Business Economics ® - January 2000
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| A. Gilbert Heebner | In Memorium (Herbert Stein) |
| Robert T. Parry | Tribute to Ed Mennis |
| Robert T. Crow | From the Editor |
Articles |
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| Peter Bernstein | Facing
the Consequences Although the achievements over the past three hundred and fifty years in the measurement of risk are extraordinary intellectual leaps, these mathematical innovations are merely instruments. Risk is about how we make decisions and only incidentally about the math we employ to reach those decisions. The consequences of our decisions must always dominate the probabilities. Leibniz taught us that no model has an R 2 of 1.00—so beware of those who tell us we know more about the long run than the short run. And finally, the way we make decisions reflects our most basic philosophical assumptions of what life is all about. |
| Robert T. Parry | Implications
of Productivity Uncertainty for Monetary Policy Faster productivity growth rates are consistent with the remarkable combination of fast GDP growth, low unemployment, and low inflation the U.S. economy has enjoyed recently. Yet there are uncertainties about this productivity growth, not only because of measurement problems, but, more fundamentally, because one cannot tell at this early stage whether the productivity surge is a cause or a result of today’s fast output growth, and, if it’s a cause, how long it will last. These uncertainties complicate the question of where the Fed should be along the spectrum of more pre-emptive action or more cautious action. |
| Alan S. Blinder | How
the Economy Came to Resemble the Model (Article
available to public) Over the years, economists have spent much effort to modify the capitalist, perfect-competition, profit-maximizing model of classical microeconomics to fit reality. Thus, it is ironic that in recent times reality has been approaching the classical model. This is due only in part to the persuasive talents of economists, and not all of this change is necessarily an improvement. Among the factors contributing to the reversion to the classical model are the failure of socialism, alignment of managerial and shareholder interests, focus on shareholder value, decline of labor union power, changes in financial markets, global competition, and changes in regulatory practices. ( |
| R. McFall Lamm, Jr. | Economic
Foundations and Risk Analysis in Investment Management The risk management systems now used in investment analysis are based on Markowitz mean-variance optimization. Successful application depends on the accuracy with which market returns, risk, and correlation are predicted. Forecasting methods now commonly employed for this purpose rely on time-series approaches that generally ignore economic content. This article suggests that explicitly incorporating economic variables into the forecasting process can improve the ability of such systems to manage risk by providing a delineation between risk associated with changes in economic activity and that attributable to other shocks and discontinuities. |
| Duncan Meldrum | Country
Risk and Foreign Direct Investment Country risk analysis (CRA) attempts to identify imbalances that increase the risk of a shortfall in the expected return of a cross-border investment. This paper describes the general process used to create risk measures and discusses some of the weaknesses of this process. It then examines the degree of association of six measures and analyzes the ability of these measures to predict returns for a manufacturing investment. The paper concludes that company analysts may improve the performance of risk measures available from commercial services by adjusting risk measurement to fit the company’s specific type of foreign direct investment. |
| Till M. Guldimann | How
Technology is Reshaping Finance and Risks Dramatic increases in the capacity and speed to transmit and process information electronically are trans-forming the structure of the investment management industry from integrated service providers dominating local markets to a network of specialized advisors, processors and risk intermediaries operating on a global scale. International exchanges are threatening the sovereignty of national financial markets, and regulators are losing influence. The Long Term Capital Management debacle was an early harbinger of future challenges: significant new risks in the stability of the global network and the growing illusion of assured liquidity created by market-to-market reporting. |
| James W. Harris | Weighing
Emerging Market Risk: The Supply of Capital Economic professionals specializing in country risk or international portfolio analysis face a daunting challenge when called on to assess the volatility of capital flows and risk pricing associated with the more than thirty emerging market countries. One of the reasons is that most analytic frameworks in use do not adequately consider the determinants of the availability of capital, confining themselves instead to the policy and performance characteristics of the emerging markets themselves. Capital flows are overwhelmingly an industrial-country game, however, and assessing what emerging markets get and can sustain requires a broad toolkit, including no less than an understanding of the global economy. |
| C. Richard Neu | European
Monetary Union: Will it Really Contribute to Stability? In the long run, European monetary union will almost surely prove beneficial— economically and politically— for Europe and probably for the rest of the world. For the next several years, though, monetary union is likely to increase three kinds of risks facing firms doing busi-ness with, from, and in Europe. First, increased risks arise from the reduced predictability, coherence, and quality of overall macroeconomic policy making in Europe. Second, real economic conditions within Europe are likely to be more variable and volatile. Finally, monetary union may lead to increased uncertainty about—and maybe even increased strife over—social policies. |
| John M. Barron,Gregory Elliehausen,
and Michael E. Staten
|
Monitoring
the Household Sector with Aggregate Credit Bureau Data This article demonstrates the value of aggregated credit bureau data for benchmarking portfolio performance and modeling trends in household borrowing and payment behavior. The analysis utilizes a unique database built from a series of large random samples of U.S. consumer credit histories drawn quarterly since 1992. The data provide a more accurate picture of borrowing behavior at the regional, state, and local level than the aggregate statistics available from the federal government and industry associations. Their predictive power is apparent in models built to explain county-level patterns in personal bankruptcies and three types of consumer loan delinquencies from 1993–1998. |
Focus on Statistics |
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| Robert Parker and Richard Berner | Will
the Real Economy Please Stand Up? New measures of U.S. GDP were released on October 28, 1999. The revisions indicate more growth and less inflation than previous measures. Changes in the treatment of computer software, banking and corporate profits were particularly important. Information about the availability of the new measures and their background is provided. |
Book Reviews (Article available to public) |
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| Edmund A. Mennis | Stephen B. Adams and Orville R. Butler, Manufacturing the Future: A History of Western Electric |
| Bruce Kratofil | Peter O’Grady, The Age of Modularity: Using the New World of Modular Products to Revolutionize Your Corporation |
| Brandon Dupont | Masahisa Fujita, Paul Krugman, and Anthony J. Venables, The Spatial Economy: Cities, Regions, and International Trade |
| Morgan O. Reynolds | Bruce L. Benson, To Serve and Protect: Privatization and Community in Criminal Justice |
| James N. Rosse | Gerald J. Baldasty, E.W. Scripps and the Business of Newspapers |
| Merrill Matthews | H.E. Frech, III and Richard D. Miller, Jr., The Productivity of Health Care and Pharmaceuticals: An International Comparison |
