Skip to main content

1999 Economic Commentaries

  • The Exchange Stabilization Fund: How It Works


    William Osterberg James Thomson

    Abstract

    The increased turmoil in international financial markets, starting with the Asian crises of 1997, has led to calls for financial assistance from the wealthier nations. In December 1997, the United States announced a $5 billion commitment toward an international package of financial assistance for South Korea. Two months earlier the United States pledged $3 billion for assistance to Indonesia. In both instances, the Exchange Stabilization Fund (ESF) was to be involved. Read More

  • Forecasts and Sunspots: Looking Back for a Better Future


    Charles T. Carlstrom Timothy Fuerst

    Abstract

    Some would argue that economic forecasts are about as accurate as soothsayers and weather forecasts. Yet central banks all around the world make such forecasts and use them when conducting monetary policy. In fact, countries with inflation targets (Canada, New Zealand, and the United Kingdom, for example) all base their policy actions on inflation forecasts. As Federal Reserve Chairman Alan Greenspan recently commented: “Implicit in any monetary policy action or inaction is an expectation of how the future will unfold, that is, a forecast.” Read More

  • Are We in a Productivity Boom? Evidence from Multifactor Productivity Growth


    Paul Bauer

    Abstract

    With the U.S. unemployment rate at a 30-year historic low and the labor force expected to grow only about 1 percent in the near future, increased productivity could be the key to preserving the country’s robust, noninflationary GDP growth. As a result of compounding, even a small boost in annual productivity growth can yield large benefits in the long run. Providing more goods and services without expending additional resources is a surefire way of relieving supply-side bottlenecks and improving living standards over time. Read More

  • Financial Crises and Market Regulation


    Jerry Jordan

    Abstract

    Financial crises are inevitable. Both government intervention and market innovations can influence the frequency and severity of these episodes, but they cannot eliminate them. Evolution toward stronger political and economic institutions is a discovery process, and the sometimes dramatic financial market adjustments labeled “crises” are an unavoidable part of that process. Read More

  • Dollarization and Monetary Sovereignty: The Case of Argentina


    David Altig Owen F. Humpage

    Abstract

    By almost any objective measure, Argentina surely stands as one of the outstanding economic success stories of the past decade. Throughout the 1980s, inflation plagued the Argentine economy. By the end of that decade, pricelevel growth reached hyperinflationary rates: In June 1989, the Consumer Price Index was 1,471 percent above the previous year’s level. By March 1990, the index had advanced 20,266 percent over the prior 12 months. By the end of that year, real gross domestic product per capita was 23 percent below its 1980 level, reflecting the wastefulness of prolonged and extreme inflation. Read More

  • Growth and the Internet: Surfing to Prosperity?


    David Altig Peter Rupert

    Abstract

    In the late nineteenth century, the economist Thomas Malthus made a simple prediction of economic theory that would result in the discipline being forthwith known as the dismal science. The pessimistic extrapolation for which Malthus is famed foretold of long economic cycles in which widespread famine must be an inevitable part. Read More

  • The Recent Ascent in Stock Prices: How Exuberant Are You?


    John Carlson

    Abstract

    It has been almost three years since Chairman Greenspan posed the foregoing question and thereby launched the phrase “irrational exuberance” into the economic idiom. Since then, of course, some stock-price indexes have doubled, and the question still remains unanswered. Over the same period, favorable U.S. economic performance continued to surprise even some of the more optimistic prognosticators. Because stock prices are presumably forward looking, earlier exuberance appears, at least up to this point, to have been validated by experience. Read More

  • Money Growth and Inflation: How Long is the Long-Run?


    Terry Fitzgerald

    Abstract

    The growth rate of the money supply currently receives little attention in the conduct of monetary policy. While guarding against rising inflation is one of the Federal Reserve’s primary objectives, the Fed has found the short-run relationship between money growth and inflation too unreliable for money growth to merit much attention. Read More

  • Resisting Electronic Payment Systems: Burning Down the House?


    Ben R. Craig

    Abstract

    In the Cleveland Museum of Art hangs a famous painting, <em>The Burning of the Houses of Parliament,</em> by J.M.W. Turner. The painting depicts an event that provides a fascinating case study of the difficulty of changing payments systems in the face of new technology. This difficulty is surfacing again as modern economies face the switch from paperbased payments systems to a variety of electronic systems. The Rivlin Committee called attention to the phenomenon in its 1998 report when it observed that “...the reliance on paper-based retail payment methods is striking in an electronic age.” The report estimates that the percentage of paper makes up 78 percent of all noncash transactions in the United States and only 37 percent in Europe. Why has the United States been so slow to change? Much insight into the reason can be gained by examining the events surrounding the original adoption of paper as a means of public record keeping— events which led to the disastrous fire depicted in Turner’s masterpiece. Read More

  • Measuring Total Employment: Are a Few Million Workers Important?


    Mark E. Schweitzer Jennifer Ransom

    Abstract

    Each month employment reports are eagerly awaited by economic analysts and small and large investors alike. The <em>Employment Situation Report</em> provided by the Bureau of Labor Statistics (BLS) reports both the unemployment rate and the total number of jobs in the economy; both statistics indicate the overall health of the economy. Read More

  • Mortgage Brokers and Fair Lending


    Stanley Longhofer Paul Calem

    Abstract

    Fair-lending issues have gained new prominence over the course of the last decade. Spurred in part by the controversial findings of the now-famous “Boston Fed Study,” financial institutions have come under more intense scrutiny over compliance with fair-lending laws, with the Department of Justice taking action in more than a dozen lendingdiscrimination cases since 1990. Read More

  • The Truth about Hedge Funds


    William Osterberg James Thomson

    Abstract

    The highly publicized problems of Long Term Capital Management (LTCM) in 1998 have once again focused the attention of policymakers and the financial press on the hedge fund industry. LTCM’s sudden fall from grace has made for colorful reading, in part because its principals include Nobel laureates Robert Merton and Myron Scholes. Interest was heightened by the Federal Reserve Bank of New York’s involvement in coordinating LTCM’s short-term rescue by 15 large banks and security firms. The New York Fed later justified its participation on the grounds that “an abrupt and disorderly liquidation would have posed unacceptable risks to the American economy.” Read More

  • Money Growth and Inflation: Does Fiscal Policy Matter?


    Charles T. Carlstrom Timothy Fuerst

    Abstract

    The determinants of inflation have long interested both economists and central bankers. This interest has taken on renewed importance in light of a growing consensus that central banks should —first and foremost—pursue price stability. The roots of this argument date back to Milton Friedman’s famous dictum that “inflation is always and everywhere a <em>monetary</em> phenomenon.” Yet recently this view has come under attack. As figure 1 illustrates, there has been virtually no correlation between money growth and inflation since at least the early 1980s. Read More

  • Fixing Social Security: Is the Surplus the Solution?


    David Altig Jagadeesh Gokhale

    Abstract

    On certain topics, confusion perpetually reigns. Everyone has a personal list, of course, but somewhere near the top of most is what to make of any debate that includes the words “Social Security.” As the seeds of Social Security reform, planted in President Clinton’s January 1999 State of the Union address, begin to flower in the early heat of the political spring, we can expect the surrounding discussion to yield its fair harvest of muddled thinking, mixed messages, and mistaken claims. Read More

  • The Challenge of Stability: Mexico’s Pursuit of Sound Money


    Jerry Jordan

    Abstract

    Mexico needs a stable standard of value. Indeed, no economy can achieve its potential without a stable standard of value. Read More

  • How Much of Economic Growth Is Fueled by Investment-Specific Technological Progress?


    Michael Gort Jeremy Greenwood Peter Rupert

    Abstract

    Gross domestic product today is only modestly bigger than it was 100 years ago, at least if it’s measured in tons! While this may seem an absurd way to measure GDP, the point is that how economic variables are measured is important. Read More

  • Construction and Monetary Policy: A View from the Sidelines


    Sandra Pianalto

    Abstract

    The Federal Reserve’s popularity in the business community is as high as it has been in the 15 years I’ve been in the System, and perhaps as high as ever in our 86-year history. I often hear someone say, “The Fed sure is doing a good job.” Read More

  • Will Increasing the Minimum Wage Help the Poor?


    David Neumark Mark E. Schweitzer William Wascher

    Abstract

    After holding at $3.35 per hour from 1983 to 1989, the minimum wage has been raised four times over the past decade, reaching $5.15 per hour in September 1997. Recently, the Fair Minimum Wage Act of 1999 was introduced in Congress; if enacted, it would raise the minimum wage an additional dollar over the next two years to $6.15.1 According to its proponents, the primary rationale for increasing the minimum wage is to raise the incomes of poor and near-poor families with members in the workforce. Introducing the Fair Minimum Wage Act in the U.S. Senate on January 19, 1999, Senator Edward Kennedy declared, “I intend to do all I can to see that the minimum wage is increased this year. No one who works for a living should have to live in poverty.” Read More

  • Bringing the Unbanked Onboard


    Barbara Good

    Abstract

    Millions of Americans do not have a banking relationship with a traditional financial institution.1 The “unbanked” —estimated to be 13 percent of American households—use a variety of means to cash checks, make payments, and take out small, short-term loans. Numerous programs and policies have been proposed and implemented to address this issue, but the success rate has not been high. Read More

  • The Euro


    Edward Stevens

    Abstract

    The primary job of the modern central bank is to manufacture money. In January 1999, the new European Central Bank (ECB) began manufacturing a new money—the euro—by taking over the operations of 11 European nations’ monetary systems. The symbol for the euro is &euro;, just as $ is the symbol for the dollar. By 2002, the euro will have replaced entirely the existing currencies of the 11 participating nations. Read More