Economic Research and Data

2003 Economic Commentary

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The Nature of Economic Changetop
by Sandra Pianalto
December 2003

Sandra Pianalto, president and chief executive officer of the Federal Reserve Bank of Cleveland, addressed the Akron Roundtable on November 20, 2003. She discussed the economy and the nature of economic change. This Commentary is adapted from her remarks.

Full Text 116K in PDF

Expensing Stock Optionstop
by Joseph G. Haubrich
November 2003

Many market commentators argue that companies should expense the stock options they give their employees. Will expensing give investors better information about what companies earn and spend?

Full Text 96K in PDF

Bubble, Toil, and Troubletop
by Ben Craig
October 15, 2003

Not everyone believes bubbles occur in stock markets. Many economists do, but others think something else is happening during periods of rapidly rising and plummeting stock prices. This Commentary explains the two schools of thought and shows how both can describe a famous historical episode known as the Mississippi bubble.

Full Text 120K in PDF

Foreign Exchange and the Liquidity Traptop
by Owen F. Humpage and William R. Melick
October 1, 2003

When short-term interest rates hover near zero, central banks may have difficulty offsetting downward momentum on prices and economic activity through traditional monetary-policy channels, since commercial banks have little incentive to make loans. Economists refer to this situation as a liquidity trap. Do exchange rate targets and foreign exchange operations, as some have suggested, offer a way to escape such a trap

Full Text 132K in PDF

What Is the Right Inflation Rate?top
by David E. Altig
September 15, 2003

The primary objective of most of the world’s central banks these days is to keep inflation low, and the range of inflation rates banks find acceptable appears to be around 2.5 percent to 3.5 percent. While banks may have hit on this range through trial and error, economic theory and empirical observations suggest a good reason for it.

Full Text 264K in PDF

An Option for Anticipating Fed Actiontop
by John B. Carlson, William R. Melick, and Erkin Y. Sahinoz
September 1, 2003

Options contracts on federal funds futures, a new financial instrument introduced earlier this year, can be analyzed to gauge public expectations of future Fed actions. The real bonus is that they can detect differences of opinion when markets see more than two possible outcomes for an FOMC meeting as well as the likelihood associated with each.

Full Text 118K in PDF

by O. Emre Ergungor
August 15, 2003

Obscure just 20 years ago, the securitization of loan portfolios by private and government-sponsored enterprises is a $5 trillion business today. This Commentary explains why the use of asset-backed securities has grown so spectacularly.

Full Text 180K in PDF

The Economic Rise of China: Threat or Opportunity?top
by Nicholas R. Lardy
August 1, 2003

China’s economy is opening up to the outside world. This worries those who fear that country’s huge pool of lowcost labor will drain jobs from U.S. shores, and less expensive goods will spark trade problems. The author points out that not only does China’s untapped market present huge opportunities for U.S. businesses that would surely outweigh any loss of jobs, but the sort of jobs that would move to China left the U.S. a long time ago. And with respect to fair trading practices, China has made much progress.

Full Text 93K in PDF

The Taylor Rule: A Guidepost for Monetary Policy?top
by Charles T. Carlstrom and Timothy S. Fuerst
July 2003

Once a topic to be found only in scholarly economic journals, the Taylor rule is popping up regularly in news magazines, finance journals, and central bankers’ speeches. Does the Fed follow the rule? Should it? This Commentary explains what the Taylor rule is, discusses why it seems to describe Fed interest-rate setting, and argues that the rule is most valuable as a guideline rather than a prescription..

Full Text 139K in PDF

The Evolving Role of the Federal Home Loan Banks in Mortgage Marketstop
by Daniel K. Maloney and James B. Thomson
June 2003

The Federal Home Loan Banks are part of a system created by the federal government to promote home ownership. This Commentary looks at new initiatives undertaken by these government-sponsored enterprises to expand their role in financial markets and the attendant implications for their balance sheets.

Full Text 145K in PDF

The New Discount Windowtop
by Ed Stevens
May 15, 2003

New regulations will change the way credit is rationed at the Federal Reserve's discount window. The Reserve Banks used to charge a below-market discount rate and rely on loan officers to restrict access to loans. Under the new system, the discount rate normally will be significantly higher than market rates, but loans will be available to any sound institution (which means most) at its discretion. This new arrangement eliminates any perception of a subsidy at the discount window. It also should prevent the actual fed funds rate from exceeding the discount rate so long as depository institutions feel free to borrow at the window.

Full Text 154K in PDF

Information and Pricestop
by O. Emre Ergungor and Joseph G. Haubrich
May 1, 2003

Information problems pervade the economy. This Commentary describes the challenges they create and the clever solutions markets find to overcome them.

Full Text 117K in PDF

Iowa Electronic Marketstop
by Paul Gomme
April 15, 2003

In 1998, University of Iowa faculty members created their own futures markets. These experimental markets, designed to provide insights into the behavior of traders and naturally occurring markets, are still going strong. Their clever design gives them another practical use: They can be used to predict future events such as election outcomes and Federal Open Market Committee voting.

Full Text 150K in PDF

Do Energy Price Spikes Cause Inflation?top
by Owen F. Humpage and Eduard Pelz
April 1, 2003

Many people mistakenly believe that a sharp rise in the price of energy is necessarily inflationary. They fail to understand that energy prices adjust to the demand and supply of energy, whereas inflation responds to the demand and supply of money. This Economic Commentary explains that the Federal Reserve can do nothing about relative energy prices, but it can determine how relative energy price shocks are reflected in the overall level of prices. Over the last 20 years, the inflationary consequences of energy price shocks, while significant, have been fairly subdued.

Full Text 187K in PDF

Why Are TIIS Yields So High? The Case of the Missing Inflation-Risk Premiumtop
by Ben Craig
March 15, 2003

Treasury inflation-indexed securities are just like nominal Treasuries, except that their coupon and principal payments are indexed to inflation. The yield spread between the two types of securities should serve as a daily measurement of the market's perception of expected inflation, modified to reflect the cost of inflationary risk. But TIIS yields are about 60 basis points higher than expected. This Commentary examines several factors other than inflation that might raise TIIS yields relative to nominal Treasuries.

Full Text 159K in PDF

Another Jobless Recovery?top
by Mark Schweitzer
March 1, 2003

The expansion of the 1990s began with such unexpectedly slow employment growth that commentators called it the “jobless recovery.” As the economy now begins to expand after the most recent recession, will employment follow the typical path of most postwar recoveries, or will it repeat the pattern of the 1990s? A look at trends in employment, unemployment, and the labor force participation rate reveals important similarities with the jobless recovery. That said,one feature that stands out is an unusually low level of labor force participation, which suggests the recovery might be better characterized as “jobseekerless.”

Full Text 123K in PDF

Open and Operating: Providing Liquidity to Avoid a Crisistop
by Bruce Champ
February 15, 2003

The terrorist attacks of 9/11 triggered a staggering increase in demand for U.S. dollars all over the world, a demand which threatened to disrupt the American payments system but was met swiftly and successfully by the Federal Reserve. Earlier in the nation's history, the system didn't respond so well to severe shocks. This Commentary describes financial crises that occurred during one period in which the country had no central bank.

Full Text 143K in PDF

Measures of Corporate Earnings: What Number Is Best?top
by John B. Carlson and Erkin Y. Sahinoz
February 1, 2003

Revelations of corporate fraud in 2002 shook the public’s confidence in financial reporting and led to calls for reform. Without credible, transparent, and comparable financial information, investors, auditors, and others cannot make decisions that are essential to the efficient functioning of the economy. But while rules can be improved, it is not possible to achieve a rigid standard that applies uniformly to every company. This Economic Commentary explains why.

Full Text 118K in PDF

Does School Quality Affect Juvenile Crime?top
by Amy Pandjiris
January 15, 2003

The Federal Reserve Bank of Cleveland sponsored an undergraduate essay competition, Essays in Economics, in 2001. Amy Pandjiris, then a senior at Oberlin College in Ohio, wrote the winning essay, which we reprint here. Essays in Economics was created to promote economics education and to encourage students to apply economic reasoning to current policy issues. The competition was open to all juniors and seniors enrolled in Fourth District colleges or universities.

This essay investigates whether students who attend higher-quality schools commit fewer crimes. If so, improving school quality might be worth considering as an approach to reducing juvenile crime. The author finds some evidence that higher-quality schools are associated with lower probabilities of committing some types of crime.

Full Text 116K in PDF

Not as Easy as It Looks: Regulating Effective Corporate Governancetop
by Jerry L. Jordan
January 1, 2003

Accounting scandals, executive misconduct, and poor management at once-prosperous corporations have shaken investor confidence in corporate integrity, and worse, in the mechanisms that are supposed to ensure good corporate management. What will it take to restore confidence? This Commentary suggests that the markets will respond with innovations and adjustments that lead to better management, accounting, and disclosure. Greater government policing has an important, but limited, role to play.

This Commentary was adapted from talking points and notes prepared for various seminars and workshops related to financial system reforms.

Full Text 147K in PDF

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