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- Achieving Price Stability: A 1993 Report Card
By George A. Kahn The primary goal of Federal Reserve monetary
policy is to foster maximum sustainable growth in the U.S. economy by achieving price
stability over time. Although considerable progress toward price stability has been made
since the early 1980s, inflation remains above the level most analysts would associate
with price stability. Because price stability is the key contribution the Federal Reserve
can make toward maximizing long-run growth and living standards in the United States, it
is important for the Federal Reserve to remain vigilant in its efforts to keep inflation
in check.
Kahn examines the behavior of inflation over the past year in relation
to the Federal Reserve's goal of achieving price stability over time. First, he discusses
why price stability is important and how the Federal Reserve has made significant progress
toward price stability since the early 1980s. Second, he describes the behavior of
inflation in 1993, showing that inflation declined for the year as a whole. Third, he
shows that inflation expectations also declined in 1993, suggesting the public believes
the inflation outlook has improved. Together, these findings suggest the Federal Reserve
made progress in 1993 toward achieving price stability.
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Financial Markets in 2020
By Charles S. Sanford, Jr.
Advances in communications and information management, combined with new
developments in financial theory, will radically alter the way that financial services are
delivered in the next century. This is the view of Charles Sanford, Chairman of Bankers
Trust, as expressed in his luncheon address at the Federal Reserve Bank of Kansas City's
1993 symposium on "Changing Capital Markets: Implications for Monetary Policy."
According to Sanford, the basic financial functions will still be
present, but traditional financial products, such as loans, borrowings, and securities,
will be replaced with "claims on wealth" or "financial claims" that
will be actively traded around the clock and worldwide. Banks, as currently structured,
will no longer exist. And there will be no need for separate financial branches as
individuals become more directly linked to markets and financial service providers.
To make this future possible, further advances in financial theory will
be necessary to identify underlying risks and their component attributes, to price these
attributes, and to re-bundle the attributes into new investment products. Sanford traces
out some of the implications of these changes for financial markets and policymakers.
While the future financial system would tend to be more efficient in terms of lower
transactions costs and better risk management, Sanford thinks the task of managing
financial institutions will be more complex. In addition, he stresses that to monitor and
control systemic risk, central banks will have to understand and adapt to this new
financial world.
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Agriculture Rides Out the
Storm
By Alan Barkema and Mark Drabenstott
Harsh weather pummeled U.S. agriculture in 1993, destroying crops and
threatening a downturn in the farm economy. But while the rough weather took a large toll
from many farmers, others prospered. Overall, the industry ended the year in solid
financial condition.
Barkema and Drabenstott explain why agriculture is well-positioned for a
better year in 1994. With a return to normal weather, crop production should rebound.
Higher crop prices, pushed up by lean crop inventories, may reward farmers for bringing
larger crops to market. But higher crop prices will also push up feed costs for livestock
producers. Overall, prospects for farm earnings are relatively bright, although little
change is expected in the industry's already strong balance sheet.
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The Tenth District Economy:
Picking Up the Pace
By Tim R. Smith
The Tenth District economy improved overall during 1993 thanks to a
booming construction sector and healthy growth in services. The district's gain was
uneven, however, because other major sectors of the region's economy remained mixed.
Economic performance also diverged considerably across the seven district states.
Smith reviews the district's economic performance in 1993 and explores
the outlook for 1994. The district economy will probably improve slightly in 1994 as the
national economy continues to strengthen. District manufacturing should improve somewhat,
but construction may slacken from its recent vigorous pace. The district should not expect
to gain additional strength from two of the region's key industries agriculture and
energy. Overall, the district economy is expected to grow moderately in the year ahead.
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- Fiscal Policies Aimed at Spurring Capital
Formation: A Framework for Analysis
By Robert S. Chirinko and Charles Morris
In recent years, policymakers have proposed various fiscal policies to spur long-run
economic growth through increased capital formation. The
Bush Administration, for example, proposed lowering the capital gains tax rate. The
Clinton Administration, among other measures in its
economic package, proposed reinstituting the investment tax credit. These proposals stem
from heightened concerns that the U.S. economy
has been growing by less than its long-run potential, and from the judgment that this
subpar growth is due in part to deficient capital formation.
Chirinko and Morris present a framework for examining fiscal policies aimed at spurring
capital formation and highlight the conditions for their
success. First, they show why capital formation is an important determinant of economic
growth. Second, they show how the optimal amount of
capital formation, and therefore economic growth, is determined. Third, they show how
economic distortions can cause capital formation to fall
short of the socially optimal amount. Finally, they discuss several fiscal policies that
have been proposed to raise capital formation.
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