Business Economics
April 2009, 44, 63–72. doi:10.1057/be.2009.1
Business Economics is a refereed journal that serves as an essential resource and provides practical information for people who apply economics in their jobs.
The Need to Return to a Monetary Framework
John B Taylor
Bus Econ 44: 63-72; doi:10.1057/be.2009.1
Prepared for the National Association of Business Economics Panel, "Long-Run Economic Challenges: A Federal Reserve Perspective," at the Allied Social Sciences meetings in San Francisco, January 3, 2009.
This paper examines the 100-fold increase in reserve balances at the Federal Reserve during 2008. By looking at the balance sheet of the Federal Reserve and factors influencing the supply and demand for reserves, the paper shows that the increase was due to large purchases of securities and loans to certain sectors and institutions. Such actions constitute a combination of monetary policy and industrial policy, or a mondustrial policy. This characterization raises questions about the future of the Federal Reserve and suggests the need to return to a monetary framework that controls the money supply while the interest rate is zero and establishes rules for setting the interest rate.
Keywords: monetary policy framework, reserve balances, quantitative easing
A Two-Headed Dragon for Monetary Policy
James Bullard
Bus Econ 44: 73-79; doi:10.1057/be.2009.5
The current financial crisis has been the key global economic event since it unfolded in earnest in early August 2007. The Federal Reserve has taken aggressive actions—both conventional and unconventional—to counteract the economic and financial fallout. Among these actions have been a number of new special lending programs created under section 13(3) of the Federal Reserve Act, which had not been employed since the 1930s. Academics, policymakers, and the general public have shown great interest in the Federal Reserve's new programs. In this paper, I emphasize two medium-term risks that the Federal Reserve now faces as it continues to confront financial market turmoil and recession. The two medium-term risks are opposites of each other, a "two-headed dragon." One is a Japanese-style deflation trap, and the other is a breakout of inflation like that seen during the 1970s. An explicit inflation target would help mitigate these very real risks.
Keywords: monetary policy, reserve balances, quantitative easing
Is China's Exchange Rate Policy a Form of Trade Protection?
Anthony J Makin
Bus Econ 44: 80-86; doi:10.1057/be.2008.8
This paper examines how China's heavily managed exchange rate contributes to its huge trade surplus with its major trading partners, most notably the United States. Based on the distinction between economies' aggregate output and expenditure and on the premise that exchange rates are shared variables, it develops a straightforward framework that shows how exchange rate management by China's central bank affects China's fast growing output, expenditure, employment, and trade balance, while simultaneously influencing these aggregates in its slower growing industrialized trading partners. This framework reveals that under conditions of limited private capital mobility an inflexible yuan yields higher short-run output gains for China at trading partners' expense through a form of "exchange rate protection." At the same time exchange rate misalignment limits China's consumption and hence living standards. A misaligned currency is also shown to bias international saving and investment flows and is central to any explanation of global imbalances.
Keywords: China, exchange rate, trade protection, trade imbalance, fixed exchange rate
The Value of Private Businesses in the United States
Patrick L Anderson
Bus Econ 44: 87-108; doi:10.1057/be.2009.4
The vast majority of businesses in the United States are privately held, and approximately 99 percent meet a common government definition of "small." However, we know surprisingly little about the market values of these organizations. In this paper, we estimate the market value of privately held firms in the United States from sources on earnings, assets, and reported market value of multiple forms of business entities, including corporations, partnerships, LLCs, and sole proprietorships. We discuss various theoretical and practical methods of valuing assets, including those arising from economics, neoclassical finance, portfolio theory, and tradition. Concluding that most of them are not appropriate for valuing private firms, we use insights from dynamic programming and ratio analyses from traditional technique to produce a new estimate based on reported taxable earnings, net worth, and tax filing status. Using this approach, we estimate that privately held U.S. firms had earnings that exceeded those of publicly held firms in two recent years by a significant margin. Moreover, the market value of these firms exceeded that of publicly traded firms. We also conclude that policymakers, perhaps grossly, underestimate the true scale of "small" and privately held firms in the economy.
Keywords: valuation, small business, private business
A New Metric to Gauge Household Economic Stress: Improving on the Misery Index
Robert A Dye and Chad Sutherland
Bus Econ 44: 109-113; doi:10.1057/be.2009.
We present an improvement on the Misery Index that quantifies the economic stress that households are feeling today. Much of the economic stress in households today stems from the decline in household wealth that has come as a result of falling house prices, so we have added a measure of house price change to the Misery Index. Deteriorating economic conditions in most U.S. regions through the first three quarters of 2008 have resulted in increasing household economic stress as all components of the expanded Household Economic Stress Index increased. The components are the rate of change in the consumer price index, the unemployment rate, and rate of change in house prices. The authors show that this intuitive and simple index is useful in analyzing mortgage delinquencies both nationally and regionally.
Keywords: Misery Index, inflation, unemployment, house prices, regional
Focus on Statistics: Updated Economic Statistics in 2009
Robert P Parker
Bus Econ 44: 114-119; doi:10.1057/be.2009.8
Forum on Future Issues: The CEO Share Of Earnings: A New Approach To Evaluating Executive Compensation
Kevin M Zhao, Charles L Baum and William F Ford
Bus Econ 44: 120-122; doi:10.1057/be.2009.9
Book Reviews
The Black Swan: The Impact of the Highly Improbable
Reviewed by Gerald L Musgrave
Bus Econ 44: 123-125; doi:10.1057/be.2009.6
The First Billion is the Hardest: Reflections on a Life of Comebacks and America's Energy Future
Reviewed by John C Goodman
Bus Econ 44: 125-127; doi:10.1057/be.2009.7
