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2001 Economic Commentaries

  • Swaps and the Swaps Yield Curve


    Joseph G. Haubrich

    Abstract

    Interest rate swaps have become a popular financial derivative, and market watchers and economists are paying closer attention to them and their associated yield curves. This Commentary gives a brief introduction to swaps and their relation to other interest rates. Read More

  • The Curiously Different Inflation Perspectives of Men and Women


    Michael Bryan Guhan Venkatu

    Abstract

    That men and women occasionally see things differently is not a remarkable observation. But that the sexes could report vastly different perspectives on the rate at which prices are rising over a long period of time is astonishing. This Commentary describes the difference in inflation sentiment held by men and women — a puzzle that may hold the key to interpreting survey-based data on household inflation expectations. Read More

  • The Demographics of Inflation Opinion Surveys


    Michael Bryan Guhan Venkatu

    Abstract

    In this Commentary, we document that people report very different perceptions and predictions of inflation depending upon their income, education, age, race, and gender—a strange finding that may provide an important clue to understanding how to interpret survey data of inflation expectations. Read More

  • How Well Does the Federal Funds Futures Rate Predict the Future Federal Funds Rate?


    Ed Nosal

    Abstract

    Contrary to popular belief, federal funds futures rates do not tell us precisely where the market thinks federal funds rates will be in the future. On average, futures rates overpredict future fed funds rates, and, depending on whether fed funds rates are falling or rising, the futures rate may consistently overestimate or underestimate the future fed funds rates. To obtain a reliable estimate of the future fed funds rate, one must adjust the fed funds futures rate appropriately to account for the bias and past movements of the fed funds rate. Read More

  • Who Benefits from Increasing the Federal Deposit Insurance Limit?


    James Thomson

    Abstract

    Who might stand to benefit from doubling the insured-deposit limit to $200,000, and are such benefits consistent with the social objectives of federal deposit insurance? Read More

  • Productivity Gains: How Permanent?


    Paul Bauer Jeffrey Jensen Mark E. Schweitzer

    Abstract

    This Economic Commentary confirms unusually robust productivity growth of the last few years and explores reasonable assumptions about the likely future pattern of productivity growth. These assumptions can generate substantially different productivity growth paths. Government forecasts, which guide the major tax and benefit programs, have been increased in recent years yet remain cautious. Read More

  • Does Social Security Worsen Inequality?


    Jagadeesh Gokhale

    Abstract

    Gaps between the rich and poor grow once people hit retirement. Some say privatizing Social Security will increase wealth inequality among retirees. This Commentary argues it won't and suggests that the current system may be reducing wealth mobility from one generation to the next. This Commentary is based on a presentation given at the CATO Institutes conference on Social Security Privatization, February 5—7, 2001. Read More

  • From Market Failure to Market-Based Solution Policy Lessons from Clean Air Legislation


    Eduard Pelz Terry Fitzgerald

    Abstract

    How can the United States balance its need for increased energy production with national and global environmental concerns? This Economic Commentary argues that competitive markets can be used to address environmental needs without placing an excessive burden on citizens. Read More

  • Money, Manufacturing, and the Strong Dollar


    Owen F. Humpage

    Abstract

    U.S. firms are facing tough international competition, and the U.S. trade deficit has grown to a level that some find alarming. Why doesn’t the United States respond by easing monetary policy to lower the dollar’s exchange rate and reduce the price of U.S. goods in foreign markets? This Commentary argues that monetary policy is incapable of improving the competitive position of U.S. manufacturing through exchange rate manipulation. The temporary gains monetary easing might achieve through a nominal dollar depreciation would be offset by higher inflation and decreased foreign investment. Read More

  • Effective Supervision and the Evolving Financial Services Industry


    Jerry Jordan

    Abstract

    Technology, market consolidation, international competition, and new legislation are changing the face of the financial services industry. How are the agencies responsible for ensuring the safety and soundness of our financial system responding? Jerry L. Jordan is president and chief executive officer of the Federal Reserve Bank of Cleveland. This Commentary is adapted from his keynote address to the 111th Annual Meeting of the Ohio Bankers Association on May 31, 2001. Read More

  • On the Cost of Inflation


    Paul Gomme

    Abstract

    The FOMC has two objectives: maximizing sustainable economic growth, and maintaining price stability. At times—like the past year—these goals appear to be in conflict. This Economic Commentary outlines some economic theory that suggests that in the long run the FOMC can achieve its two objectives by focusing primarily on its price stability target. Read More

  • Monetary Policy with Humility


    Sandra Pianalto

    Abstract

    When the economy slows, monetary policymakers face pressure to deviate from their longer-term goals to address short-term problems. This Commentary argues that the Fed must stay focused on the long term—maintaining the stable purchasing power of the dollar. The Commentary is adapted from a speech delivered by Sandra Pianalto, first vice president of the Federal Reserve Bank of Cleveland, to the Association for Corporate Growth in March 2001. Read More

  • Fiscal Policy in an Era of Surpluses


    Jagadeesh Gokhale

    Abstract

    Federal surpluses have come as a pleasant surprise, but using them to finance additional government spending would be disastrous. By the middle of the next decade, Social Security and Medicare outlays will soar beyond projected payroll taxes. While using the surpluses to offset future entitlement payments is a good idea, finding a way to do it is not so easy. This Commentary suggests it could be accomplished by paying down the national debt and combining the remaining surplus with Social Security reform. Read More

  • Why Is the Dividend Yield So Low?


    John Carlson

    Abstract

    The dividend yield on stocks has dropped sharply over the last decade. Is its drop reflective of irrational exuberance, as some have claimed? This Commentary assesses alternative explanations for the diminished dividend yield. Read More

  • Beyond Zero: Transparency in the Bank of Japan's Monetary Policy


    Edward Stevens

    Abstract

    Japan’s economy has problems that, undoubtedly, are more complex than monetary policy might be expected to solve. But other kinds of policy actions stand a better chance of success when monetary policy is transparent. Transparency means that market participants’ anticipations of central bank actions are congruent with those of policymakers themselves. The Bank of Japan has made repeated efforts toward greater transparency since achieving independence in 1998. Read More

  • Life-Cycle Income and Consumption Variability


    Peter Rupert Chris Telmer

    Abstract

    By all accounts, economic inequality is growing — the rich are getting richer, and the poor are getting poorer. This Economic Commentary explores inequality in income and consumption and asks whether inequality is determined early in life, before individuals enter the labor market, or whether it manifests itself during the working years. Read More

  • Perils of Price Deflations: An Analysis of the Great Depression


    Charles T. Carlstrom Timothy Fuerst

    Abstract

    If a central bank adopts a zero inflation target, it would, in practice, occasionally deviate from that rate up and down, and the economy would experience episodes of mild inflation and deflation. Is deflation—a decrease in the level of prices—a cause for concern? Deflation can cause output to decline, but to what extent? This Economic Commentary explores how much of a problem deflation might be for modern economies by estimating the effect that massive price declines had on output during the Great Depression. We find that while deflation can cause output to decline, mild episodes of deflation are unlikely to be a problem. Read More

  • Risk Management and Financial Crisis


    Joseph G. Haubrich

    Abstract

    Some financial failures occur when people don’t understand the risks they take. Others are simply bad luck. But the most important cases happen when private risks have an additional social aspect. Read More

  • A Retrospective On The Stock Market in 2000


    John Carlson Eduard Pelz

    Abstract

    Should the end of the bull market have come as a surprise? Read More

  • Riding the S-Curve Thriving in a Technological Revolution


    Jerry Jordan

    Abstract

    The information technology revolution offers a great opportunity to leap forward in our collective prosperity. All of us stand to benefit. But some will take to the revolution more easily than others—policymakers have learned this lesson from previous economic revolutions. This Economic Commentary is adapted from a speech given by Jerry L. Jordan, president and CEO of the Federal Reserve Bank of Cleveland, to the Ohio Aerospace Institute on October 12, 2000. Read More