Economic Commentary
Providing you with in-depth analysis of current economic and financial issues.
2003
- December 2003
- The Nature of Economic Change
- 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. (PDF)
- November 2003
- Expensing Stock Options
- 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? (PDF)
- October 15, 2003
- Boil, Toil, and Trouble?
- 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. (PDF)
- October 1, 2003
- Foreign Exchange and the Liquidity Trap
- To influence the supply of money and credit in the economy, most central banks target a short-term interest rate akin to the U.S. federal funds rate. With the rates in some countries falling to levels barely hovering above zero, some economists warn that central banks may face a danger that renders their actions with the interest rates ineffective: a liquidity trap. Foreign exchange interventions have been proposed as a way to escape, but will they work? (PDF)
- Sept. 15, 2003
- What Is the Right Inflation Rate?
- 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 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. (PDF)
- September 1, 2003
- An Option for Anticipating Fed Action
- Prognosticators pore over official FOMC releases, consult public opinion by analyzing the prices of federal funds futures contracts, and sometimes even cast a sideways glance to the size of Greenspan’s briefcase to gather clues about what the Fed might next do to interest rates. A new technique will add better information to the mix. Options contracts on fed funds futures, a new type of 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 outcome. (PDF)
- August 15, 2003
- Securitization
- Obscure just 20 years ago, loan portfolio securitization by private and government-sponsored enterprises is a $5 trillion business today. This Commentary explains the reasons behind the spectacular growth of asset-backed securities. (PDF)
- August 1, 2003
- The Economic Rise of China: Threat or Opportunity?
- China’s economy is opening up to the outside world. This worries those who fear that country’s huge pool of low-cost 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. (PDF)
- July 2003
- The Taylor Rule: A Guidepost for Monetary Policy?
- The Taylor rule, formerly mentioned only in scholarly economics journals, now pops 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 the Federal Reserve’s interest-rate setting, and argues that the rule is most valuable as a guideline rather than a prescription. (PDF)
- June 2003
- The Evolving Role of the Federal Home Loan Banks in Mortgage Markets
- 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. (PDF)
- May 15, 2003
- The New Discount Window
- 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. (PDF)
- May 1, 2003
- Information and Prices
- Information problems pervade the economy. This Commentary describes the challenges they create and the clever solutions markets find to overcome them. (PDF)
- April 15, 2003
- The Iowa Electronic Markets
- In 1998, Iowa University 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. (PDF)
- April 1, 2003
- Do Energy Price Spikes Cause Inflation?
- Many people mistakenly believe that a sharp rise in the price of energy is necessarily inflationary. They fail to understand that energy prices adjust with 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 price level. Over the last 20 years, the inflationary consequences of energy-price shocks, while significant, have been fairly subdued. (PDF)
- March 15, 2003
- Why Are TIIS Yields So High? The Case of the Missing Inflation-Risk Premium
- 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. (PDF)
- March 1, 2003
- Another Jobless Recovery?
- 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 to the 1990s jobless recovery. That said, one of the similarities is an unusually low unemployment rate, which suggests that the recovery might be better characterized as “jobseekerless.” (PDF)
- February 15, 2003
- Open and Operating: Providing Liquidity to Avoid a Crisis
- The terrorist attacks of 9/11 triggered a staggering increase in demand for U.S. dollars all over the world, a demand that 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. (PDF)
- February 1, 2003
- Measures of Corporate Earnings: What Number Is Best?
- 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 Commentary explains why. (PDF)
- January 15, 2003
- Does School Quality Affect Juvenile Crime?
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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.
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. (PDF) - January 1, 2003
- Not as Easy as It Looks: Regulating Effective Corporate Governance
- 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. (PDF)