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1991 Economic Commentaries

  • The Outlook: No Boom, No Doom


    John Erceg Lydia Leovic

    Abstract

    The economy's mixed performance in recent months has led to a growing perception that a recovery has not yet begun, or that its sustainability is threatened. Recent declines in housing sales and new car sales, stalled industrial production, and minimal growth in employment have caused some observers to dismiss the reported third-quarter revival in economic growth. Pending layoffs by some manufacturers, financial institutions, and retailers are seen as additional warning flags of a faltering economy. Read More

  • Median Price Changes: An Alternative Approach to Measuring Current Monetary Inflation


    Michael Bryan Christopher Pike

    Abstract

    Price movements are the channel through which market information is transmitted. An increase in one price relative to others is the signal that directs resources and rations consumption. In other words, markets operate through the <em>distribution</em> of prices. Read More

  • Generational Accounts: A New Approach to Fiscal Policy Evaluation


    Alan Auerbach Jagadeesh Gokhale Laurence Kotlikoff

    Abstract

    Despite recent attempts to impose discipline on the federal budget-making process, federal budget deficits have continued to escalate over the past several years. The prospect of still larger deficits over the next few years has stimulated discussion about how to bring them under control. Some have suggested reforms that would enable the federal government to achieve balanced budgets, not necessarily in every year in the future, but at least on average over a number of years. Read More

  • Why U.S. Managers Might Be More Short-run Oriented Than the Japanese


    Gerald Anderson

    Abstract

    A decade ago, some business analysts began to accuse U.S. managers of concentrating too much on current profits and too little on enhancing their firms' long-run prospects. The implication of this alleged corporate myopia is that American companies would gradually become less competitive and less profitable relative to their foreign counterparts (particularly Japanese firms), which are thought to be more long-run oriented. Read More

  • Some Observations on Central Bank Accountability


    W. Lee Hoskins

    Abstract

    We often hear complaints about the performance of the Federal Reserve System. A cogent example is the decade of the 1970s, when the Federal Reserve mistakenly and regrettably paid too little attention to inflation. This mistake culminated in the enactment of the Federal Reserve Reform Act of 1977, which set out provisions for reporting to Congress about economic conditions and monetary targeting. Read More

  • Exchange-Market Intervention and U.S. Monetary Policy


    Owen F. Humpage

    Abstract

    The United States often buys or sells foreign currencies, hoping to influence dollar'exchange rates. The most visible result of these transactions, however, seems to be a continuing debate about their appropriateness. Read More

  • Financial Fragility and Regional Economic Growth


    Katherine Samolyk Rebecca Wetmore-Humes

    Abstract

    Although the 1980s ushered in the second-longest economic expansion in U.S. history, regional economic performance was uneven during the decade. These regional disparities were accompanied by a deterioration in the quality of bank loans and a sharp increase in the number of bank failures. Indeed, more than half of the banks that have failed since the Federal Deposit Insurance Corporation was founded in 1933 did so during the 1980s. Read More

  • Increasing National Saving: Are IRAs the Answer?


    David Altig Katherine Samolyk

    Abstract

    Saving, so advised the proverbial ant to the spendthrift grasshopper, allows an individual to "prepare today for the wants of tomorrow." Likewise for an economy, national saving provides resources for capital accumulation, expanding the economy's future productive capacity and hence its future potential output. The precipitous decline in average saving rates during the 1980s, as measured by the National Income and Product Accounts (NIPA), has convinced many that we have become a nation of grasshoppers in need of policies that will turn us back into a nation of ants. Read More

  • Federal Funds Rate Volatility


    Diana Dumitru Edward Stevens

    Abstract

    The federal funds rate was unusually volatile for several months starting in late December 1990. Day-to-day changes over this period were far greater than in previous years, although the difference seems to have disappeared recently (figure 1A). Read More

  • An Anemic Recovery?


    John Erceg Lydia Leovic

    Abstract

    The latest economic indicators are signaling an end to the recession that began last July. According to most forecasters, a recovery has already begun, or is about to begin shortly. Less certain are questions about the strength of the recovery and about Federal Reserve policy in the early stages of the upturn. Read More

  • Do Excess Reserves Reveal Credit Crunches?


    Joseph G. Haubrich

    Abstract

    The anticipated economic recovery is haunted by the specter that banks, under pressure from regulators and shareholders, will make too few loans to reignite the economy. Like a phantom, this socalled credit crunch eludes attempts to pin it down, quantify it, or dissect it. Read More

  • Price Stability and World Economic Recovery


    W. Lee Hoskins

    Abstract

    During the past decade, we have enjoyed considerable success in reducing inflation. Despite an unusually long economic expansion, rates of inflation did not accelerate much during the 1980s. While this is heartening, I do not mark our success solely by the numbers; indeed, inflation remains unacceptably high. Instead, I find encouragement in changing attitudes, in both the United States and Europe, about the proper role of monetary policy. Policymakers and academic economists increasingly accept the view that monetary policy can promote stable economic growth only by focusing on long-term price stability. Read More

  • Understanding the Recent Behavior of M2


    John Carlson Sharon Parrott

    Abstract

    The behavior of the monetary aggregates— particularly M2—is often an important consideration in the Federal Reserve's monetary policy decisions. The Federal Open Market Committee (FOMC), the monetary policymaking arm of the Federal Reserve System, periodically sets a target range for M2 growth, based on economic conditions and on its policy stance. In order to steer M2 growth within these bounds (currently 2'/2 and 6V2 percent), policymakers must be able to predict with precision the demand for M2. This entails understanding why individuals and institutions hold transactions and savings deposits. The determining factors have traditionally been the level of income and the opportunity cost of holding M2 balances. Until recent years, these factors have accurately predicted M2 growth. Read More

  • Realignment in the U.S. Motor Vehicle Industry


    Michael Bryan John Martin

    Abstract

    In December 1987, GM closed five auto assembly plants in the United States, including one in Norwood, Ohio. What made the Norwood closure notable from an economic perspective was not the plant's size — which at roughly 140,000 cars per year was moderate by automotive standards — but its location. Approximately 100 miles to the south, Toyota was about to open an auto production facility in Georgetown, Kentucky. And at the same time, 100 miles to the northeast, Honda announced plans to expand its U.S. operations with a plant in East Liberty, Ohio. Read More

  • The RTC and the Escalating Costs of the Thrift Insurance Mess


    Christopher Pike James Thomson

    Abstract

    Almost daily, the news media report on the ever-growing cost of resolving the savings and loan (thrift) insurance crisis. A year ago, the administration estimated that the present-value cost of resolving the insolvency of the now defunct Federal Savings and Loan Insurance Corporation (FSLIC) fund was $130 billion. With the passage of time and the continued deterioration of the troubled portion of the thrift industry, current estimates of the final cost of the FSLIC bailout are half again as high. Taxpayers, who are paying a substantial portion of this bill, wonder why the cost continues to increase and why the Resolution Trust Corporation (RTC) appears to be slow in ending the thrift problem. Read More

  • Price Stability and Regional Diversity


    W. Lee Hoskins

    Abstract

    Those who recognize and appreciate the regional diversity of our national economy can readily understand why I believe that price stability is the only policy objective that the Federal Reserve System can achieve. My reason for espousing this view is quite simple and is vested in the nature of national business cycles. Read More

  • Public Subsidies for Private Purposes


    William Osterberg

    Abstract

    The last day of 1990 was an important date for sports franchises. It had nothing to do with opening day, a national championship, or a players' draft, but for several cities it appeared to determine whether they would be able to retain or to attract a major-league sports team. December 31, 1990 marked the expiration of a provision in the federal tax code granting federal tax exemption to the debt issued by specific local governments to finance sports facilities. Read More

  • Defending Zero Inflation: All For Naught


    W. Lee Hoskins

    Abstract

    During the past several years, I have spent a considerable amount of time promoting price stability as the overriding objective for the Federal Reserve System. In this <em>Economic Commentary,</em> I would like to discuss some of the criticisms that this position has generated, to respond to those criticisms, and to comment on a conference that the Federal Reserve Bank of Cleveland held last year on the subject of price stability. Read More

  • Is This Really a "White-Collar Recession"?


    Randall Eberts Erica Groshen

    Abstract

    Until the National Bureau of Economic Research (the official arbiter of business cycles) decrees it, we cannot be certain that history will record the current economic downturn as a recession. Nonetheless, many economic analysts and media representatives have chosen not to wait for the official pronouncement, proclaiming not only that the US. economy is in the midst of a recession, but that this downturn is different from previous ones because it has hit white-collar workers disproportionately hard. While both issues provide interesting material for debate, this article investigates only whether we are indeed experiencing a <em>white-collar</em> downturn. Read More

  • Deregulation, Money, and the Economy


    John Carlson

    Abstract

    Nothing complicates the life of an economist quite like institutional change. When institutions change, patterns of behavior change, and long-standing economic relationships may break down. It often takes time for new behavioral patterns to stabilize and hence for new relationships to emerge. This lag frustrates the economist, who often must rely on historical relationships as a basis for analysis. Read More

  • The Effect of War Expenditures on U.S. Output


    Charles T. Carlstrom Jagadeesh Gokhale Sharon Parrott

    Abstract

    The war with Iraq has become the most extensive U.S. military involvement since Vietnam. Although the duration and the political ramifications of the operation are still unclear, it is likely that the United States will bear a substantial share of the war's financial cost, placing an additional burden on the federal budget. Aside from the obvious concerns about war's devastation and the tragic cost in human lives, policymakers have also expressed concern about the impact that the war will have on the U.S. economy. Read More

  • 1991 Outlook: Mild Recession, Mild Recovery


    John Erceg

    Abstract

    The U.S. economy has been buffeted in the past few months by uncertainties surrounding the Persian Gulf War and its effects on crude oil supplies and by a strained financial sector domestically. Though these factors can make shortterm economic forecasts highly unpredictable, members of the Fourth District Economists' Roundtable, who met January 18 at the Federal Reserve Bank of Cleveland, project that the current contraction will be brief and that economic growth will resume by mid-year. Read More

  • The Sectoral and Regional Effects of Oil Shocks: Who's over a Barrel?


    Paul Bauer Susan Bryne

    Abstract

    Once again the United States has been jolted by an oil price shock. Since Iraq's August 2 invasion of Kuwait, the cost of crude has soared as high as $41 a barrel. And although prices have since moderated, they continue to exceed the preinvasion level. The U.S. economy has already begun to register adverse effects, as rising energy costs have contributed to the economic slowdown and a general increase in prices. Furthermore, heightened uncertainty about future oil prices and the prospects for war in the Persian Gulf could weaken the economy even more as some firms reduce, delay, or cancel projects in the face of these added risks. Read More

  • Forecast Accuracy and Monetary Policy


    Michael Bryan William Gavin

    Abstract

    It has been suggested that the purpose of economic forecasting is to make weather forecasters look good by comparison. Despite their inaccuracies, though, forecasts of the economy must be useful, given the large number of them available and the relatively high cost of producing such information. Indeed, if forecasters can even marginally reduce uncertainty about future business conditions, the savings to business is potentially huge. Read More