debacle has made so abundantly clear, murky financial reporting can lead to devastating consequences. Is something similar happening with the way government finances are reported — especially with regard to Social Security and Medicare?

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Commercial Banks’ Borrowing from the Federal Home Loan Banks top
by James B. Thomson
July 2002

Since 1990, when commercial banks were first eligible to join the Federal Home Loan Bank System, they have become an important constituency of the FHLBs. Currently, seven out of 10 banks are members, and nearly half of all banks have advances outstanding. Given the wide range of activities that commercial banks can engage in, this Commentary asks whether FHLB lending to them is consistent with their traditional housing finance mission, with the Gramm-Leach-Bliley extension of their mission to provide liquidity support to community banks, or with both.

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Fear and Loathing of Central Banks in America top
by Michael F. Bryan and Bruce Champ
June 2002

The Federal Reserve System is America’s uneasy compromise between our wariness of concentrated financial power and our desire to promote efficiency in our national payments system. In fact, the Federal Reserve is the nation’s third attempt to establish a large national bank — what we now call a central bank — that is in a unique position to influence a nation’s money and credit. This Commentary retells the story of the rise and fall of the two earlier national banks, the Banks of the United States.

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Is It More Expensive, or Does It Just Cost More Money? top
by Michael F. Bryan
May 15, 2002

Most of us, from the general public to professional economists, use the term inflation pretty loosely. It's increasingly applied to any rise prices, and even economists use it interchangeably with a rise in the cost of living. This Commentary explains what inflation is, why it is quite different from a rise in the cost of living, and how some statistical measures attempt to distinguish the two.

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Why Is Stable Money Such a Big Deal? top
by David E. Altig
May 1, 2002

What do attempts to counterfeit an enemy’s currency during wartime have in common with decisions to adopt another country’s currency during peacetime? Both are inspired by the power of a stable monetary standard and, conversely, the consequences of losing it. Both illustrate why preserving the value of the nation’s currency is a central bank’s most important responsibility. This Commentary is based on a speech given (jointly with Mike Bryan) to the Cleveland City Club New Leaders group on February 19, 2002

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A Beautiful Theory top
by Ed Nosal and Peter Rupert
April 15, 2002

It wasn’t A Beautiful Mind — the book or the movie — that made John Forbes Nash, Jr., famous. It was his work in game theory, a theory that models strategic interactions between people as games. Before Nash, the only games theorists could get a handle on were artificial ones with no real-world applications. Nash’s insights enabled economists to expand the use of game theory to interesting practical problems.

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Why the Optimism? top
by John B. Carlson
April 1, 2002

In spite of the recent recession, hopes for the New Economy have been little daunted. Surprisingly robust productivity growth during the recent downturn provides compelling new evidence that something truly fundamental is going on. This Commentary argues that advances in information technology, and their diffusion through the economy, are justifiable reasons for our optimism. Higher productivity growth is not an ephemeral phenomenon but one likely to persist for some time into the future, perhaps even accelerating further.

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Consumer Financial Privacy and the Gramm-Leach-Bliley Act top
by Paul W. Bauer
March 15, 2002

By requiring financial institutions to put adequate controls in place to secure consumers’ confidential data and by clearly spelling out what rights consumers and financial institutions have, the 1999 Gramm-Leach-Bliley Act is a positive step toward ensuring consumer financial privacy. If there are no market imperfections, then competition may be relied on to efficiently sort out the competing interests of consumers and financial institutions. Alternatively, if there are market imperfections in the form of externalities, the Coase theorem suggests that the act, by clearly assigning property rights to the information, should facilitate an economically efficient outcome.

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Electronic Money and the Future of Central Banks top
by Ed Stevens
March 1, 2002

Computers and telecommunications devices may replace paper currency and checks — some day. Indeed, electronic methods of transferring money have become widely used. Recently, however, discussion of “electronic money” has taken a new turn, zeroing in on the extent to which holding new forms of electronic money eventually could make central banks obsolete, rendering them powerless to control inflation. This Commentary updates the old story of electronic funds transfers before introducing the new story of electronic money holdings as a metaphor for a larger question about the future of central banking.

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Monetary Policy Rules and Stability: Inflation Targeting versus Price-Level Targeting top
by Charles T. Carlstrom and Timothy S. Fuerst
February 15, 2002

Monetary policy rules help central banks exercise the discipline necessary to achieve their long-term goals. The type of rule many banks are turning to these days is inflation targeting, which has several advantages. But in following the rule, banks usually base their actions on forecasts of future inflation, and this can lead to inflation-rate instability in some cases. A price-level target offers many of the same benefits as an inflation target, but because it uses past inflation to guide the bank’s actions, it avoids this vulnerability.

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Legal Systems and Bank Development top
by O. Emre Ergungor
February 1, 2002

In some countries, banks are firms’ key source of financing. In others, firms look mainly to credit markets to meet their financial needs. Why should this be so? New research suggests that a country’s legal tradition strongly influences which financial system becomes dominant there.

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Infrastructure and the Wealth of Nations top
by Ed Nosal and Peter Rupert
January 15, 2002

Economies can’t grow without a sufficiently developed infrastructure, but how deep does the infrastructure have to be to make a difference? The authors take a look at some research from the Fraser Institute that examines the relationship between economic growth and economic infrastructure across 123 countries. They find that infrastructure is a bit of an all-or-nothing proposition.

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Why Haven’t Long-Term Interest Rates Fallen? top
by David E. Altig and Ed Nosal
January 1, 2002

In 2001, the Federal Reserve lowered the federal funds rate target more than it had in over 25 years, but long-term interest rates didn’t budge. Has monetary policy become ineffective? Just the opposite, the authors argue. The stability of long-term rates shows that people don’t expect inflation to rise. That confidence, especially in light of the dramatic shocks the economy experienced, attests to the success of the central bank’s policies.

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