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1997 Economic Commentaries

  • Do More Banking Offices Mean More Banking Services?


    William Osterberg Sandy Sterk

    Abstract

    Measuring output in the nation’s service industries has always been problematic, but in recent years, economists have been focusing more intensely on this issue. Their findings have important implications for measures of national output and inflation. Read More

  • Accelerating Money Growth: Is M2 Telling Us Something?


    John Carlson

    Abstract

    When things appear to be working well, there’s a natural reluctance to tinker. For several years now, the policymaking arm of the Federal Reserve System, the Federal Open Market Committee (FOMC), has conducted monetary policy in a framework in which money growth plays no formal operational role. Since the summer of 1993, when Federal Reserve Chairman Alan Greenspan reported that M2 had been de-emphasized, economic outcomes have been quite favorable. Output growth has accelerated to an average rate of about 3 percent over the period, and inflation has fallen to nearly 2 percent thus far in 1997. Moreover, the “core” rate of inflation—the Consumer Price Index (CPI) less food and energy— rose 2.2 percent over the 12-month period ending last September, the smallest annual increase since 1966. Such results do not inspire a significant change in the way policy is implemented. Read More

  • On the Origin and Evolution of the Word Inflation


    Michael Bryan

    Abstract

    A historical look at the origin and uses of the word inflation, arguing that although the term has become nearly synonymous with "price increase," its original meaning - a rise in the general price level caused by an imbalance between the quantity of money and trade needs - is the definition driving many of those who advocate an anti-inflation policy for the Federal Reserve. Read More

  • Bad Standards


    Michael Bryan

    Abstract

    The measurement standards that we take for granted today, such as for weight, length, time, and temperature, were not always so exact. Over the years, we have come to appreciate the importance of maintaining consistent standards in our measurement of these and other subjective phenomena. Why, then, do we not demand the same rigorous adherence to a standard when it comes to our measure of value - the dollar? We should. Read More

  • The Dark Side of Liquidity


    Joseph G. Haubrich João dos Santos

    Abstract

    Lord Byron once wrote that “ready money is Aladdin’s lamp.” And who can deny that liquidity—having enough ready cash to pay your debts when they come due—is a good thing? But even at a simple level, people recognize the sacrifices that must be made for liquidity and will often trade, for example, an extremely liquid nest egg for a quite illiquid house, and consider that they have gotten the better of the deal. Read More

  • Money, Fiscal Discipline, and Growth


    Jerry Jordan

    Abstract

    History will regard the last quarter of the twentieth century as a time when the world reawakened to one of Adam Smith’s most important observations— that the specialization and trade fostered by market economies are ultimately the source of the wealth of nations. At no time in history have markets spread so rapidly, and with such promising prospects, as in the last 15 years. Europe’s move to a single market for capital, goods, and labor is part of a worldwide trend toward greater reliance on unfettered markets for the allocation of productive resources. Read More

  • Wage Inflation and Worker Uncertainty


    Mark E. Schweitzer

    Abstract

    According to a recent article in the <em>New York Times,</em> the leading explanation of why inflation has been so limited these last three years—despite low unemployment rates—is that wage demands have been held down by an unusually high degree of “worker uncertainty.” Substantial effort has gone into identifying (and disputing) the sources of this presumed insecurity in the face of a rather buoyant labor market. The most commonly mentioned reasons are the threat of middle-management layoffs, competition from foreign workers, and less unionization, all of which are believed to reduce wage inflation by making workers think twice before requesting higher pay—even if their firms’ balance sheets have improved. Read More

  • Wealth, Economic Infrastructure, and Monetary Policy


    Jerry Jordan

    Abstract

    Acountry’s choice of institutions profoundly affects its wealth and development. Institutions constitute a nation’s economic “infrastructure,” the framework on which enterprise is built. Perhaps the most important element separating economic “haves” from “havenots” is whether these institutions—and particularly public institutions—either facilitate or confiscate production. One of those institutional arrangements is the monetary regime. Read More

  • TIPS for Safer Investing


    Kevin Sargent Richard Taylor

    Abstract

    Inflation - a persistent increase in the price level- threatens people's financial well-being by reducing the purchasing power of money, cutting into the future value of savings, and, when unexpected, lowering the real rate of return on investments. To protect their holdings, people take great pains to find investments whose returns exceed the inflation rate, such as stocks, bonds, and numerous other financial instruments. But when their returns are corrected for inflation, investors often see negative numbers. Read More

  • Monetary Policy in the Cold War Era


    Mark Sniderman

    Abstract

    The Soviet Union officially disbanded on December 26, 1991, one day after the resignation of Mikhail Gorbachev. Ever since, the countries that made up the former USSR have been struggling both to govern themselves and to find their places in the world. The cold war against communism was over. Read More

  • Okun's Law Revisited: Should We Worry about Low Unemployment?


    David Altig Terry Fitzgerald Peter Rupert

    Abstract

    The quotation above expresses a common, if not dominant, view of the genesis of inflationary pressure in an economy. The story goes something like this: High GDP growth eventually places excessive strain on a nation's resources. This strain can become particularly acute in labor markets, where it is manifested as low unemployment. The labor market tightness associated with this low unemployment ultimately leads to higher prices. Read More

  • Is Noninflationary Growth an Oxymoron?


    David Altig Terry Fitzgerald Peter Rupert

    Abstract

    Just before the Federal Open Market Committee's (FOMC) May 20 meeting, popular opinion about the near-term future of U.S. monetary policy was summarized by John 0. Wilson, chief economist at Bank America Corp. Read More

  • Where Have All the Tellers Gone?


    Ben R. Craig

    Abstract

    Even in the rapidly expanding U.S. economy, the rising GDP tide has not been able to lift all boats. Some industries continue to contract as aggregate production bounds ahead. Other businesses are trimming their payrolls, but their production levels are picking up. The latter describes the banking industry, where employment has dropped considerably in the last decade, yet the industry as a whole has experienced strong growth. Read More

  • Medicare: Usual and Customary Remedies Will No Longer Work


    Jagadeesh Gokhale

    Abstract

    Medicare was established in 1965 to ensure that all elderly Americans have access to quality health care. After Social Security, the Medicare program which covers almost everyone over the age of 65-constitutes the most important source of economic security for retirees. Without its benefits, many of the nation's elderly would find it difficult to pay their medical bills and still maintain more than a minimum standard of living. Read More

  • PMI Reform: Good Intentions Gone Awry


    Stanley Longhofer

    Abstract

    Last April, the House of Representatives overwhelmingly passed the Homeowners Insurance Protection Act (H.R. 607) with the noblest of intentions-relieving the burden of as many as 250,000 home owners who currently pay for private mortgage insurance (PMI), even though their loan agreements may stipulate that such insurance is no longer necessary. Similar legislation, the Homeowners Protection Act of 1997 (S. 318), is now being considered by the Senate Committee on Banking, Housing, and Urban Affairs (Banking Committee). Read More

  • Maintaining a Low Inflation Environment


    John Carlson

    Abstract

    Immediately after its March 25 meeting, the Federal Open Market Committee (FOMC) announced that it had "decided to tighten money market conditions slightly, expecting the fed funds rate to rise <sup>1</sup>&frasl;<sub>4</sub> percentage point to around 5 <sup>1</sup>&frasl;<sub>2</sub> percent." This was the Committee's first action in almost 14 months and the first increase since January 1995. Read More

  • Structural Reform of the Social Security System: The Time Has Come


    Jagadeesh Gokhale

    Abstract

    After months of wrangling, Congress and the administration recently reached an agreement on how to balance the federal budget by the year 2002. Although the compromise bill contains a $115 billion reduction in projected Medicare spending, it includes no initiatives regarding Social Security. Read More

  • Information Dynamics and CRA Strategy


    Robert Avery Patricia Beeson Mark Sniderman

    Abstract

    Congress enacted the Community Reinvestment Act of 1977 (CRA) to combat redlining, whereby lenders allegedly curtail the supply of mortgage credit to particular neighborhoods, discounting the creditworthiness of the applicants because the neighborhood itself is considered undesirable. Under the CRA's provisions, bank regulators are required to use their supervisory authority to encourage each depository institution including those in low- and moderate income communities-to help meet its community's credit needs consistent with safe and sound lending practices. Read More

  • Stock Market Fundamentals


    Joseph G. Haubrich

    Abstract

    The Great Bull Market of 1996-97 has caught the attention of stock market professionals and individual investors alike. Because the stock market serves as an economic indicator and a possible source of economic disturbances, its recent movements have captured the interest of policymakers as well. Read More

  • The Hidden Costs of Mexican Banking Reform


    William Osterberg

    Abstract

    Analyses of the Mexican financial system in the wake of the 1994- 95 peso crisis have generally focused on the fiscal costs of recapitalizing the nation's banks and of satisfying bank claimants. Seemingly missing from these reports are the possible costs of the incentives provided by banking reform. Such costs might be reflected in the prices at which Mexican banks attract funding or the likelihood that taxpayers will have to provide additional assistance. Read More