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1989 Economic Commentaries

  • Is There a Message in the Yield Curve?


    Edward Stevens

    Abstract

    Short-term bond yields have moved above long-term bond yields over the past year. The resulting inverted yield curve indicates that monetary policy is tighter than it could be and may be tighter than it has been, but provides no basis for judging whether policy is tight (or easy) enough. Read More

  • Making Judgments About Mortgage Lending Patterns


    Robert Avery

    Abstract

    Studies examining whether mortgage lenders discriminate against borrowers in minority and lower-income areas have traditionally analyzed the relationship between aggregate annual mortgage lending within a neighborhood and the neighborhood's characteristics. Regulatory-agency compliance examiners make judgments about the mortgage lending procedures adopted by individual lenders. The differences in these two methods of evaluation are not easily reconciled. Read More

  • Monetary Policy and the M2 Target


    Susan Black William Gavin

    Abstract

    As 1989 comes to an end, the levels of nominal GNP and the M2 aggregate seem to be in balance, as M2 growth has slowed to a 4 to 5 percent range in the past three years. The Federal Reserve's tentative target range for M2 growth in 1990 permits ample opportunity for the inflation rate to decline in the next few years. Read More

  • How Soft a Landing?


    Paul Nickels John Erceg

    Abstract

    While nearly everyone in attendance at a recent Fourth District Economists' Roundtable agreed that the economy is in a cooling-off period that should last well into 1990, few predicted a recession. There was less agreement on the "livability" of the current rate of inflation, however. Read More

  • Foreign Capital Inflows: Another Trojan Horse?


    Gerald Anderson Michael Bryan

    Abstract

    The U.S. economy has been awash in foreign investment for nearly the entire decade of the 19805. A close look at the destinations of this net inflow of funds reveals that, contrary to popular perception, most of the windfall is being used to fund U.S. investment. Read More

  • Breaking the Inflation-Recession Cycle


    W. Lee Hoskins

    Abstract

    In a recent speech to a Toronto business group, Federal Reserve Bank of Cleveland President W. Lee Hoskins presented his prescription for attaining maximum sustainable economic growth in the coming decade: a policy of price stability that will thwart the damaging cycle of inflation and recession. Read More

  • Forecasting Turning Points With Leading Indicators


    Gerald Anderson John Erceg

    Abstract

    The financial news media frequently point to the movement of the Composite Index of Leading Indicators (ILl) as proof of impending growth or contraction in economic activity. A closer look indicates, however, that while the ILl can provide a great deal of useful information, its value as a forecasting tool is limited. Its usefulness increases when it is used in cornbination with other indexes. Read More

  • The Indicator P-Star: Just What Does It Indicate?


    John Carlson

    Abstract

    Monetary indicators can help policymakers to evaluate the likely success or failure of policy instrument settings. The recently unveiled P-Star indicator can be useful as an indicator of potential inflation and, more broadly, as a method of assessing the Federal Reserve's long-term goal of price stability. Read More

  • Have the Characteristics of High-Earning Banks Changed? Evidence from Ohio


    Paul Watro

    Abstract

    Regulatory and technological changes in the banking industry have had a pronounced effect on bank operations in the last decade. By analyzing the average return on assets for both high- and low-earning banks in Ohio over five-year periods in the mid-1970s and mid-1980s, the author finds that the top-performing financial institutions earned higher returns after deregulation, while the earnings of poorly managed banks deteriorated. Read More

  • LBOs and Conflicts of Interest


    William Osterberg

    Abstract

    Leveraged-buyouts (LBOs) have had a major impact on our financial system, and have particularly affected traditional corporate relationships between stockholders, bondholders, and employees. It is unclear if LBOs improve economic performance. The growth of LBOs, however, has sparked an evolutionary response that is restructuring the corporation as an institution. Read More

  • Mergers, Acquisitions and Evolution of the Region's Corporations


    Erica Groshen Barbara Grothe

    Abstract

    Mergers and acquisitions have both positive and negative effects on a region's industrial structure. The authors use a sample of 37 companies to discuss the effects of mergers and acquisitions on three key metropolitan areas in the Fourth Federal Reserve District. Read More

  • Setting the Discount Rate


    Edward Stevens

    Abstract

    An independently determined discount rate seems irrelevant as long as open market operations implement monetary policy. This suggests moving the discount rate frequently in alignment with market rates. Instead, however, the Federal Reserve could use the discount rate as an independent tool to enrich the policy process. In so doing, the central bank could improve the reliability of short-term policy information available to the public and prevent market activity based on faulty assumptions about policy intentions. Read More

  • Inflation and Soft Landing Prospects


    John Erceg

    Abstract

    A consensus forecast by 27 economists who met recently at the Federal Reserve Bank of Cleveland calls for continued slow growth in output and a "soft landing" for the economy through 1990. However, their projected inflation rate is relatively intractable and prospects for lower inflation in the near future do not appear promising. Read More

  • Payment System Risk Issues


    Edward Stevens

    Abstract

    An effective payment system risk policy must deal with complex, sometimes- interrelated issues. These range from how to devise a workable international division of labor among sovereign bank-regulatory agents, all the way to the basic operational question of how to define a real-time daylight overdraft that includes offline activities. Read More

  • Rethinking the Regulatory Response to Risk-Taking in Banking


    W. Lee Hoskins

    Abstract

    In considering reforms to promote the health and efficiency of our financial services industry, the critical focus should be on revamping the current system of deposit-insurance pricing and coverage. These reforms should emphasize greater reliance on market forces and less reliance on the regulatory apparatus, while retaining the advantages of a multiple-agency framework. Read More

  • Economic Principles and Deposit-Insurance Reform


    James Thomson

    Abstract

    The current system of federal deposit insurance subsidizes risk-taking by depository institutions, resulting in increased failure-resolution costs and decreased efficiency for the entire financial system. Reforms to the deposit-insurance system should consider both the policy objectives and the attendant economic consequences and costs of deposit guarantees. Read More

  • Airline Deregulation: Boon or Bust?


    Paul Bauer

    Abstract

    Deregulation of the airline industry has produced wide-ranging changes that have created benefits and some problems for the public. The promotion of safety, high-quality performance, and beneficial competition within the industry should be a goal of public policy. These policy goals, however, must be based on a sound understanding of the market forces behind the post-deregulation changes in the airline industry. Read More

  • Communication and the Humphrey-Hawkins Process


    John McElravey

    Abstract

    The Federal Reserve reports its monetary policy goals for the coming year to Congress in what is known as the Humphrey-Hawkins testimony. The report includes a discussion of the economic projections of the Federal Open Market Committee (FOMC) and of the Federal Reserve's target ranges for growth of the M2 and M3 monetary aggregates. The process seems to work well for reporting short-term goals, but perhaps could be improved upon to better communicate the Federal Reserve's long-term monetary objectives. Read More

  • A Market-Based View of European Monetary Union


    W. Lee Hoskins

    Abstract

    The European Economic Community will benefit enormously from the creation of a single internal market by 1992. Nevertheless, the free movement of financial capital could force Europe to choose between fixed exchange rates and monetary independence. This Commentary discusses the alternatives involved with this choice, one of which is the creation of a European monetary union. Read More

  • The Costs of Default and International Lending


    Chien-Nan Wang

    Abstract

    During the past few years, a number of less developed countries (LDCs) have had difficulty repaying their foreign debt. Sometimes payments have been suspended or delayedmaking it necessary for debtors and creditors to renegotiate or reschedule loan payments. These problems have raised questions about the costs and benefits of different types of debt repayment negotiations and their implications for the future of internationallending. This article investigates these questions. Read More

  • Bank Lending to LBOs: Risks and Supervisory Response


    James Thomson

    Abstract

    Leveraged buyouts (LBOs), a popular method of corporate restructuring in the past decade, have attracted significant attention among the news media, Congress, and bank regulators. The huge size of recent takeover deals and the dramatic increase in LBO credits on bank portfolios have raised concerns about the risks of LBO financing. This article examines these risks and discusses the current response of bank supervisory authorities to the increased use of funding by leveraged buyouts. Read More

  • Monetary Policy, Information, and Price Stability


    W. Lee Hoskins

    Abstract

    Inflation rates over the last several years have eroded the purchasing power of the dollar and have impaired economic efficiency. The Federal Reserve could move more effectively toward its stated goal of price stability through an information program stating its goals, methods, and timetables for achieving zero inflation. Read More

  • Money and Velocity in the 1980s


    John Carlson John McElravey

    Abstract

    The behavior of money has changed greatly in the 1980s. This article identifies the newly emerging patterns in money and its relationship to economic activity. These new patterns, largely a consequence of both deregulation and disinflation, reveal an increased sensitivity of money to interest rates. The implications for the role of money in the monetary policy process are also discussed. Read More

  • International Policy Coordination: Can We Afford It?


    W. Lee Hoskins

    Abstract

    The globalization of markets offers enormous potential for international cooperation--a potential both to enhance markets and to supplant markets. We must not accept proposals for international policy coordination without a critical assessment of their potential costs as well as benefits. Read More