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1994 Quarter 1 | Vol. 30, No. 1


Institutional Aspects of U.S. Intervention
by Owen F. Humpage

Exchange-market intervention is one of the more controversial policies that the Federal Reserve undertakes. Opponents of intervention fear that it can prove detrimental to the consistency and credibility of U.S. monetary policy. Their concern starts with the observation that sterilized intervention is of limited effectiveness, but equally important to the controversy are a number of institutional considerations. This article discusses the institutional aspects of U.S. intervention, from the decision to intervene to the investment of the proceeds. The author focuses primarily on interactions between the U.S. Treasury and the Federal Reserve System.

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The 1995 Budget and 20 Health Care Reform: A Generational Perspective
by Alan J. Auerbach, Jagadeesh Gokhale, and Laurence J. Kotiikoff

Whereas the U.S. budget and deficit projections report government receipts and expenditures for only a year at a time, generational accounts reveal the long-term implications of prevailing fiscal policies for intergenerational wealth distribution. The accounts for 1992, which include the effects of the Omnibus Budget Reconciliation Act of 1993, indicate that a sizable imbalance remains: Under current policy, those born in 1992 will pay approximately 36 percent of their lifetime income in net taxes, while future generations will give up an average of 82 percent. Receipts and expenditures projected under the administration's health care reform proposal would reduce this imbalance by about half.

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On Disinflation since 1982: An Application of Change-Point Tests
by Edward Bryden and John B. Carlson

This paper examines recent changes in the statistical properties of alternative measures of core inflation. For long periods since 1982, core inflation has behaved as if it were generated by a process with a fixed mean and serially independent error term. The authors use nonparametric tests to identify statistically significant change points in the fixed mean. For all measures of core inflation considered, changes in the inflation rate trend have been infrequent and, for the most part, rather abrupt.

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1994 Quarter 2 | Vol. 30, No. 2



U.S. Banking Sector Trends: Assessing Disparities in Industry Performance
by Katherine A. Samolyk

While the past decade appears to have been a difficult time for the U.S. banking sector, performance within the industry varied widely. Using statelevel data, the author investigates the extent to which variations in banking conditions were associated with differences in bank size and holding company relationships. Controlling for local economic factors, very large banks had more problems with loan quality and poor profitability over the period than did smaller banks; the results, however, do not indicate an emerging relationship between bank size and bank performance. At the same time, smaller banks that affiliate with larger organizations in the form of holding companies appear to benefit from the relationships.

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Competition for Scarce Inputs: The Case of Airport Takeoff and Landing Slots
by Ian Gale

Since 1986, airline carriers have exercised the right to buy and sell takeoff and landing slots at airports. Questions remain, however, about the optimal way to allocate these slots. This paper provides a framework for analyzing competition for such scarce inputs, describing the outcome of an auction of slots between two carriers, who may have existing slots, and the possible outcomes from a merger or takeover wave. The author finds that the equilibrium allocation of slots is typically asymmetric, but not monopolistic, because as the allocation of slots becomes more concentrated, the price that the leader must pay for the marginal slot rises. This suggests that the concern over monopolization of airports may be misplaced.

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Regional Wage Convergence and Divergence: Adjusting Wages for Cost-of-Living Differences
by Randall W. Eberts and Mark E. Schweitzer

After decades of convergence, the economic fortunes of U.S. regions appeared to diverge in the early 1980s as measured by both per capita income and wages. This study examines that phenomenon by looking at the effect of relative price-level controls on the convergence/divergence of regional wages. The authors find that once prices are factored in, relative wage rates continue to converge across regions due to rising covariance between price and wage levels. The results also confirm that the trend in regional wage variation can be traced to declining differences in labor market valuations of worker attributes rather than to shifts in the regional composition of the workforce.

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1994 Quarter 3 | Vol. 30, No. 3



A Conference on Federal Credit Allocation
by Joseph G. Haubrich and James B. Thomson

In October 1993, the Federal Reserve Bank of Cleveland and the Journal of Money, Credit, and Banking sponsored a conference that examined the costs, causes, and consequences of credit allocation by the federal government. The eight presenters looked at the broad rationale for government intervention in U.S. credit markets, analyzed some issues related to pensions and federal pension guarantees, and discussed a number of specific programs and regulations, including credit imperfections in housing markets, risk-based capital requirements for banks, and community reinvestment rules. This article is an overview of those proceedings.

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Employment Creation and Destruction: An Analytical Review
by Randall W. Eberts and Edward B. Montgomery

The capacity of markets to create jobs is typically measured by net employment changes. However, net job flows veil the dynamics underlying these aggregate figures. Recent studies have examined the cyclical behavior of the four components of net employment: jobs gained from business openings and expansions and jobs lost from business closings and contractions. This paper extends the inquiry to examine whether these employment components follow similar patterns across regions. The evidence indicates quite different behavior across regions than over time. Regional employment changes are primarily associated with job creation, whereas cyclical employment changes are associated with job destruction. Thus, policymakers need to differentiate between programs that stimulate regional job growth and those that help firms survive economic downturns.

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A Monte Carlo Examination of Bias Tests in Mortgage Lending
by Paul W. Bauer and Brian A. Cromwell

Despite three years of data from the Home Mortgage Disclosure Act (HMDA) indicating that the rejection rate for black mortgage applicants is much higher than for whites, most financial institutions have received regulatory compliance ratings of satisfactory or better. This result may stem from the absence of several key individual characteristics in the HMDA data, which can cause tests to find bias even when it does not exist. Here, the authors examine the steps involved in determining whether a financial institution discriminates against minorities and construct a simulation model to gauge how well some of these tests perform when the degree of bias is known. They find that for plausible levels of bias, the sample size is critical, but that low levels of bias can be difficult to detect even with large sample sizes.

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1994 Quarter 4 | Vol. 30, No. 4



Tax Structure, Optimal Fiscal Policy, and the Business Cycle
by Jang-Ting Guo and Kevin J. Lansing

The real business cycle (RBC) approach to the study of aggregate fluctuations is now a well-established paradigm in macroeconomics. Most RBC models abstract from government fiscal policy altogether or treat it as some exogenous stochastic process. This article develops an RBC model in which government fiscal variables such as tax rates and public expenditures are endogenous. The authors characterize the "optimal" behavior of fiscal policy over the business cycle for two different tax structures and relate this behavior to movements in private-sector variables like output, consumption, labor hours, and investment. As a benchmark, they also provide a comparison between the model and U.S. data.

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Cross-Lender Variation in Home Mortgage Lending
by Robert B. Avery, Patricia E. Beeson, and Mark S. Sniderman

This study evaluates the feasibility of using information collected under the Home Mortgage Disclosure Act (HMDA) to form quantitative measures of lender activity for use in enforcement. By evaluating three firm-level measures- loan application, approval, and origination rates-the authors find that cross-lender variation in minority and low-income originations primarily reflects differences in home mortgage application rates, not in approval rates. The authors also compare gross measures of lender performance with indices controlling for property location and loan applicant characteristics and determine that they perform similarly. This suggests that most of the variation in lender behavior is idiosyncratic and cannot be attributed to variance in applicant characteristics reported in the HMDA data or to differences in the geographic markets served by the lenders.

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The Efficiency and Welfare Effects of Tax Reform: Are Fewer Tax Brackets Better than More?
by David Altig and Charles T. Carlstrom

On the wish list of many members of the new Congress is an income tax system characterized by constant marginal tax rates, typically referred to as a flat-tax system. In reality, what we are likely to see is a continuation of the worldwide trend toward replacing systems with high marginal-rate progressivity with those that have a smaller number of rates that are flat over relatively broad income ranges. In this article, the authors compare a simple two-bracket tax code with an approximation to traditional structures that entail steeply rising marginal tax rates. Their conclusion - that the simpler rate structures are not necessarily more efficient than alternatives with numerous, highly progressive brackets - serves as a cautionary note to potential reformers.

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