Business Economics ®- October 2001

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Henry Kaufman

What Would Adam Smith Say Now?
The breadth and depth of Adam Smith’s thought over 200 years ago still provide powerful lessons today. Were he present, he would applaud much of what has transpired in the organization of economic life, particularly in the U.S. economy and its thrust toward individual achievement and relatively free markets for goods and services, capital, and labor. However, he would also be
deeply troubled by recent trends toward consolidation, particularly in the financial sector, and the emergence of “too-big-to-fail” as an argument for government to weaken the discipline of markets.
(PDF, 61 K)

Charles Steindel and Kevin J. Stiroh

Productivity: What Is It, and Why Do We Care About It?
Economists, business analysts, and policymakers have all
focused considerable attention on U.S. productivity growth in recent years. This paper presents a broad overview of productivity—both labor and total factor—and discusses why it is such an important topic. We begin with the official U.S. productivity statistics prepared by the U.S. Bureau of Labor Statistics and discuss several stylized facts. We show how productivity relates to criti-cally important variables like long-run growth, living standards, and inflation. We then describe the proximate factors that determine labor productivity using a standard growth accounting framework. Finally, we outline a series of unresolved productivity issues that have direct implications for the future of the U.S. economy.
(PDF, 122K)

Ernest Goss

The Internet’s Contribution to U.S. Productivity Growth
How much has the Internet contributed to recent productivity performance in the U.S. economy? While Oliner and Sichel (2000), using “back of the envelope” calculations, found that it had no impact, Litan and Rivlin (2001), using “judgmental estimates,” found the Internet’s contribution to productivity growth to be 0.2-0.4 percent per year over the last half of the 1990s. This study examines the impact of actual Internet usage byindustry for 1997, 1998, and 1999 by using pooled times-series and cross-section data in a production function framework. Its results suggest that job-related Internet usage had a positive and statistically significant impact on productivity growth of roughly 0.25 percent per year. Furthermore, the productivity enhancing power of the Internet is found to differ according to the information technology (IT) intensity of the industry. For those industries characterized by less intensive use of IT, it is estimated that Internet usage added 0.52 percent annually to productivity growth. For IT intensive industries, it contributed less than 0.04 percent. Going forward, it is likely that the Internet will continue to enhance U.S. productivity growth, especially among non-IT intensive industries.
(PDF, 95 K)

Laurence H. Meyer

Comparative Central Banking and the Politics of Monetary Policy
All central banks must steer a careful course between independence and accountability. There are four important mechanisms: legislative mandate, instrument independence, informal interactions with government, and government procedures to foster accountability. Inherent conflict between independence and accountability makes balance a crucial component of successful central banking. If this balance is not struck successfully and there is not a shared understanding of the roles of government and the central bank, it is unlikely that stabilization policy will be successful. Transparency is also important for credibility and accountability.
(PDF, 57K)

Michael Moskow

Comments on International Perspectives on the Process of Monetary Policy Formulation
The deliberations of central banks can be compared to those of judicial panels. Both have traditionally deliberated in private. In democracies, the judiciary issues detailed, after-the-fact reasoning behind its decisions. However, until recently, the central bank said little, if anything about its monetary policy actions. What are the benefits and costs of the new trend toward transparency? Also, under what circumstances is it preferable to have a narrowly focused mandate for monetary policy rather than one that requires the reconciliation of competing objectives?
(PDF, 30 K)

Charles Freedman

Monetary Policy Formulation: The Process in Canada
Experience in Canada and elsewhere has demonstrated that inflation targeting is a clear and effective way of achieving low inflation. As a result, financial, product, and labor markets have adjusted their longer-term inflation expectations and have reduced risk premiums that compensate for inflation uncertainty. Moreover, inflation targets are easily communicated, thereby enhancing credibility and transparency, which are increasingly recognized as desirable elements of the monetary policy process. Effective, timely communication of monetary policy is also important in achieving transparency. Specific actions of the Bank of Canada to implement these principles are presented and discussed.
(PDF, 50 K)

Christian Noyer

Monetary Policy Formulation in the Euro Area
The primary objective and unambiguous mandate of the European Central Bank (ECB) is price stability in the euro area. The ECB’s objective is to provide a stable environment that is supportive of long-term growth rather than short-term fine tuning. Policy is made by its Governing Council and implemented by its Executive Board, which instructs national banks on actions to be taken. Given the uncertainty of the future economic environment, especially with the introduction of the euro as a common currency, it is important to rely on a variety of models and approaches and on judgemental appraisal. One pillar of this approach is a focus on the relationship of inflation to monetary aggregates. The second is more general analysis of macroeconomic conditions. Combining these two pillars of monetary policy has been successful in maintaining long-term interest rates consistent with price stability.
(PDF, 42 K)

Sushil B. Wadhwani

Some Reflections on the Bank of England’s Monetary Policy Committee
The new monetary policy framework in the UK has made an encouraging start, as inflation expectations have fallen to around target. This does not appear to have come at the cost of growth, as the unemployment rate has continued to fall, and output growth has been slightly above its average rate. A critical feature of our framework is that it specifies a symmetric target. If we persistently undershoot the target, it could eventually damage our credibility. Therefore, it will remain important to respond to the possible changes in the structural relationships that underlie our forecasting processes. While UK monetary policy is more transparent than in many other countries, our interest rate decisions appear to have surprised the markets more than those of other central banks. However, these empirical results may be distorted, because, in the early years of the Monetary Policy Committee, the markets were trying to learn how we would react to developments in the economy. Over a more recent period, the average market surprise associated with our decisions is broadly in line with other major central banks.
(PDF, 100 K)

Robert V. DiClemente

Monetary Policy and Financial Markets: Two Hands Clapping
Clear and effective communication between central bankers and financial markets helps to establish and reinforce credibility of policy. During the Greenspan era, the Fed has made major strides in effective communication and has largely avoided the damaging consequences of markets misinterpreting Fed policy. By the same token, the Fed’s careful attention to signals coming from markets has helped it avoid policy mistakes. It seems reasonable to say that the success of the Fed of the Greenspan era has been as much due to its ability to referee markets as to control them.
(PDF, 49 K)

Michael McKee

Central Banks and the Financial Press
The financial press is playing a critical and growing role in communicating central bank policy. The result has been more effective central bank policy and better risk management in financial markets. A critical role of the financial press is to make monetary policy more transparent, enhanced by the increased willingness of many central banks to be more open in their communication. There are, however, areas in which both the financial press and the central banks can be even more effective in communication of monetary policy.
(PDF, 47 K)

Forum on Emerging Issues

William F. Ford

Economic Impacts of the World Trade Center and Pentagon Attacks
Business economists have new responsibilities and opportunities to help their organizations cope.
(PDF, 43 K)

Book Reviews

J. Fred Weston

Michael J. Brennan, Empirical Corporate Finance (Volumes I, II, III and IV)
(PDF, 44 K) Available to public