Economic Research and Data

Economic Review

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1990 Quarter 1 | Vol. 26, No. 1


A Hitchhiker's Guide to International Microeconomic Policy Coordination
by Owen F. Humpage

A wealth of studies about international macroeconomic policy coordination have surfaced in the past decade, offering important insights that unfortunately have remained inaccessible to many economists and policymakers because of the sophisticated mathematics inherent in the literature. This paper lifts the analytical veil from these studies, presenting their findings in a less-technical fashion.

PDF file 640K

Public Infrastructure and Regional Economic Development
by Randall W. Eberts

What are the various channels through which public capital can influence regional economic activity? A review of recent empirical studies reveals that, among other findings, 1) public capital stock positively affects regional growth, primarily as an unpaid input into the production process: 2) public capital and private capital are complements in manufacturing; and 3) public capital stock has a positive influence on the start-up of firms.

PDF file 660K

Using Market Incentives to Reform Bank Regulation and Federal Deposit Insurance
by James B. Thomson

The current system of bank regulation and federal deposit insurance is not working and requires a massive overhaul. This paper looks at the issues involved in reforming the regulatory structure of the financial services industry, including the financial safety net. and presents the case for adopting market-oriemed reforms.

PDF file 640K

Full PDF version of this issue of the Economic Review 2,030K


1990 Quarter 2 | Vol. 26, No. 2



School Reform, School Size, and Student Achievement
by Randall W. Eberts, Ellen Kehoe Schwartz, and Joe A. Stone

Advocates of market-based public school reform maintain that offering parents and students a choice of schools will promote more effective performance by teachers and administrators. Few proposals have been implemented, however, so empirical evidence of this consequence is scant. This paper examines the effect on student achievement of one possible outcome of a more decentralized educational system-smaller schools. The authors find that students in small schools of fewer than 600 pupils scored much higher on math achievement tests than otherwise comparable students in large schools of more than 800 pupils.

PDF file 620K

In Search of the Elusive Credit View: Testing for a Credit Channel in Modern Great Britain
by Katherine A. Samolyk

The "credit view" of the link between the financial sector and macroeconomic activity proposes that the performance of this sector can affect output fluctuations. In examining the credit performance of the financial sector in the modern British economy, this paper determines that problems in credit markets associated with debt default and liquidation can disrupt the production of real financial services necessary to channel funds to efficient investment opportunities. Findings indicate that borrower insolvency is empirically significant in explaining output, controlling for both lagged economic activity and monetary factors.

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Seasonal Borrowing and Open Market Operations
by E.J. Stevens

Rapid growth of borrowing under the Federal Reserve seasonal borrowing program has been complicating the Federal Open Market Committee's borrowed reserve procedure for implementing monetary policy. Flexibility in pursuing the Committee's borrowing objective keeps the federal funds rate at the policy-intended level, but removes the major advantage of the procedure. This seems entirely appropriate if borrowing is dominated by loans to small, largely agricultural banks with limited access to financial markets-the institutions for which the program was designed.

PDF file 585K

Full PDF version of this issue of the Economic Review 1,810K


1990 Quarter 3 | Vol. 26, No. 3



A Reexamination of the Relationship between Capacity Utilization and Inflation
by Paul W. Bauer

This study presents new evidence on the relationship between capacity utilization and inflation in order to provide a proper framework for understanding the complexities involved. Because empirical results suggest that capacity utilization and changes in inflation are jointly endogenous, much of the previous work in this area may suffer from simultaneity bias. Using a two-equation struclural model, the author finds support for a "steady-state" rate of capacity utilization of about 81.5 percent. While that figure is in line with previous estimates, this model does not suffer from simultaneity bias and appears to be stable over time.

PDF file 435K

Financial Restructuring and Regional Economic Activity
by Brian A. Cromwell

The relationship between the performance of the financial sector and economic activity has received increasing attention from economists during the past decade. Empirical studies generally support the view that financial structure and stress can have real economic effects. This paper explores the impact of financial restructuring on economic activity by using an alternative data set that in some respects more completely measures change in the local banking sector than do data used in previous research. Results suggest that the deaths of midsized banks have a negative but short-lived impact on economic activity.

PDF file 580K

The Short-Run Dynamics of Long-Run Inflation Policy
by John B. Carlson, William F. Gavin, and Katherine A. Samolyk

Currently, the Federal Reserve is being urged to adopt price stability or an expisit price-index target as its primary long-term monetary policy objective. The purpose of this paper is to ascertain the short- and long-term implications of an inflation policy for real output. Inflation policy is defined here in terms of a series of innovations that exclusively determine trend inflation. To estimate this series, the authors adopt a recently developed method that allows structural interpretation of a simple vector-autoregression and apply it to a macroeconomic system that includes real output and inflation. Results suggest that the benefits of a monetary policy aimed at achieving gradual disinflation would probably outweigh the costs.

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Full PDF version of this issue of the Economic Review 1,400K


1990 Quarter 4 | Vol. 26, No. 4



Bank Capital Requirements and Leverage: A Review of the Literature
by William P. Osterberg

Requiring banks to increase their capital-asset ratios continues to be viewed as a policy that would improve the safety of the commercial banking system. However, relatively little is known about how banks adjust to increased capital requirements. This paper reviews the existing literature on the subject and addresses a key complication: the need to disentangle the influences of market and regulatory forces on banks' capital decisions. In order to illustrate the interaction between these forces, the author also presents a model of a bank's choice of optimal leverage.

PDF file 490K

Expectations and the Core Rate of Inflation
by Richard H. Jefferis, Jr.

Inflation rates associated with different price series are both volatile and weakly correlated, properties that make realized inflation an unattractive guide for monetary policy. In contrast, the expected inflation series generated by a wide variety of econometric models are less volatile than actual inflation and are highly correlated. This correlation suggests that the different series are tracking a common trend, or core rate, and makes expected inflation a suitable benchmark for monetary policy directed toward controlling inflation.

PDF file 360K

The Case of the Missing Interest Deductions: Will Tax Reform Increase U.S. Saving Rates?
by David Altig

As of the coming tax year, U.S. taxpayers may no longer deduct personal interest expense when calculating taxable income. Will this change, resulting from the Tax Reform Act of 1986, increase the saving rate in the nation? This paper suggests that the answer is yes: An examination of private saving rates among several OECD countries shows that saving rates are, on average, higher in countries that have not historically subsidized borrowing through interest deducibility. The author also finds that the divergence of U.S. and Canadian saving rates over the past several decades appears to be significantly related to differential tax treatment of interest expense.

PDF file 535K

Full PDF version of this issue of the Economic Review 1,420K


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