Summary of Articles in Business Economics, October 2009

By Robert Crow
Editor, Business Economics

In Memoriam: Peter L. Bernstein

Thomas W. Synnott describes Bernstein’s contributions to economics, finance, and economic history.

“Underwriting, Mortgage Lending, and House Prices: 1996-2008.”

James A. Wilcox
This paper finds that lowering of underwriting standards may have contributed much to the unprecedented recent rise and subsequent fall of mortgage volumes and house prices.  Conventional data do not satisfactorily measure changes in underwriting standards over the past decade, which were likely much more extensive than these data indicate.  For the period since the mid 1990s, the method of principal components produces a superior indicator of mortgage underwriting standards.  The results also show that this new indicator of underwriting helps account for the behavior of mortgage volumes, house prices, and gross domestic product during the recent boom and bust in mortgage and housing markets.

This paper won the 2009 Edmund A. Mennis Contributed Paper Award.

“The Effects of Oil Price Shocks on Output”

Neal Ghosh, Chris Varvares, and James Morley
This analysis explores the effects of oil price shocks on U.S. economic growth.  It shows that a structurally inspired model for nonfarm business output, which allows for oil price changes to have both long-run and short-run effects, performs better than a basic reduced-form model and also shows significantly smaller adverse effects of rising oil prices. The analysis suggests that oil prices reduced GDP growth by about 0.4 percentage point on average through the first three quarters of 2008, before contributing 1.7 percentage points in the fourth quarter as prices plummeted.

“Does Fiscal Stimulus Cause Too Much Debt?”

Laurence Seidman and Kenneth Lewis
This study distinguishes between temporary fiscal stimulus to combat a recession and two other debt-raising policies: financial bailouts and spending on Medicare, Medicaid, and Social Security.  Two striking conclusions emerge from their simulations of the impact of a temporary fiscal stimulus on the economy.  First, the fiscal stimulus effectively mitigates the recession.  Second, debt as a percentage of GDP is only slightly greater with the fiscal stimulus than it would be without the stimulus.

“The Long Run Demand for Housing, the Housing Glut, and the Implications for the Financial Crisis”

James E. McNulty
This paper estimates the long-run demand for housing to be, at most, 1.6 million units per year.  This compares to housing starts of 2 million in 2004 and again in 2005.  This overbuilding is the primary cause of the current housing glut, which is estimated to be between 1.24 and 1.72 million units.  It will thus take several years for the excess vacant units to be fully absorbed.  This housing glut needs to be quantified because it is the primary cause of the downward spiral in housing prices.  The paper argues that overbuilding aggravates economic instability considerably.  It suggests that Federal Reserve forecasters develop estimates of the long-run demand for housing and that these be considered in implementing monetary policy. 

“The Financial Crisis and the Implementation of Monetary Policy”

Jerry H. Tempelman
The ongoing financial crisis has had a dramatic impact on how the Federal Reserve conducts monetary policy.  This paper outlines how the Fed implements monetary policy during “ordinary” circumstances, and compares and contrasts this with how it has implemented policy in the wake of the crisis, especially in the latter part of 2008.

“Focus on Statistics: Key Statistics for Health Care Reform”

Robert P. Parker
This issue’s Focus on Statistics describes the sources and methods of the statistics on health care expenditure and insurance coverage that shape the current debate over health care reform.  The article covers current practices, differences in definitions and coverage of different reporting agencies, strengths and weaknesses, and plans for future improvement.

“Economics at Work: Creative Marketing Solutions for Lead Generation in a Regional Development Agency”

Kate McArthur
The author describes her work in the Baton Rouge Area Chamber, where she applies a broad range of economic and related skills in targeted marketing efforts to attract new firms to the Baton Rouge area.

Book Reviews

Thomas Sowell, The Housing Boom and Bust, reviewed by Jesse S. Hixson

Arthur B. Laffer, Stephen Moore, and Peter J. Tanous, The End of Prosperity: How Higher Taxes Will Doom the Economy, reviewed by John C. Goodman

The October issue of Business Economics will be available soon at the Palgrave site

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