Economic Review
First Quarter 2004 

How Do Data Revisions Affect the Evaluation and Conduct of Monetary Policy?
By Sharon Kozicki

Many economic data series are revised as more comprehensive information becomes available and as methodologies improve. Even the latest available data are subject to uncertainty, and at some point historical data may be replaced by more accurately measured observations. Because monetary policy decisions are made with an eye to the state of the economy, data uncertainty complicates the evaluation and conduct of monetary policy.

Kozicki focuses on revisions to data that policymakers often examine when assessing monetary policy options. While other studies have looked at the impact of data revisions on monetary policy, this article is the first to examine the policy implications of revisions in two widely used benchmarks of resource utilization—the Congressional Budget Office (CBO) estimates of potential output and the natural rate of unemployment. The article is also the first to consider how data revisions affect policy decisions through changes in estimates of the equilibrium real rate of interest.

Kozicki finds that revisions to data can lead to policy regret—instances when revised data may suggest alternative actions would have been preferable to those taken. Based on this finding and analysis in other studies, she recommends making policy less sensitive to economic indicators that are subject to large revisions.

Editor's Note: Earlier versions of this article that appeared on this website contained editorial errors. This version, like the one published in the first quarter 2004 Economic Review, is correct.

Economic Policy Implications of World Demographic Change
By Richard Johnson

Demographic changes over the next 50 years will affect the world economy in many ways. Some of these effects will be beneficial. In developing countries, for example, falling birthrates will enable women to supply more paid labor and families to invest more in the education of each child. Other demographic changes will cause economic problems. In developed countries, population aging is likely to imply government pension systems cannot continue with their current rules. Population growth in developing countries could also change patterns of world trade and thereby reduce the wages of some workers in developed countries.

Economists have argued that policy changes are needed to maximize the rewards of some demographic changes and reduce the negative impacts of others. For example, governments of developing countries may need to create more flexible labor markets if their increased female workforce is to find employment. The governments of many developed countries need to plan how much they will support the high number of retirees expected in the future and communicate this plan to workers.

Johnson describes aspects of predicted world demographic changes that are likely to pose challenges for economic policy and explores how policy could react to these changes. He concludes that the economic effects of such changes will depend heavily on future government policy. In particular, the effect of population growth in developing countries will depend on whether their governments’ policies encourage economic growth. Government policy in developed countries will affect the size and distribution of problems created by population aging but will not be able to remove these problems altogether.

Will the Farm Rebound Lead a Rural Recovery?
By Jason Henderson

Economic headlines in rural America were mostly positive in 2003, especially in the farm sector. The farm economy broke out of its drought-induced recession. Low global crop supplies, strong demand, and high prices underpinned strong gains in U.S. farm income. Meanwhile, the nation’s economic recovery appeared to forge a beachhead in rural America as job losses and factory closures eased in 2003.

It still remains unclear, though, whether the rural economy can build upon the optimism of 2003 in the coming year. Farm finances have improved, global supplies remain low, and prices are relatively high, but demand for U.S. farm products remains uncertain, especially in the light of the recent mad cow incident. While job losses on Main Street have eased, rural communities continue to struggle as they try to create the high-skill, high-wage jobs that pace U.S. economic growth.

Henderson discusses some of the economic headlines for the rural economy in the past year and the outlook for 2004. He describes the top economic stories emerging from the farm economy. Next, he examines the economic headlines on Main Street. Finally, he explores the outlook for the rural economy in the year ahead. If rural communities are to do well in 2004, demand for U.S. farm products must remain strong and new high-skill, high-wage opportunities must be created on rural Main Streets.

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