Economic Research and Data

2005 Economic Commentary

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Have International Developments Lowered the Neutral Rate? top
by Owen F. Humpage
December 2005

One way to think about monetary policy is in terms of a neutral federal-funds rate, one that exerts neither inflationary nor deflationary pressures. Recent declines in worldwide investment, coupled with the growing globalization of financial markets, suggest that the neutral rate may be lower than the current stance of monetary policy and the stage of the business cycle may lead one to believe.

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Considerable Period of Time: The Case of Signaling Future Policy top
by Charles T. Carlstrom and Timothy S. Fuerst
November 2005

There has been a remarkable increase in the FOMC’s communication over the last decade. Perhaps the most dramatic change was the inclusion of language indicating the possible direction of future policy. One example is the now famous “considerable-period” language that was inserted in August 2003. This forward-looking language was remarkable in that it seemingly signaled the Committee’s intention to keep rates low for an extended period. This Commentary analyzes the reasons behind the “considerableperiod-of-time” language, and it argues that such language was important to stem further declines in inflation since the funds rate was already close to its lower bound of zero.

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The Role of Relationships in Small-Business Lending top
by Ben R. Craig, William E. Jackson III, and James B. Thomson
October 15, 2005

In the presence of imperfect information, both large and small banks try to find alternative ways to identify creditworthy borrowers. Lending relationships are one way to go about this. Relationships between banks and small businesses tend to be much closer than those between banks and large businesses. This Commentary explains why lending relationships are valuable to both small businesses and banks, how they reduce information-lending problems, and what other solutions exist to help in the reduction.

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The Tale of Gresham’s Law top
by Richard Dutu, Ed Nosal, and Guillaume Rocheteau
October 1, 2005

Gresham’s law, which says that bad money tends to drive good money out of circulation, may account for many nations’ episodes of money troubles, as far back as ancient Athens. This Commentary discusses the two main explanations for Gresham’s law and suggests some circumstances in which the law does not apply.


Umbrella Supervision top
by Joseph G. Haubrich and James B. Thomson
September 15, 2005

Deregulation and financial consolidation have led to the development of financial holding companies—allowing commercial banking, insurance, investment banking, and other financial activities to be conducted under the same corporate umbrella—and the Federal Reserve has been named supervisor of the consolidated enterprise. This Commentary explains the increasing importance of an umbrella supervisor amid the sea of regulatory agencies, and why the Fed may be the best natural choice, both practically and conceptually, to assume the role.

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Nondeliverable Forwards: Can We Tell Where the Renminbi Is Headed? top
by Patrick Higgins and Owen F. Humpage
September 1, 2005

Since the early 1990s, international banks have been offering nondeliverable forward (NDF) contracts to clients who need to hedge exposures in currencies of emerging-market economies. Many also use the exchange rate on these contracts as a best guess of where the emerging-market currency is headed. The exchange rates on NDFs, however, likely embody a substantial risk premium that interferes with forecasting accuracy.

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The Chinese Renminbi: What’s Real, What’s Not top
by Patrick Higgins and Owen F. Humpage
August 15, 2005

China's recent devaluation and liberalization of its exchange-rate policies will, at best, have only a temporary impact on its trade competitiveness with the United States. The type of exchange-rate regime that a country adopts matters little for its long-term international competitiveness. In addition, the recent focus on China's exchange rate diverts attention from the real problem: China’s command economy.

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Accounting for the Jobless Recoveries top
by Paul Gomme
August 1, 2005

Much has been made of the so-called jobless recovery of the past two business cycles—that is, their atypically weak employment growth early in the expansion phase. This Commentary examines the factors that account for this behavior, focusing on two key measures: the probabilities of job finding and job separation.

PDF 148K | Data 157K

Oil Prices, Monetary Policy, and the Macroeconomy top
by Charles T. Carlstrom and Timothy S. Fuerst
July 2005

Recessions are associated with both rising oil prices and increases in the federal funds rate. Are recessions caused by the spikes in oil prices or by the sharp tightening of monetary policy? The authors discuss how to disentangle these two effects.

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Labor Productivity Growth across States top
by Paul Bauer and Yoonsoo Lee
June 2005

Labor productivity growth, a measure of output per unit of work, is closely tied to gains in wages and living standards, and it provides a direct measure of a country’s competitive position over time. The same holds true for states. Since the last business cycle peak in 2000, states boosted their average labor productivity growth to 2.3 percent. In Ohio, this growth came as a result of modest output growth accompanied by sharp employment losses. Although this has been a painful transition for the Fourth District, solid productivity gains have made the remaining firms and workers more competitive and may prepare the way for future growth.

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Why Policymakers Might Care about Stock Market Bubbles top
by Paul Gomme
May 15, 2005

This Commentary makes a case for Fed action in the event of a stock market bubble. Because stock market prices serve as a signal to business managers to invest, bubbles can mislead managers into investing when it is not profitable. The overinvestment, which becomes apparent after the bubble bursts, can lead to a period of low investment, which can cause a recession. Policymakers may wish to step in to end a bubble before stock prices get too far out of line relative to their fundamentals.

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The Power of Price Stability top
by Sandra Pianalto
May 1, 2005

The economy has been expanding for the past few years, but concerns are growing over the pressures placed on it by fiscal deficits, current account imbalances, and energy shocks. Sandra Pianalto, president and CEO of the Federal Reserve Bank of Cleveland, explains why she thinks the Federal Reserve can best meet those challenges and promote economic prosperity by maintaining price stability. This Commentary contains the text of her remarks to the Levy Economics Institute of Bard College on April 21, 2005.

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Expectations, Communications, and Monetary Policy top
by Sandra Pianalto
April 15, 2005

Since early 1994, the FOMC has taken many steps toward increasing the amount of information it conveys to the public about its actions. Sandra Pianalto, a Federal Reserve Bank president and FOMC participant, outlines the evolution of increasing transparency in FOMC communications and suggests a way that the process can go further still. This Commentary is taken from Pianalto’s speech to the Money Marketeers in New York City on April 19, 2005.

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The Growing Significance of Purchasing Power Parity top
by Ben Craig
April 1, 2005

The principle of purchasing power parity is central to the theoretical underpinnings of the analysis of many trade issues, but up until recently, there was little evidence that PPP held in the long run. Current research has changed that. The key to finding the evidence was realizing how to test for a long-run effect given the fact that exchange rates adjust to their long-run levels in a nonlinear way.

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Too Much Risk? top
by Joseph G. Haubrich and Ben Craig
March 15, 2005

Are asset prices climbing too far too fast? Do they signal the approach of an unsustainable boom that the FOMC should step in and stop before it gathers speed? Bubbles are notoriously hard to spot beforehand, and even if we were better at it, no one is sure what the best monetary policy response would be.

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Rethinking the Welfare Cost of Inflation top
by Ben Craig and Guillaume Rocheteau
March 1, 2005

New models of monetary economies, developed in the last 15 years, suggest that traditional measures of the welfare cost of inflation may underestimate the true loss that inflation inflicts on society. According to these models, the cost of 10 percent inflation ranges from 1 to 5 percent of real income.

PDF 124K

Should Ohio Invest in Universal Preschooling? top
by Clive R. Belfield
February 15, 2005

A growing body of evidence shows that quality preschooling is associated with a host of benefits to students, schools, and society at large. These benefits can have a positive impact on a state’s budget, too: Children who attend preschool are not only more successful throughout their school careers, they also graduate and go on to college more often, commit fewer crimes, and earn higher wages once they enter the workforce. Research suggests that making public pre-schooling available to all children would be a cost-effective way to improve academic performance. This Commentary explains why making public preschooling available to all children in the state would be a wise investment for Ohio.

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A Perspective on Monetary Policy top
by Sandra Pianalto
February 1, 2005

This Commentary contains an insider’s view of the decisionmaking process followed by the monetary policymakers of the FOMC. In particular, Sandra Pianalto, president and CEO of the Federal Reserve Bank of Cleveland and a member of the FOMC, describes her take on the objectives, principles, and economic events that have played a role in the Committee’s decisions since last June, when it made the first of a series of interest rate increases. These remarks were originally made to the Association for Corporate Growth in Pittsburgh, Pennsylvania, on January 18, 2005.

PDF 132K

This Is Bangalore Calling: Hang Up or Speed Dial?
What Technology-Enabled International Trade in Services Means for the
U.S. Economy and Workforce
by Catherine L. Mann
January 15, 2005

The U.S. service sector is in the midst of a transformation similar to the one undergone by the manufacturing sector. Some jobs are moving to other countries, some are disappearing, some are being born. But the service-sector transformation is likely to be different. Technological advances and globalization are making it possible, but these factors reinforce each other in such a way that the gains to the U.S. economy are likely to be greater than with manufacturing, and the transition costs more widespread. Thus, superior and better coordinated domestic and international policies are needed to address the challenges and opportunities.

PDF 140K

Losing Its Minds? Evaluating “Brain Drain” in Ohio top
by Shadya Yazback
January 1, 2005

Is Ohio losing its best and brightest minds? That’s what is often implied by some well-publicized data on college graduates who move to other states after graduation. But what do these data actually tell us? This Commentary shows that they do not paint a complete picture of the emerging class of graduates, much less the state’s workforce. States interested in attracting and retaining college graduates as part of their overall economic development plans should look to other sources of data for a more complete picture. But they also need to consider the drive to improve graduate retention rates in the context of the larger goal—maintaining a well-educated workforce.

PDF 144K

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