Economic Review
First Quarter 2002 

Will the Rural Economy Rebound with the Rest of the Nation?
By Jason R. Henderson 

As the U.S. economy slipped into recession in 2001, an already lackluster rural economy lost even more steam. Since 1995, job growth in rural areas has trailed growth in metro areas. But in the wake of last year’s terrorist attacks, national recession, and falling food demand, job rolls in many parts of rural America have not only stopped growing but contracted. Meanwhile, commodity prices have only recently begun to turn around. As a result, farm incomes continue to rely on large government payments.

With the U.S. economy now in recession, the demand for most rural products - farm and nonfarm alike - has stalled. Many economic analysts expect the U.S. economy to turn around in 2002. But, are the prospects of a rural recovery as bright as the rest of the nation? Are both the Main Street and farm segments of the rural economy positioned to recover?

Henderson examines the impact of the current recession on rural growth, recaps rural performance in 2001, and explores the prospects for the year ahead. He suggests that, overall, rural areas seem poised to recover along with the rest of the nation in 2002, but only if demand for rural products rebounds.

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The Changing U.S. Financial System: Some Implications for the Monetary Transmission Mechanism
By Gordon H. Sellon, Jr. 

An important part of monetary policy is the monetary transmission mechanism, the process by which monetary policy actions influence the economy. While the transmission mechanism involves a number of channels, including exchange rates, bank credit, and asset prices, most economists consider interest rates to be the principal avenue by which monetary policy affects economic activity.

In recent decades, significant changes in the structure of financial markets and institutions in the United States may have altered the interest rate channel. Key developments include the deregulation of the financial system, the growth of capital markets as an alternative to bank intermediation, increased competition among intermediaries both domestically and internationally, and greater transparency by the Federal Reserve about monetary policy operations. These changes may have altered both the timing and magnitude of the response of interest rates to monetary policy. Indeed, the failure of long-term interest rates to respond to monetary policy easing during the past year has been cited in the financial press as an indication that monetary policy may now have less influence on interest rates than in the past.

Sellon examines how the changing financial system has affected the interest rate channel of monetary policy. He finds that the response of interest rates to monetary policy, rather than diminishing, has actually increased considerably over time. Indeed, bank lending rates on consumer and business loans and mortgage rates now appear to exhibit a much stronger and faster response to monetary policy actions than in the past. Moreover, institutional changes, such as the increased use of variable-rate loans and the availability of low-cost mortgage refinancing, may have altered the transmission mechanism, potentially broadening the influence of monetary policy on the economy.

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Clicking with Dollars: How Consumers Can Pay for Purchases from E-tailers
By Stacey L. Schreft 

The Internet is often referred to as the world’s largest mall. About half of all adults in the United States have made a purchase online. Worldwide, online shopping is considerably greater—and cybershopping is expected to continue to grow as more households become connected to the Internet and as improvements in mobile telecommunication technology allow wireless Internet access anywhere and anytime.

A byproduct of the dramatic increase in online shopping has been a heightened demand for convenient and secure online payment methods. Consumers make almost all their online purchases with credit cards. But study after study continues to identify concerns about the safety of providing credit-card numbers and personal information online as the biggest barrier to cybershopping. Without further improvements in consumers’ online payment options, e-tailing might not realize its full potential.

Schreft surveys and assesses what is new about the options consumers have to make payments at Internet retailers. She discusses how making payments in cyberspace differs from making payments in the bricks-and-mortar world and describes the use of traditional payment methods for cybershopping. She also examines the new means of payment designed especially for use online.

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