Economic Review
Third Quarter 2007 

To view an Economic Review article using a PDF reader, click on the article title. If you do not have a PDF reader, you can download a reader from this site. 

The Role of Money in Monetary Policy: Why Do the Fed and ECB See It So Differently?   -   (PDF 294K)
By George A. Kahn and Scott Benolkin

Monetary policymakers and central banks universally recognize that, in the long run, inflation is strictly determined by monetary policy. However, they disagree sharply about the role of monetary aggregates in the conduct of monetary policy.

These differences in views are reflected in the way the Federal Reserve and the ECB conduct monetary policy and communicate with the public. At the Federal Reserve, the Federal Open Market Committee no longer specifies targets or monitoring ranges for the monetary aggregates, and committee members seldom mention the aggregates in their deliberations. In contrast, the ECB regularly examines the implications of money growth for the inflation outlook over the medium term to long term. What accounts for these differences of views, and why do the Federal Reserve and ECB see things so differently?

Kahn and Benolkin examine why the Federal Reserve and ECB differ in their approach to the monetary aggregates and find two main reasons. First, their institutional histories are different. And, second, in the United States and the Euro area, there are differences in the usefulness of monetary aggregates as indicators of future economic conditions over the medium to long run.


Work and Taxes: Allocation of Time in OECD Countries - (PDF 194K)
By Lee Ohanian, Andrea Raffo, and Richard Rogerson

Policymakers devote a great deal of attention to short-run fluctuations in the labor market. Central banks monitor indicators of labor market tightness in the conduct of monetary policy due to the potential implications for inflation. And fiscal authorities are concerned with the budget consequences of fluctuations in the labor market because they affect both revenues and expenditure programs. More generally, these fluctuations may be associated with significant losses in welfare.

This article stems from a striking empirical observation about long-run variations in labor market outcomes: Long-run changes in total hours of work in OECD countries exceed the variation of hours worked over the business cycle in a representative country (say, the United States) by almost an order of magnitude. If understanding changes in hours of work of the magnitude of business cycle fluctuations is an important policy concern, then understanding the sources of
these trend differences is also crucial. Surprisingly, the academic and policy debates have focused on the business cycle movements in the labor market, almost ignoring low frequency
changes.

Lee Ohanian, Andrea Raffo, and Richard Rogerson describe the steep decline in average hours worked and the large variation across countries in the magnitude of this decline. Next, they find that changes in labor taxes account for a large share of the trend differences. Finally, they find that countries with high tax rates devote less time to market work, but more time to home activities, such as cooking and cleaning. Moreover, this reallocation of time from market work to
home work is much stronger for females than for males.


The Tenth District's Defining Industries: How Are They Changing? - (PDF 217K)
By Chad R. Wilkerson and Megan D. Williams

The economy of the Tenth Federal Reserve District has become increasingly more services-based in recent years. While this transformation has lessened many of the historical differences with the rest of the nation, the regional economy still remains distinct, especially in some states. Wyoming, for instance, still has the most unique industrial structure in the country. And Nebraska, New Mexico, and Oklahoma still rank among the top third of states with economies that differ from the rest of the nation.

What industries make the Tenth District so different, and what can they tell us about the future of the regional economy?

Wilkerson and Williams examine the “defining” industries of the region. They find that the performance of a relatively small group of these industries track closely with overall job growth in each state. In other words, states whose defining industries have prospered in recent years have grown quickly overall, while states whose defining industries have struggled have grown sluggishly. Thus, identifying a state’s defining industries and understanding how they are changing can provide vital context for policymakers seeking to improve prospects for growth—as well as help identify the types of economic shocks that might threaten the region in the future.

Nonbanks in the Payments System: Innovation, Competition, and Risk - A Conference Summary   -   (PDF 109K)
By Richard J. Sullivan and Zhu Wang

From the early days of automated card sorting to the more recent times of the Internet and check imaging, payments and payments processing have continually embraced new technology. At the same time, the industry has been shaped by its share of entry and exit, through startups, mergers, and the reorganization of businesses seeking the proper scope of horizontal and vertical integration.

These changes have enabled nonbank organizations to play a larger role in the payments system. Nonbanks have followed a number of pathways to more prominence: purchasing bank payment processing subsidiaries, carving out niches in the payments market through innovation, and taking advantage of economies of scale made possible by shifting to electronic forms of payment.

Nonbanks have introduced some of the most far-reaching innovations to the payments system in recent years, leading to greater efficiencies in payments processing. At the same time, nonbanks have changed the dynamics of competition in payments, leading to a significant change in the system’s risk profile.

Sullivan and Wang summarize the proceedings of a conference on nonbanks in the payments system held by the Federal Reserve Bank of Kansas City in Santa Fe, New Mexico, on May 2-4, 2007. The conference addressed many of the key questions raised by the growing presence of nonbanks in payments, including: Have recent payment innovations been more likely to come from nonbanks? Have nonbanks improved or harmed competition in payments? Have nonbanks increased risk or helped to develop tools to manage it? How should public policy respond as increasingly more activity in payments lies outside of the banking system?
Back to top          Economic Review home