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  1997 Economic Commentary
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Do More Banking Offices Mean More Banking Services?

by William P. Osterberg and Sandy A. Sterk
December, 1997

It is tempting to look at the recent growth in the number of banking offices as evidence that industry consolidation has not meant a deterioration in banking services. However, much of this expansion can be traced to thrift conversions and the growth of supermarket branching. An examination of state-by-state data reveals that higher banking office growth does not necessarily imply higher growth in small business lending, one banking service of particular concern to smaller markets and poorer communities.

Full Text 72K in PDF

Accelerating Money Growth: Is M2 Telling Us Something?

John B. Carlson
November, 1997

In the late 1970s and early 1980s, the FOMC built its fight against inflation around monetary targeting. The monetary aggregates' role in the policymaking process was downgraded in the early 1990s, when M2's velocity began to rise much more quickly than past experience would have predicted. Although evidence is accumulating that M2 has now stabilized into a pattern more consistent with its historical performance, the data are too limited to recommend a resumption of monetary targeting. But ignoring the sharp acceleration in M2 over the last year and a half would be equally unwise.

Full Text 121K in PDF

On the Origin and Evolution of the Word Inflation

Michael F. Bryan
October 15, 1997

Today, we commonly hear about different kinds of inflation. Indeed, the word inflation is often used synonymously with "price increase." But there is also a different, more specific, definition of inflation - a rise in the general price level caused by an imbalance between the quantity of money and trade needs. This "inflation" has but one origin - the central bank. It is the latter definition that drives many of those advocating an anti-inflation policy for the Federal Reserve, and that more closely conforms with the word's original meaning.

Full Text 71K in PDF

Bad Standards

Michael F. Bryan
October 1, 1997

The measurement standards that we take for granted today, such as for weight, length, time, and temperature, were not always so exact. Over the years, we have come to appreciate the importance of maintaining consistent standards in our measurement of these and other subjective phenomena. Why, then, do we not demand the same rigorous adherence to a standard when it comes to our measure of value — the dollar? We should."

Full Text 42K in PDF

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The Dark Side of Liquidity

Joseph G. Haubrich and Joćo Cabral dos Santos
September 15, 1997

The liquidity of a firm's assets - that is, the ease with which they can be traded or sold - is generally thought to enhance the company's value. Clearly, having enough ready cash to meet the payroll or pay the interest on outstanding loans is a good thing. But liquidity also has a dark side. A company with too much of its worth tied up in liquid assets instead of productive equipment, for example, not only pays the price of lost opportunities, but also has a harder time attracting investors, who must be convinced that the firm's managers will not "take the money and run."

Full Text 25K in PDF

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Money, Fiscal Discipline, and Growth

by Jerry L. Jordan
September 1, 1997

European Monetary Union's full potential will be realized only if the supra-national monetary authority ensures a stable currency and safeguards the financial system's integrity. Uncoupling monetary from fiscal policymaking will impose severe constraints on member nations' fiscal policies. Collectively unsound fiscal policies may compromise the ability to maintain a stable currency and erode prospects for economic growth.

Full Text 31K in PDF

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Wage Inflation and Worker Uncertainty

by Mark E. Schweitzer
August 15, 1997

What keeps the lid on wages in today's vigorous labor market? If workers' uncertainty about their jobs prevents their asking for raises, we can expect wage demands - and then prices - to rise when the insecurity lifts. But the wage-setting behavior of human resource managers tells a different story. Pay changes are mostly based on compensation at other firms, cost-of-living indexes, and their own firms' financial results (in that order). This suggests that wages will respond to price changes, with little danger that a burst of worker optimism will set off an inflationary spiral. This Commentary looks at how these stories match the evidence on the timing of inflation and wage changes.

Full Text 63K in PDF

Wealth, Economic Infrastructure, and Monetary Policy

by Jerry L. Jordan
August 1, 1997

Why are some countries rich and others poor? The simple answer — that rich countries have more resources per capita — merely begs another question: Why are some countries more successful in accumulating resources? Often overlooked is the state's role in promoting the development of an "economic infrastructure." It's not the specific "growth" programs that governments enact which determine a nation's prosperity, but the totality of the state's attitude toward the accumulation of private wealth, including the central bank's management of a nation's money.

Full Text 28K in PDF

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TIPS for Safer Investing

by Kevin H. Sargent and Richard D. Taylor
July 1997

Treasury Inflation-Protection Securities, or TIPS, are the first U.S. government securities guaranteed to provide riskless, long-term protection against unexpected inflation. Benchmarked against changes in the Consumer Price Index, TIPS should attract various types of investors, including those who do not want to risk their money in the stock market, those who need to draw on their investment while preserving their principal, and small investors who might not otherwise be able to shelter their savings from inflation’s ill effects.

Full Text 40K with graphics/ 27K without graphics

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Monetary Policy in the Cold War Era

by Mark S. Sniderman
June 1997

When the inflation rate hit the double digits in the late 1970s, the Federal Reserve was given a mandate to push it back down, and quickly. Inflation had become so intolerable that few questioned the government’s decision to wage a "hot war" against it. Now, with the economy booming and inflationary pressures scant, there is less public support for such a hard-line approach. Is it indeed time for the Fed to relax its stance and make peace with our current low and stable inflation rate? This article explains why the battle against inflation — a cold war instead of a conventional war this time — is continuing, and why peace requires a broad public understanding that monetary policy best contributes to national prosperity by eliminating both inflation and the expectation that it will reemerge.

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Okun's Law Revisited: Should We Worry About Low Unemployment?

by David Altig, Terry Fitzgerald, and Peter Rupert
May 15, 1997

Economists have long viewed the negative connection between unemployment and output growth — known as "Okun’s law — as one of the most consistent relationships in macroeconomics. When the economy is strong, unemployment falls, and this labor market tightness eventually leads to inflationary pressures. But how reliable is Okun’s law, particularly over short time horizons? The answer has important implications for the proper conduct of monetary policy.

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Is Noninflationary Growth an Oxymoron?

by David Altig, Terry Fitzgerald, and Peter Rupert
May 1, 1997

One question on the minds of policymakers and economic analysts alike is, "When will the bill come due for the robust economic growth the United States has been enjoying?" That is, when will inflation begin to pick up? But a better question might be, "Just because inflation and above-trend growth have coincided in the past, does that mean that they must do so in the future?" Contrary to popular wisdom, it is quite possible to have a booming economy without an acceleration in the price level.

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Where Have All the Tellers Gone?

by Ben Craig
April 15, 1997

Until recently, U.S. banks were considered a haven from the employment uncertainties that affected other industries. Now, some analysts are predicting that as many as 400,000 banking jobs will be lost over the next decade. This article looks at the reasons behind this trend and examines the fate of the job losers.

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Medicare: Usual and Customary Remedies Will No Longer Work

by Jagadeesh Gokhale
April 1, 1997

Medicare is projected to be insolvent by the year 2001. The budget for fiscal year 1998 pushes that date ahead a few years by introducing additional cost-control measures, but it will not rectify the structural deficiencies associated with the current system. Moreover, it is likely to worsen the quality of care for Medicare enrollees. A better approach — one that will help solve Medicare’s problems in the long run — is to adopt a "defined contribution" plan that will restore consumers’ interest in economizing on health care services and boost competition among providers and insurers.

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PMI Reform: Good Intentions Gone Awry

by Stanley D. Longhofer
March 15, 1997

Congress is currently considering legislation intended to make private mortgage insurance more fair and affordable for homeowners. Unfortunately, as with many well-intentioned interventions into private markets, this legislation could actually hurt the very borrowers it is intended to help by restricting the availability of mortgage loans and making them more costly.

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Maintaining a Low Inflation Environment

by John B. Carlson
March 1, 1997

Monetary policy since 1982 demonstrates that the federal funds rate can vary substantially with few or no adverse economic consequences. In fact, funds rate increases in response to inflationary pressures have been associated with robust growth in recent years. The economy’s favorable performance over the past decade and a half highlights the importance of maintaining the existing low inflation environment.

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Structural Reform of the Social Security System: The Time Has Come

by Jagadeesh Gokhale
February 15, 1997

A conservative look at Social Security’s financial projections suggests that the system may become insolvent much earlier than is officially recognized. Moreover, the program contains structural shortcomings that distort the use of resources, both human and physical. An early, structural reform of Social Security is imperative to place the retirement of baby boomers and future generations on a sound financial footing and to promote faster economic growth. To be effective, these structural changes must boost saving and investment and improve work incentives.

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Information Dynamics and CRA Strategy

by Robert B. Avery, Patricia E. Beeson, and Mark S. Sniderman
February 1, 1997

Evidence shows that by focusing on certain neighborhoods, lenders can sometimes exploit economies of scale in the collection of information. They can also find themselves at a disadvantage in areas where too many lenders are competing for a limited number of qualified mortgage applicants. Current CRA regulations provide greater scope for lenders to pool their resources (through community development banks, loan consortia, and other institutional arrangements) and to achieve the critical mass of applications necessary to exploit economies of scale.

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Stock Market Fundamentals

by Joseph G. Haubrich
January 15, 1997

While the Dow Jones industrial average continues on its roller coaster course, one thing that remains constant is investors’ concern about whether current stock prices are justified by today’s economy or whether they are based on mere speculation. The optimist and pessimist camps are divided over the meaning of dividend and earnings growth, but they both often ignore the importance of time-varying expected returns. This article examines the primary factors driving stock market fundamentals and looks at how well those factors explain — or fail to explain — current market trends.

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The Hidden Costs of Mexican Banking Reform

by William P. Osterberg
January 1, 1997

Observers acknowledge that improvements in Mexico’s economic conditions hinge on the latest banking reforms being successful but not too costly. However, the ultimate cost of the reform efforts will depend on monetary policy restraint and behavioral responses to the reforms. If interest rates are lowered to help the banks, or if banks expect continued government assistance, the final cost could easily exceed recent estimates.

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