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Series:Economic and Financial Policy Review  Bank:Federal Reserve Bank of Dallas 

Journal Article
The federal funds rate as an indicator of monetary policy: evidence from the 1980s
Recently, several economists have argued that movements in the federal funds rate are a good proxy for changes in monetary policy. In this article, Nathan Balke and Kenneth Emery critically examine this view and the evidence supporting it. Using simple vector autoregressions, they find that before 1980 the correlations between the federal funds rate and other important macroeconomic variables are consistent with a traditional monetary policy interpretation of the federal funds rate. However, they show that after 1982 the relationships between the federal funds rate and other macroeconomic variables change significantly. Most important, the correlations between the federal funds rate and other macroeconomic variables observed during the 1980s are not as consistent with a traditional monetary policy view of the federal funds rate as they were before 1980. ; Balke and Emery's work highlights how relationships between important macroeconomic variables can change when institutions or policy regimes change. While the federal funds rate may still be a good indicator of monetary policy, its relationship with other important macroeconomic variables is now clearly different from what it was before 1980.
AUTHORS: Emery, Kenneth M.; Balke, Nathan S.
DATE: 1994

Journal Article
Demographics and the long-term outlook for housing investment
John Hill and D'Ann Petersen measure the importance of projected shifts in the size and age distribution of the U.S. population for domestic housing investment. Their analysis runs through the year 2010 and provides separate estimates for single-family and multifamily investment. ; Hill and Petersen find that the contractionary effects of the population slowdown are already being felt in the housing industry and probably have been since the latter part of the 1980s. In Hill and Petersen's simulations, demographic shifts lower net housing investment by 17 percent from the late 1980s through the first half of the 1990s. Population factors then reduce net investment an additional 22 percent through the year 2005 before turning favorable. ; Hill and Petersen discuss the implications of their findings for construction jobs and housing prices. They suggest that the population slowdown need not produce an absolute contraction in housing employment. It will, however, reduce housing's share of national employment by as much as one-third. According to the authors, the changing demographics do not provide a compelling reason for average home prices to suffer a deep decline. They do suggest, however, that significant relative price adjustments may need to take place between different types of homes.
AUTHORS: Petersen, D'Ann M.; Hill, John K.
DATE: 1994

Journal Article
A primer on the nature of business cycles
Discussions of the effects of monetary and fiscal policy sometimes center on the impact of such policies in ameliorating fluctuations associated with the business cycle. However, though familiar with the term "business cycle," many people are not aware of what it refers to exactly. In this article, Gregory Huffman presents an explanation of the term and provides a detailed illustration of post-World War II U.S. business cycles. He also contrasts the behavior of various U.S. economic time series over the business cycle with similar Canadian statistics and points out some apparent anomalies in the data.
AUTHORS: Huffman, Gregory W.
DATE: 1994

Journal Article
The saving grace
Many economists agree that a country's rate of saving can be a key factor in the growth rate and living standards the country achieves. Analysts are less certain about which factors have positive and negative influences on saving, what role government should have in creating a better environment for saving, and the extent to which a country can offset the effects of low domestic saving by tapping into other countries' savings. ; Economists, bankers, and officials discussed these and other aspects of saving earlier this year at a symposium sponsored by the Federal Reserve Bank of Dallas. Richard Alm and David Gould recap much of that discussion in this article.
AUTHORS: Alm, Richard; Gould, David M.
DATE: 1994

Journal Article
The consumer price index
The consumer price index (CPI) is probably the most closely watched indicator of inflation in the U.S. economy. In this article, Mark Wynne and Fiona Sigalla explain the construction of the CPI and evaluate some of its potential shortcomings as a measure of inflation. Specifically, they examine the discrepancies that arise between the CPI and the true cost- of-living index as a result of improvements in the quality of goods, the introduction of new goods, substitution on the part of consumers between different goods and retail outlets, and the difficulty of measuring the prices actually paid by consumers for the goods they purchase. ; The authors review the literature that quantifies these discrepancies, with the objective of estimating the magnitude of the overall bias in the CPI. Wynne and Sigalla argue that, in fact, remarkably little is known about the extent or significance of the overall bias in the CPI. They conclude that biases in the CPI cause it to overstate inflation by no more than 1 percent a year, and probably less.
AUTHORS: Wynne, Mark A.; Sigalla, Fiona
DATE: 1994

Journal Article
The Texas construction sector: the tail that wagged the dog
The boom-to-bust days of the Texas construction industry will linger in people's memory for many years. D'Ann Petersen, Keith Phillips, and Mine Yucel examine the factors that led to the rise and fall of the Texas construction industry and determine the role the industry played in the state's volatile economy during the 1970s and 1980s. ; Petersen, Phillips, and Yucel employ an econometric model to analyze the roles residential and nonresidential construction played in the state's economic fluctuations from 1976 through 1990. The authors find that, although large swings in oil prices were the greatest source of economic instability in the Texas economy, the construction sector also played an important and independent role in the changing fortunes of the state. The authors' results show that the homebuilding sector, in particular, had a large impact on the Texas economy. In addition, the authors find that the state's economy needs several years to adjust to shocks in the construction industry. Consequently, the current expansion in residential construction is likely to have positive economic effects in the years ahead.
AUTHORS: Mine K. Ycel; Phillips, Keith R.; Petersen, D'Ann M.
DATE: 1994

Journal Article
Solving the mystery of the disappearing January blip in state employment data
Frank Berger and Keith Phillips propose a new two-step method of seasonally adjusting state Current Employment Statistics (CES) data produced by the Bureau of Labor Statistics (BLS). This method, first proposed in the July/August 1993 issue of Southwest Economy, recently was adopted by the BLS to seasonally adjust the broadest industry groupings of the state employment series. With this new adjustment procedure, the state employment data should be smoother and better reflect trend-cycle movements than if a more traditional seasonal adjustment method were used. ; The article finds that forty-six states suffer a break in their seasonal pattern toward the end of the data series. The authors explain the reason for the break and describe a procedure to adjust for it. Although the BLS is currently using this procedure for states at the broadest level of industry detail, analysts who want to seasonally adjust the state employment data at a finer level of industry detail should find the authors' description of the process useful. Also, analysts who seek to seasonally adjust the CES data for metropolitan areas may find the two-step method helpful.
AUTHORS: Phillips, Keith R.; Berger, Franklin D.
DATE: 1994

Journal Article
An economy at risk? The social costs of school inefficiency
A preponderance of economic evidence demonstrates that the public school system in the United States is less efficient than it could be. However, few researchers have examined the economic consequences of such inefficiency. Lori Taylor finds that, although school inefficiency can crowd out consumption and investment in the remainder of the economy and can reduce the rate of return to investments in education, inefficiency has only a limited impact on economic activity. She estimates that, even compounded over twenty-five years, plausible degrees of school inefficiency reduce consumption and potential GDP by less than 1 percent. As such, the social costs of school inefficiency are similar in magnitude to the social costs of monopoly or the corporate income tax.
AUTHORS: Taylor, Lori L.
DATE: 1994

Journal Article
Monetary policy and recent business-cycle experience
Some critics of recent monetary policy have focused on slow M2 growth, claiming that the Federal Reserve is too interested in price stability and is forsaking its growth mandate. Others criticize the Fed for achieving price stability too cautiously and urge the adoption of a rule that seeks to eliminate inflation more quickly. ; R. W. Hafer, Joseph Haslag and Scott Hein examine two alternative monetary policies and gauge their expected impacts on economic activity. Both policies are simulated over the period 198792. One policy, a GNP-targeting rule similar to one proposed by Bennett McCallum, slows nominal GNP growth substantially. Simulated nominal GNP, however, is quite volatile under the GNP-targeting rule. The other policy, referred to in the article as the M2-targeting approach would have resulted in somewhat faster average nominal GNP growth compared with what actually occurred, the start-and-stop pattern exhibited during the recent U.S. recovery would still be present. Thus, the evidence indirectly supports the notion that real shocks were the driving force behind recent weakness in economic activity.
AUTHORS: R.W. Hafer; Hein, Scott E.; Haslag, Joseph H.
DATE: 1994

Journal Article
GATT and the new protectionism
The Uruguay Round of the General Agreement on Tariffs and Trade (GATT) is the first agreement of its kind that reduces or eliminates tariffs on many goods and addresses issues related to intellectual property rights, trade in services and agricultural subsidies. With good reason, it has generated much optimism about the future of free world trade. ; But does GATT's trade liberalization today mean that trade will remain liberalized tomorrow? Increasingly, governments are counteracting the perceived unfair trade practices of other nations with their own trade barriers. While concerns about fairness are legitimate, raising trade barriers to counteract actual or perceived unfair trade practices of others is another form of protectionism that restricts world trade. This new protectionism has most often taken the form of antidumping and countervailing duties. ; Because the use of antidumping and countervailing duties has grown dramatically in recent years across many countries, David Gould and William Gruben analyze whether the recent changes to the GATT accord will discourage the most protectionist aspects of these widely used trade barriers. Gould and Gruben find that while the new GATT agreement does not eliminate the ability of such countries to misuse antidumping and countervailing duties, the accord delineates the rules of such duties much more clearly and provides mechanisms that will likely limit their abuse.
AUTHORS: Gruben, William C.; Gould, David M.
DATE: 1994

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