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2006 Economic Commentaries

  • Milton Friedman, Teacher, 1912–2006


    Charles T. Carlstrom Timothy Fuerst

    Abstract

    Nobel laureate Milton Friedman, who died on November 16, 2006, changed the course of modern central banking. Many of his proposals for the conduct of monetary policy were controversial at the time he made them but are now widely accepted. This Commentary reviews some of Friedman’s contributions to monetary economics. Read More

  • The Anatomy of an Oil Price Shock


    Eric Fisher Kathryn Marshall

    Abstract

    Oil price shocks do not cause inflation, no matter how close the connection seems to be in our practical experience. But they can cause significant price increases throughout the economy. Tracing the way a sharp increase in the price of crude oil affects prices in various industrial sectors of the U.S. economy suggests how big these increases are. Fortunately, our economy seems better prepared now to weather such shocks than in the 1970s and 1980s. Read More

  • Understanding Unemployment


    Guillaume Rocheteau

    Abstract

    Modern economists have built models of the labor market, which isolate the market’s key drivers and describe the way these interact to produce particular levels of unemployment. One of the most popular models used by macroeconomists today is the search-matching model of equilibrium unemployment. We explain this model, and show how it can be applied to understand the way various policies, such as unemployment benefits, taxes, or technological changes, can affect the unemployment rate. Read More

  • Inflation, Inflation Expectations, and Monetary Policy


    Sandra Pianalto

    Abstract

    Careful readers of FOMC communications will note that in addition to talking about actual inflation, the committee often talks about inflation expectations. Sandra Pianalto, the president and chief executive officer of the Federal Reserve Bank of Cleveland, explains the important role that inflation expectations play in the monetary policy process. This Commentary is taken from a speech she delivered to the Copper Development Association’s Global Market Trends Conference on September 8, 2006. Read More

  • Central Bank Independence: The Key to Price Stability?


    Charles T. Carlstrom Timothy Fuerst

    Abstract

    Low inflation over long periods is the sign of an effective central bank. The authors suggest that a large fraction of the worldwide decline in inflation since the early 1980s results from an international movement toward more independent central banks. Read More

  • Paths to Prosperity: Knowledge is Key for Fourth District States


    Paul Bauer Mark E. Schweitzer

    Abstract

    Even as per capita income has increased across the United States, differences among states’ incomes remain. What are the sources of these remaining differences? This Commentary identifies and analyzes the key factors—patents, educational attainment, and industry structure— that influence income-growth rates and thus per capita incomes. It also explores where the Fourth District falls in relation to other states and the country as a whole. Read More

  • Industrial Loan Companies


    O. Emre Ergungor James Thomson

    Abstract

    Once Wal-Mart announced its intention to acquire an industrial loan company, a public furor arose that has brought a lot of attention to a type of institution that has existed for quite some time, but was not widely recognized outside of banking circles. What are ILCs and why have they become so controversial lately? Read More

  • Central Bank Credibility


    Paul Gomme

    Abstract

    Major League Baseball Commissioner Bud Selig announced he would crack down on steroid use in baseball, hoping to stop players from doping. He was forced to discipline stars like Rafael Palmeiro, possibly hurting the game immediately, in order to develop a reputation for being tough on steroids. The Federal Reserve System has worked hard over the past few decades not only to lower inflation and keep it low, but also to convince the public that it is dedicated to delivering low inflation over the long haul. This Commentary explains why credibility is so important to monetary policymakers. Read More

  • Economic Conditions and Monetary Policy


    Sandra Pianalto

    Abstract

    In order to set monetary policy appropriately, policymakers need to assess current economic conditions, understand how the economy got where it is, and have a good idea of where it is heading. Because economic conditions are always in flux, good communications are important to successful policymaking. Communications can help the public appreciate policymakers’ objectives, understand their thinking about the prospects for meeting those objectives, and consider how new information might affect policy choices. This Commentary was adapted from a speech given to the Broadcast Cable Financial Management Association on June 12, 2006, in Orlando, Florida. Read More

  • FOMC Communications and the Predictability of Near-Term Policy Decisions


    John Carlson Ben R. Craig Patrick Higgins William Melick

    Abstract

    In February 1994, the FOMC began a new era in transparency, gradually building a communications apparatus that conveys information about the Committee’s decisions and expectations. Has the new apparatus improved the public’s ability to predict FOMC interest rate decisions? New research based on the prices of fed funds futures shows that over the past decade, it has, especially over horizons of two to three months. Read More

  • Inflation, Banking, and Economic Growth


    John Boyd Bruce Champ

    Abstract

    The world has seen a dramatic decline in inflation rates in recent decades, but concerns about inflation may still be warranted, especially in some countries. Evidence is mounting that inflation is harmful to economic activity even at fairly modest rates of inflation because of the way it adversely affects the banking sector and investment. Read More

  • Monetary Policy in an Interdependent World


    Sandra Pianalto

    Abstract

    While central bankers must focus on delivering price stability and other mandates in their own countries, they must also monitor international developments closely because national trade and financial markets have become increasingly interconnected. Sandra Pianalto, president and chief executive officer of the Federal Reserve Bank of Cleveland, explores how the globalization of financial markets could affect U.S. monetary policy and explains how a commitment to price stability and policy transparency can help monetary policymakers deal with challenging international developments. A version of this speech was presented to the Marshall Forum on Transatlantic Affairs in Tremezzo, Italy, on March 18, 2006. Read More

  • Does the Yield Curve Signal Recession?


    Joseph G. Haubrich

    Abstract

    Experience has taught economic forecasters to expect a recession when the yield on short-term Treasury securities rises above the yield on longerterm securities—a situation known as a yield-curve inversion. But some economists suspect the yield curve might not be as reliable a predictor of output growth as it used to be. Read More

  • Employment Growth, Job Creation, and Job Destruction in Ohio


    Yoonsoo Lee Brian Rudick

    Abstract

    Over the past several years, Ohio’s employment has grown much more slowly than the national average. If we look at patterns of job creation and destruction in the state, we can start to get a handle on why. In the late 1990s, not only was the rate of job creation sluggish relative to the nation, but the rate of job destruction climbed rapidly. Read More

  • Choice, Charters, and Public School Competition


    Eric Hanushek

    Abstract

    In the last century, public schools changed in ways that dramatically reduced the control that parents have over their local schools. Regaining that control is one key to improving the quality of our schools, and giving students a choice of schools is one way of increasing the influence that parents have over the way schools are run. Several types of school choice have arisen in recent years, including magnet and charter schools. But when these are reviewed in terms of outcomes and incentives, charter schools are found to have a much better chance of providing the competitive pressure necessary to improve the quality of public schools. Read More

  • Vouchers and the Cleveland Scholarship Program: Little Progress So Far


    Clive Belfield

    Abstract

    Voucher programs are intended to raise the academic achievement of students, but, unfortunately, so far the evidence suggests that Cleveland’s voucher students perform no better than their counterparts in public schools. Read More

  • Economic Forecasts and Monetary Policy


    Sandra Pianalto

    Abstract

    Economic forecasts are essential tools for monetary policymakers. But behind the numbers of any given forecast, demand- or supply-side factors could be at play, each requiring very different policy responses. For this reason, explains Sandra Pianalto, the president and chief executive officer of the Federal Reserve Bank of Cleveland, in her role as a policymaker it is as important to think about why an economic forecast calls for the economy to head toward a certain point as it is to know what that forecasted point is. These remarks were originally presented to the Cleveland Association for Business Economics on February 13, 2006. Read More

  • Cleveland (on the) Rocks


    Guhan Venkatu

    Abstract

    Cleveland’s employment growth has lagged the nation’s for nearly 15 years, a fact that is often blamed on the kinds of industries that are here—either the area is burdened with too much manufacturing, or it has failed to attract enough high-tech industries. But an analysis shows little support for that view. Read More

  • Optimal Deposit Contracts: Do-It-Yourself Bank-Run Prevention for Banks


    Ed Nosal

    Abstract

    The need for federal deposit insurance is often based on the claim that it prevents bank runs and makes the banking system more stable. But research shows that banks could prevent bank runs by constructing their deposit contracts appropriately, and, in the absence of deposit insurance, they would do so in their own self interest. Federal deposit insurance may be useful as insurance per se—protecting depositors against unforeseen accidents—but it should not be considered necessary for banking system stability. Read More

  • Are We Engineering Ourselves Out of Manufacturing Jobs


    Mark E. Schweitzer Saeed Zaman

    Abstract

    Since the 1970s, productivity growth in the manufacturing sector has outpaced the overall economy, yet the sector’s share of the workforce has declined dramatically. This leads us to ask if we are in fact engineering ourselves out of jobs. This Economic Commentary explores the relationship between productivity and employment and points out why this apparently straightforward relationship may be more complicated than it appears. Read More