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1995 Economic Commentaries

  • M2 Growth in 1995: A Return to Normalcy?

    John Carlson Benjamin Keen


    In years past, the growth rates of money measures such as M2 received considerable attention because evidence showed that there was a simple and stable long-run relationship between M2, nominal income, and inflation. Many analysts believed that abrupt changes in money growth induced swings in output, while changes in the trend rate of money growth led to changes in the underlying rate of inflation. Indeed, the view that M2 is an important monetary policy guide is reflected in the fact that the Federal Reserve is required by law to specify growth ranges for the monetary and credit aggregates Read More

  • Rooting Out Discrimination in Home Mortgage Lending

    Stanley Longhofer


    Racial justice is a fundamental social goal in the United States, making enforcement of fair lending laws an important function of the Federal Reserve and other regulators. Despite nearly three decades of effort, however, discrimination in the home mortgage market remains a vexing problem. Read More

  • The Consumer Price Index and National Saving

    Michael Bryan


    Although a majority of U.S. lawmakers now favor the goal of balancing the federal budget within the next decade, there is little consensus on how to achieve it. One current proposal is that the Consumer Price Index (CPI) should be adjusted to better reflect the cost-ofliving increases that result from inflation. If adopted, this measure will not only improve the long-run deficit outlook but, more importantly, will boost the nation's flagging saving rate. Read More

  • Making Payments in Cyberspace

    Paul Bauer


    Cyberspace is loosely defined as the collection of computer communication networks that has evolved since the early 1970s. Although it is most often associated with the Internet, a myriad of bulletin board providers and commercial services are also included. Read More

  • Should Social Security Be Privatized?

    Jagadeesh Gokhale


    Many developed countries operate comprehensive public pension programs to protect the elderly against a wide range of adverse economic circumstances. In the United States, the Social Security program has been in operation for 60 years and has expanded over time in terms of both payroll tax rates and per capita benefits. The manner in which such programs are financed and the methods used to provide retirement and other benefits exert a significant influence on national saving, the labor supply, and ultimately, economic growth. Read More

  • Derivative Mechanics: The CMO

    Joseph G. Haubrich


    The current interest in financial derivatives sometimes appears to be driven by the same tastes that support police and doctor dramas on television: many crashes and a lot of blood. Though undeniably exciting, such shows do not teach you how to drive safely or how to administer first aid. Likewise, a concentration on the blowups of financial derivatives slights the more basic information needed for policy decisions or corporate risk management. Read More

  • A Monetary Policy Paradox

    Charles T. Carlstrom


    One of the most difficult tasks faced by any central bank is explaining to the public the role that interest rates play in the conduct of monetary policy. The common understanding is that the Federal Reserve fights inflation by acting to raise short-term interest rates. But as pointed out by economist Irving Fisher many years ago, reduced inflation is associated with lower, not higher, rates of interest. Read More

  • Regulation and the Future of Banking

    Jerry Jordan


    The future of banking cannot be discussed without talking about regulation. Simply put, regulation is what has defined banking as we know it. For more than 60 years, the Glass-Steagall Act has defined what a banking organization has been allowed to do; the Douglas and other bank holding company acts have defined the corporate form required to do it; the national or state banking authorities, deposit insurance agencies, and Federal Reserve have defined how to do it; and their supervisors and examiners have tried to ensure that it was done that way. Read More

  • Monetary Policy and the Federal Funds Futures Market

    John Carlson Jean McIntire


    Events rarely unfold exactly as we foresee them. In the monetary policy arena, for example, the timing and intensity of specific actions can be difficult to anticipate. Following a 15-month period during which no policy action was taken, the Federal Open Market Committee (FOMC), the central bank's policymaking arm, embarked on a series of moves that has raised money market interest rates seven times since January 1994. Read More

  • SAIF Policy Options

    William Osterberg


    As part of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989, Congress mandated a minimum coverage ratio of $1.25 of insurance reserves per $100 of insured deposits for the Bank Insurance Fund (BIF) and Savings Association Insurance Fund (SAIF). The Federal Deposit Insurance Corporation (FDIC), which administers both funds, estimates that the BIF's ratio will reach the mandated 125-basis-point coverage ratio by midyear and that as a result, banks and other BIF-insured depositories are likely to see their average deposit insurance assessment fall from 24 cents per $100 of domestic deposits to 4 cents by the close of 1995. Read More

  • How Much Is Daylight Credit Worth?

    Edward Stevens


    Credit extended for a few hours during the business day, but not overnight, is called daylight credit. Once largely unnoticed, it has acquired significant importance since the Federal Reserve Banks stopped providing free and unlimited daylight overdrafts to financial institutions on demand. The Banks imposed formal restrictions in 1986 and a daylight overdraft fee in 1993, both of which were intended to reduce the subsidy of free credit. Now, as of April 13, the fee has been raised from 10 cents to 15 cents per $100 average per-minute daily overdraft in excess of 10 percent of a bank's total risk-based capital. This <em>Economic Commentary</em> examines how much daylight credit might be worth to the banks that use it and looks at the implications of raising the overdraft fee. Read More

  • Can Foreign Exchange Intervention Signal Monetary Policy Changes?

    William Osterberg


    According to news accounts, on March 3 of this year, 18 central banks spent approximately $500 million to support the international value of the U.S. dollar. The Federal Reserve System was reported to have spent $250 million the previous day. While these interventions may have slowed the decline of the dollar, its future course would depend on subsequent policies undertaken by either the U.S. government or other nations. Read More

  • Growth and Poverty Revisited

    Elizabeth Powers


    In the 1960s, economic growth seemed to be the tonic for poverty. From 1960 to 1969, real gross domestic product (GDP) grew at a 4.1 percent average annual rate, while the percentage of all persons in poverty declined at an annualized 5.9 percent. Had the 1960s' relationship between real GDP growth and poverty reduction been maintained, the share of all Americans in poverty, or the "poverty rate," would have been only 8.2 percent by 1992. The actual 1992 poverty rate, however, was nearly twice as large. Read More

  • Are Wages Inflexible?

    Ben R. Craig


    How often does an average worker's hourly wage change? Do employees and employers avoid wage cuts? When wage changes occur, do they tend to come in gradual, small adjustments or in the form of a single large increase? Finally, do pay cuts follow the same pattern as pay raises? Read More

  • A Mexican Currency Board?

    Owen F. Humpage


    A lack of confidence in the peso's purchasing power was fundamental to Mexico's recent currency crisis and remains central to the nation's convalescence. In establishing a credible commitment to price stability, countries face a trade-off between 1) adopting institutional forms that limit their government's ability to generate inflation and 2) relying on an established reputation for successfully controlling the price level. Recognizing that those countries lacking such a reputation must compensate with strong institutional limits on their monetary policy discretion, many economists have suggested that Mexico replace its central bank with a currency board. Read More

  • Is Public Capital Productive? A Review of the Evidence

    Kevin Lansing


    An recent years, analysts and policymakers have voiced concern that public investment in the United States may be too low. In response, the Clinton administration's original economic strategy emphasized a plan to expand investment in public infrastructure. Now, however, the Republican-controlled Congress is looking for ways to achieve a balanced budget by the year 2002. When the budget ax falls, will infrastructure programs be among those targeted for cuts? In making such decisions, policymakers need to consider the evidence regarding the productive effects of public capital on the U.S. economy. Read More

  • Monetary Policy: An Interpretation of 1994, a Challenge for 1995

    David Altig


    In the realm of monetary policy, 1994 was an eventful year. In February, the central bank's Federal Open Market Committee (FOMC) engineered the first of what would eventually number six increases in the closely watched federal funds rate — the interest rate that banks charge each other for overnight loans. In contrast to 1993, a year characterized by remarkable stability in short-term interest rates, these actions culminated in federal funds rates that, by year-end, matched levels not seen since 1989. Read More

  • Another Look at Part-time Employment

    Max Dupuy Mark E. Schweitzer


    Since the end of the last recession in 1991, newspaper editorialists and other pundits have frequently complained about part-time work. They claim that the labor market has changed fundamentally for the worse and that part-time jobs are displacing full-time positions at an alarmingly rapid pace. The implication is that many Americans who want full-time jobs are able to find only part-time work. Read More

  • The Myth of the Overworked American

    Kristin Roberts Peter Rupert


    A perennial debate that has become even more sharply contested in recent months concerns the size and scope of government participation in markets. Free-market proponents believe that unfettered economic competition delivers the greatest prosperity level for the citizenry. Opponents challenge the record of private enterprise to improve the standard of living of individuals from all walks of life. A specific claim is that U.S. workers are increasingly being faced with the unpleasant option of either working ever harder—and enjoying life ever less—or consuming less and watching their material comforts diminish. Read More

  • Allocating Publicly Owned Assets: The Case of Personal Communications Services

    Ian Gale


    In late July 1994, the Federal Communications Commission (FCC) began an unprecedented sale of the airwaves. Large segments of radio spectrum (frequencies) were sold in a series of auctions, enabling firms to provide new telecommunications services. First to be sold were 4,900 radio licenses for two-way paging services, voice messaging, and data services, allowing receipt of faxes by hand-held devices, for example. Next to be sold are about 2,000 licenses for wireless telephone services known as personal communications services (PCS). PCS systems will transmit calls via radio waves using digital technology. As with current cellular telephone systems, there will be many "base stations," and calls will be relayed from station to station as the caller moves around. Read More