From the Editor
Debunking prevailing myths has been among the most honorable of economists’ activities for over two centuries. This issue continues that noble tradition.
The Master Debunker may well have been Adam Smith (although votes would also be cast for John Maynard Keynes and others). Thus, it is fitting that this year’s Adam Smith Award winner, Allan H. Meltzer, takes on those who minimize the influence that the United States has had and is likely to continue to have on the unprecedented growth of the global economy since World War II. Not that the record is unblemished, but on balance Meltzer in his Adam Smith Address finds that U.S. leadership in establishing democratic capitalism and a Pax Americana have been beneficial for the world economy and will continue to play a vital role in the future.
Tim O’Neill in his Presidential Address further propels debunkery in addressing the myths, facts, and fallacies surrounding “globalization.” First, it is not really new—technological and institutional innovations notwithstanding. Second, globalization is much more local than is generally believed. Third, globalization has benefited rather than harmed poor countries—particularly those who have embraced it rather than resisted it. Fourth, impacts on job shifting, inflation, and economic sovereignty are smaller than generally supposed.
As noted in the October issue, there was a three-way tie for the 2002-2003 NABE Contributed Paper Award. One of the three was in the October issue; the other two are presented in this issue. In the first of these, Douglas J. Lamdin explores the record of the spread between corporate bond and Treasury bond yields and also between yield spreads and movements in stock market indices. His analysis indicates that yield spreads are influenced by stock market movements, rather than vice versa—a result that some may find surprising.
In the second NABE Award paper, Christopher Mills and Eleonora Omarova develop and test a practical method of predicting currency crises using a “signal extraction” approach. They discuss how the model can be used in practical applications, with a particular focus on balancing the risk of failing to signal a crisis against the risk of crying wolf when crises do not materialize.
Returning to debunking the Great Myths of Our Day, Ray Fair uses a macroeconometric model to investigate whether there was any structural change in the “new economy” of the late 1990s and concludes that only one major variable displayed true structural change: the stock market. All other major variables whose growth appeared to have departed from historical norms were either not abnormal or derived their growth from rising price-earnings ratios. The question remains, however: What triggered the surge in price-earnings ratios?
Although not exactly debunking, it is clear that rethinking monetary policy is necessary for what has become an entrenched low-inflation environment. Stephen G. Cecchetti explores how the constraint of a zero nominal interest rate affects the choice of monetary instruments when stimulus is necessary in low-inflation conditions. He also explores the Fed’s role as macroeconomic risk manager and the importance of appropriate and timely communication.
This issue has an “Update” article in which Robert Eisenbeis, Daniel Waggoner and Tao Zha update results from their July 2002 article, “Evaluating Wall Street Journal Survey Forecasters.” Their update corrects earlier errors and presents new results.
In “Economics at Work,” Rajeev Dhawan describes his work at the Georgia State University’s Forecasting Center, a small enterprise with an important role, particularly with respect to the Atlanta and Georgia economies. Like heads of small enterprises everywhere, he has to simultaneously perform many activities—not unlike trying to corral a hatful of mice.
This issue also contains a review of Why Not? How to Use Everyday Ingenuity to Solve Problems Large and Small—an exploration of problem solving, creativity and innovation.
Readers will note that this issue does not have “Focus on Industries and Markets” or “Focus on Statistics.” This is a random shock, not a structural change. It is expected that the April issue will have all three.
Finally, please note that my e-mail address is now rtcrow@comcast.net. Please address all e-mail correspondence —especially manuscripts—to the new address, as the old one will soon cease.