Summary of Articles in Business Economics, July 2008

By Robert Crow
Editor, Business Economics

NABE members can reador download the articles here.

“The Fed’s New Communication Strategy: Is It Stealth Inflation Targeting?”

Michael Woodford
The Federal Reserve’s Open Market Committee (FOMC) has begun releasing summaries of its members’ forecasts of key economic variables.  Does this change in communication policy imply that the Fed is embarking on an undeclared policy of inflation targeting?  While it appears that the objective of releasing the forecasts is to enhance communication relating to the Federal Reserve Bank’s dual mandate of low inflation and low unemployment rather than to set a specific target for inflation, communication can be improved.  This paper discusses the effectiveness of releasing forecasts in communicating the FOMC’s policy and its value as an internal discipline.  It also proposes ways to include projections of policy interest rates in the forecasts while retaining flexibility to react to changing circumstances.

“Subprime Credit: the Evolution of a Market”

John Silvia
America’s latest credit cycle, subprime lending, is not a unique experience but rather the latest variation of a traditional cycle of innovation, excess, and correction that is compounded by public policy laxity and followed by overreaction.  Indeed, there is little that is new or creative in the whole subprime saga. Because the subprime credit patterns have been so typical, it appears that much of the recent experience could have been avoided.  This paper provides a simple analytical framework that suggests that public policy actions taken as if the subprime lending was simply a matter of speculative excess failed to address the dynamic of credit markets witnessed over the last 30 years.

“Shifting Trends in Semiconductor Prices and the Pace of Technological Progress”

Ana Aizcorbe, Stephen D. Oliner, and Daniel E. Sichel
This paper examines three questions:  Why did semiconductor prices fall so rapidly in the second half of the 1990s?  Why has the rate of price decline slowed since 2001?  To what extent are these price swings associated with changes in the rate of advance in semiconductor technology?  This paper shows that the price swings are statistically significant and reflect changes in both price-cost markups and cost trends.  Further analysis indicates that the shift to faster cost declines in the mid-1990s likely corresponded to a speed-up in the pace of advance in semiconductor technology.  However, the slower cost declines since 2001 appear not to have been mirrored by a deceleration in technology.  Consequently, one should be cautious about associating price or cost movements for semiconductors with changes in the pace of underlying technology, even over moderately long periods.

“Economic Implications of Mexico’s Sudden Demographic Transition”

Fernando Sedano
Mexico is in the midst of an unprecedented demographic transition that is changing the size and age structure of its population.  The most salient demographic change—and clearly the precursor of most other demographic changes—is the abrupt decline in the country’s fertility rate from 6.5 in the early 1970s to the current 2.2 mark, one of the fastest declines in the world.  This dramatic reduction of fertility rates has created a “boom generation” that is currently in its prime working years and that will gradually age and retire.  As Mexico experiences sub-replacement fertility rates over the next decades, old-age dependency ratios will escalate to unprecedented levels, carrying significant economic implications, both in Mexico and in the United States.  After reviewing the economic literature on the link between demographics and economics, this paper attempts to shed some light on the relationship between Mexico’s demographic patterns and economic development since 1950, offering possible explanations for the apparent lack of an expected connection.  The paper then discusses the implications of Mexico’s demographic projections on both sides of the border. 

“Porter's Model of Generic Competitive Strategies”

Orges Ormanidhi and Omer Stringa
A firm’s competitive behavior is an important topic for practitioners, theorists, and policy makers. Among the explanations of firms’ behavior is Michael Porter’s model. This paper presents this model along with some alternative approaches:  Structure-Conduct-Performance, the New Industrial Organization and Game Theory, the Resource-Based Perspective, and Market Process Economics. These approaches are discussed in terms of their relations, similarities, and differences relative to Porter’s model.  In their comparative discussion, the authors support the use of Porter’s model to evaluate firms’ competitive behavior.  Their reasons for this support are this model’s popularity, well-defined structure, feasibility, clarity, simplicity, generality, and its complementarity to two other main approaches.  The authors find the Porter model to be a convenient approach to the firm’s competitive advantage and strategy. 

Economics at Work
“Pharmaceutical Economics”

George Chressanthis
The author provides an insider’s view of working as an economist in the pharmaceutical industry and he offers observations on the role of economics in shaping the direction and outcome of business research in that industry.

Focus on Statistics
“Detailed Industry, Product, and Geographic Data from the 2007 Economic Census Become Available in 2009”

Robert P. Parker
In the first quarter of 2009, the Census Bureau will begin to release data from its 2007 Economic Census.  The author describes the significance of these important data reports to researchers, policymakers, and businesses, and explains the changes in scope and coverage of the 2007 EC compared to earlier surveys.

NABE members can reador download the articles here.