Summary of Articles in Business Economics, July 2007

By Robert Crow
Editor, Business Economics

“The Changing Dynamics of Inflation”
Randall S. Kroszner

Inflation in the United States and elsewhere has become lower and more stable over the past two decades.  It is likely that monetary policy has played an important role in this change in inflation dynamics by creating expectations of stability.  This paper traces the evolution of the role of expectations in thinking about inflation, the supporting evidence over the past two decades, and the role of central banks in influencing expectations.  Increased global integration has magnified these effects.  However, the importance of factors other than monetary policy implies that policymakers must consider a wide range of information before acting.  Moreover, expectations of inflation stability cannot be taken for granted; and policymakers must be vigilant against complacency.

“The Competitiveness of European Financial Markets”
Gertrude Tumpel-Gugerell

The countries that together make up the euro area are undergoing a process of far-reaching change, with established national financial markets merging into one new European market, accompanied by deregulation, cross-border consolidation, and increased competition within the euro area.  These developments will help to increase long-term economic growth and will have a strong bearing on the international competitiveness of the European financial sector, leading to innovation and modernization.  This paper presents the underlying rationale of financial integration and increased competitiveness of European financial markets and provides a snapshot of where financial integration has been successful and where work is ongoing.  It also notes important historical lessons from U.S. financial integration. It concludes by highlighting the role and recent activities of the European Central Bank (ECB) and the Eurosystem in promoting and enhancing further financial integration.

“Germany’s Post-Wirtschaftswunder Struggle”
Jörg Decressin

For many years after World War II, Germany’s economic output grew very rapidly–a period commonly referred to as the “Wirtschaftswunder,” or economic miracle.  It came to an end in the 1970s.  This paper addresses three questions: Why did growth decline after the 1970s? Why did Germany take so long to embark on reforms?  What is the economic outlook today?  It argues that two factors were responsible for falling growth: the end of the post-World War II economic catch-up and a failure to reform the economy in response to shocks.  Because of Germany’s political system, economic reforms require broad support in the population.  However, this support changes constantly due to frequent elections.  Thus, it is difficult for governments to push through ambitious reforms, which typically have payoffs that stretch beyond electoral cycles.  Nonetheless, the depth of the 2001-05 economic downturn and Germany’s comparatively poor economic growth performance have forged a general agreement on the need for change.  The European Union, notably the policies that combat state aid and call for sound fiscal positions, have played an important role in forging this agreement.  Accordingly, Germany’s economic outlook has by now improved noticeably, although significant challenges remain.

“Demystifying Japan’s Economic Recovery: a Tale of Its Structural Reform”
Jun Kurihara

After its protracted economic doldrums, Japan has begun to revive.  Prime Minister Shintaro Abe, taking office in September 2006, pledged to continue his predecessor’s reforms while seeking closer economic ties with Japan’s neighboring countries.  This paper examines the challenges the Abe administration must face and the reforms the administration still needs to tackle.  It starts with an evaluation of Japan’s economic condition from a long-term perspective, especially drastic change in its labor market and its rapidly aging society.  It then discusses the unfinished reforms the government is facing—restored fiscal balances, a less-regulated economy both at home and abroad, and a new growth path though innovation.  In sharp contrast to his single-minded and charismatic predecessor, Prime Minister Abe has taken a less spectacular and more complex stance toward reforms.  A more market-principled Japan will create conditions that are more competitive for economic players in both the private and public sectors.  Japan’s economy will face a precarious state—swinging between an economy armed with market-based principles (but suffering from a “growth pain”) and an “ugly Japan” that divides the haves and the have-nots.

“Making Health Care More Affordable Through Health Insurance Reform”
Katherine Baicker

The way that the United States finances health insurance today is both unfair and inefficient.  The federal tax code subsidizes the most expensive employment-based policies while penalizing those who buy insurance on their own or choose more basic policies.  By reforming this system, health care can be more affordable for millions of people and more efficient.  These reforms should be coupled with policies to ensure that basic private insurance is affordable for everyone, including those with chronic health conditions or low income, and to ensure that patients and physicians have the tools that they need to make well-informed decisions.

“Seeking a Replacement for the Medicare Physician Services Payment Method”
Martey S. Dodoo, Robert Phillips, Jr., and Larry Green

Business and government spending on physician services has soared over the last few decades.  Most payers for services traditionally peg their payment rates to Medicare.  However, most consider the current Medicare single payment rate flawed because it fails to improve health outcomes or control spending.  Everyone wants to replace it, but good replacements have not been identified.  This paper estimates elasticities of the single-payment rate with respect to several of its determinants, proposes a replacement for the single-payment rate, and estimates the budget implications of replacement.  Key findings are that the single-payment rate is relatively inelastic to cost changes and expenditure levels and that a proposed service-specific payment rate promotes primary care, controls spending, and saves money.

Focus on Industriesand Markets
“The U.S. Television Set Market”
Shawn G. DuBravac

A review of projected robust growth in this industry and the factors that drive it.