Economic Quarterly

Contains articles on monetary theory and policy, banking and finance, and the payment system. Its predecessor is Economic Review, published 1974-1992.

Fall 2007 Vol. 93 No. 4

Evolving Inflation Dynamics and the New Keynesian Phillips Curve

By Andreas Hornstein

In economic policy discussions, the negative correlation between inflation rates and unemployment rates or output growth, also known as the Phillips curve, is often invoked as representing a structural tradeoff between inflation and real activity. ...

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The Evolution of City Population Density in the United States

By Kevin A. Bryan, Brian D. Minton & Pierre-Daniel G. Sarte

We compile a database of American city population densities from 1940 to 2000, which was not previously available publicly in an electronic format. Using this data set, we investigate trends in urban density patterns. Nonparametric estimates of urban...

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Currency Quality and Changes in the Behavior of Depository Institutions

By Hubert P. Janicki, Nashat F. Moin, Andrea L. Waddle & Alexander L. Wolman

Federal Reserve Banks distribute currency to—and accept deposits from—depository institutions. Currency that the Federal Reserve distributes is either newly printed by the Bureau of Engraving and Printing, or previously deposited by banks...

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Non-Stationarity and Instability in Small Open Economy Models

By Thomas A. Lubik

It is well-known that the small open-economy model with incomplete asset markets leads to a non-stationary (linearized) solution. This article shows that stationarity-inducing modifications, such as debt-elastic interest rates, can imply non-existence of...

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Summer 2007 Vol. 93 No. 3

Quantitative Models of Sovereign Default and the Threat of Financial Exclusion

By Juan Carlos Hatchondo, Leonardo Martinez & Horacio Sapriza

The article studies the role of the assumption that countries can be punished with financial exclusion after a sovereign default. It describes the business cycle properties of a sovereign default model with the exclusion punishment and compares them with...

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A Taylor Rule and the Greenspan Era

By Yash P. Mehra & Brian D. Minton

This article estimates a Taylor rule according to which the Federal Reserve is forward looking, focused on core inflation, and smoothes interest rates. Using the Greenbook inflation forecasts and the real-time output gap, the estimated policy rule...

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Inflation and Unemployment: A Layperson's Guide to the Phillips Curve

By Jeffrey M. Lacker & John A. Weinberg

The existence of a relationship between real growth and inflation has been investigated by economists for more than 200 years. In the decades after World War II, much of the profession came to view this relationship, represented by the Phillips curve, as...

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Barriers to Foreign Direct Investment Under Political Instability

By Marina Azzimonti & Pierre-Daniel G. Sarte

In this article, we describe some stylized facts about expropriation of Foreign Direct Investment (FDI) and develop a theory that relates direct and indirect forms of expropriation to the degree of political instability (the frequency at which groups...

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Spring 2007 Vol. 93 No. 2

The Economics of Sovereign Defaults

By Juan Carlos Hatchondo, Leonardo Martinez & Horacio Sapriza

This article discusses the economics of sovereign defaults, summarizing lessons from existing work on this issue. In particular, the article describes the costs associated with a sovereign default episode, identifies circumstances that are likely to lead...

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Banks and Liquidity Creation: A Simple Exposition of the Diamond-Dybvig Model

By Douglas W. Diamond

This article uses narrative and numerical examples to exposit the ideas in Diamond and Dybvig (1983) and some recent extensions of their model. Banks create demand deposits to provide investors with liquid assets. Demand deposits work very well when...

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How Accurate Are Real-Time Estimates of Output Trends and Gaps?

By Mark W. Watson

Real-time estimates of output gaps and trends are important tools for macroeconomic analysis. But how accurate are estimates of real-time gaps and trends? This article discusses the problem of estimating gaps and trends in real time and constructs...

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Interest on Reserves and Daylight Credit

By Huberto M. Ennis & John A. Weinberg

Payment of interest on banks' reserves has long been an important subject of discussion in monetary policy forums. Recent legislation that allows the U.S. Federal Reserve to pay interest on reserves starting in 2011 has made these issues especially ...

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Winter 2007 Vol. 93 No. 1

Optimal Nonlinear Income Taxation with Costly Tax Avoidance

By Borys Grochulski

In this article, we study the problem of optimal income taxation in an economy in which income can be falsified. Agents are assumed to have access to a technology that allows them to hide income from public view. As hidden income cannot be taxed, the...

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Exchange Rates and Business Cycles Across Countries

By Margarida Duarte, Diego Restuccia & Andrea L. Waddle

We study the business cycle properties of exchange rates and other macro-economic variables in a panel of developed and developing countries. We find substantial variation in the degree of co-movement of exchange rates with other macroeconomic variables...

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Implications of Some Alternatives to Capital Income Taxation

By Kartik Athreya & Andrea L. Waddle

In this article, we study the long-run implications of a switch from current U.S. tax policy, which features taxes on labor income, capital income, and consumption, to several alternative systems. These alternatives are revenue-neutral switches to 1) a...

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The Contributions of Milton Friedman to Economics

By Robert L. Hetzel

Milton Friedman began his teaching career at the University of Chicago isolated intellectually. He defended the ideas that competitive markets work efficiently to allocate resources and that central banks are responsible for inflation. By the 1980s, ...

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Fall 2006 Vol. 92 No. 4

Not Your Father's Credit Union

By John R. Walter

Market forces and regulatory changes have produced an evolution of the credit union industry so that many credit unions now compete more directly with banks than in the past. Because credit unions are tax-exempt, while in general banks are not, observers...

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Stark Optimal Fiscal Policies and Sovereign Lending

By Pierre-Daniel G. Sarte

It is often argued that taxing capital is inefficient in the long run. However, this policy prescription typically arises in settings where optimal policies are extreme at shorter horizons, initially involving the confiscation of assets for a period of...

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Bond Price Premiums

By Alexander L. Wolman

Nominal and real interest rates are often viewed from the perspectives of the intuitively appealing Fisher relationship and pure expectations hypothesis. These complementary relationships relate real or nominal long-term interest rates to expected future...

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Changes in the Size Distribution of U. S. Banks: 1960–2005

By Edward Simpson Prescott & Hubert P. Janicki

This article documents the large changes in the size distribution and size dynamics of banks from 1960 to 2005. The authors find that neither the lognormal distribution nor the Pareto distribution fit the entire distribution, though they each do better...

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Summer 2006 Vol. 92 No. 3

Making the Systematic Part of Monetary Policy Transparent

By Robert L. Hetzel

Significant additional transparency by the Federal Open Market Committee (FOMC) could involve explicitness about objectives, especially an inflation target. Explicitness about objectives, however, is incomplete without explicitness about the strategy for...

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Inflation Uncertainty and the Recent Low Level of the Long Bond Rate

By Yash P. Mehra

This article constructs an empirical measure of uncertainty about short-term inflation forecasts and finds the long bond rate to be positively correlated with this empirical measure over 1984Q1 to 2004Q3. The positive correlation suggests that an ...

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The Productivity of Nations

By Diego Restuccia & Margarida Duarte

In this article, we document three remarkable facts about the distribution of output per worker (labor productivity) across countries between 1960 and 1996. First, there is a large disparity in labor productivity across countries in the world. Second,...

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Borrowing by U.S. Households

By John A. Weinberg

Household debt relative to disposable personal income has risen steadily over the past 50 years. Some have argued that current debt levels are unsustainable and represent a significant threat to the American economy. In fact, the expansion of retail...

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Spring 2006 Vol. 92 No. 2

Can Feedback from the Jumbo CD Market Improve Bank Surveillance?

By Mark D. Vaughan, Andrew P. Meyer & R. Alton Gilbert

In recent years, policymakers in the Basel countries have begun exploring strategies for harnessing financial markets to contain bank risk. As part of this effort, we measure the potential contribution of jumbo CD yields and runoff (withdrawals) to off...

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Implementation of Optimal Monetary Policy

By Andreas Hornstein & Michael Dotsey

Optimal monetary policy analysis can be viewed as a constrained optimization problem: the policymaker chooses a competitive equilibrium allocation that maximizes social welfare among the set of all feasible competitive equilibrium allocations. Part of ...

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The Problem of Small Change in Early Argentina

By Huberto M. Ennis

From the end of the 18th century through the beginning of the 19th century, shortages of small change occurred in the territory that is present-day Argentina. During the colonial period (until 1810), evidence associated with these shortages included the...

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Winter 2006 Vol. 92 No. 1

Are We Working Too Hard or Should We Be Working Harder? A Simple Model of Career Concerns

By Leonardo Martinez & Andrew Foerster

In modern corporations, ownership is typically separate from control. Given that employees are motivated by self interest, incentive problems arise. Employees are disciplined, in part, by their career concerns. Employees' compensation depends on their...

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The 3-6-3 Rule: An Urban Myth?

By John R. Walter

The banking industry of the 1950s, 1960s, and 1970s is often described as operating according to a 3-6-3 rule: Bankers gathered deposits at 3 percent, lent them at 6 percent, and were on the golf course by 3 o'clock in the afternoon. The implication was...

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Credit Exclusion in Quantitative Models of Bankruptcy: Does It Matter?

By Hubert P. Janicki & Kartik Athreya

This article takes a first step in evaluating a commonly used assumption in recent quantitative analyses of unsecured household borrowing—-the temporary exclusion of defaulting borrowers from credit markets. Exclusion from credit markets is an...

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Discretionary Policy and Multiple Equilibria

By Robert G. King

Discretionary policymaking can foster strategic complementarities between private sector decisions, thus leading to multiple equilibria. This article studies a simple example, originating with Kydland and Prescott, of a government that must decide ...

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Fall 2005 Vol. 91 No. 4

Trend Inflation, Firm-Specific Capital, and Sticky Prices

By Alexander L. Wolman & Andreas Hornstein

Early empirical studies of the New Keynesian Phillips Curve imply implausibly high levels of price stickiness for standard monetary models with Calvo-type nominal rigidities. More recently researchers have found that the addition of real rigidities...

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Technological Design and Moral Hazard

By Edward Simpson Prescott

Technological choice by a principal is added to the standard moral hazard model. It is argued that this is an important margin of choice. Two examples are provided in which the choice has significant implications. In one it drastically simplifies the...

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Monetary Policy and the Term Structure of Interest Rates

By Bennett T. McCallum

A prominent failure of the expectations theory of the term structure of interest rates concerns the magnitude of slope coefficients in regressions of short rate (or long rate) changes on long-short spreads. The anomalous empirical findings can be...

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How Well Do Diffusion Indexes Capture Business Cycles? A Spectral Analysis

By Pierre-Daniel G. Sarte & Raymond E. Owens

The potential benefits of small surveys of the economy are well known—surveys can supply measures of economic activity quickly and at a relatively low cost. But potential drawbacks are also recognized, namely that small samples may produce...

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Summer 2005 Vol. 91 No. 3

Oil Prices and Consumer Spending

By Jon D. Petersen & Yash P. Mehra

Richmond Fed Economist Yash P. Mehra and Research Associate Jon D. Petersen present evidence of a nonlinear relation between oil price changes and consumer spending. They assert that oil price increases have a negative effect on spending whereas oil ...

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Unemployment and Vacancy Fluctuations in the Matching Model: Inspecting the Mechanism

By Giovanni L. Violante, Per Krusell & Andreas Hornstein

Andreas Hornstein (Richmond Fed economist and vice president), Per Krusell (economics professor, University of Rochester, and Richmond Fed visiting scholar), and Giovanni L. Violante (assistant professor of economics, New York University) review recent...

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What's Driving Wage Inequality?

By John A. Weinberg & Aaron Steelman

Wage inequality has increased sharply in the United States since the mid-1970s. Some have argued that globalization—in particular, increased international trade and immigration—is primarily responsible for changes in the wage distribution...

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Spring 2005 Vol. 91 No. 2

Equilibrium Models of Personal Bankruptcy: A Survey

By Kartik Athreya

A comparison of models and results from selected papers on personal bankruptcy establishes how particular modeling assumptions matter for the implications of bankruptcy. For example, it can be argued that only under income processes that allow for large...

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What Difference Would an Inflation Target Make?

By Robert L. Hetzel

Critics of an explicit inflation target argue that it would require additional fluctuations in real output and unemployment. I argue that theory and practice have shown this alleged dilemma to be a false one. However, an inflation target would demand ...

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Bank Risk of Failure and the Too-Big-to-Fail Policy

By H. S. Malek & Huberto M. Ennis

Some U.S. banks may be perceived as too big to fail: If any such bank were to get into trouble, the market may expect a government bailout. In general, the possibility of contingent bailouts creates a risk and a size distortion in the decisions of banks...

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Limited Participation and the Neutrality of Money

By Stephen D. Williamson

An exploration of limited participation models reviews the literature and plots some new directions of research in this area. I constructed and modified a baseline cash-in-advance model to illustrate the main ideas. The model shows how limited...

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Winter 2005 Vol. 91 No. 1

Depression-Era Bank Failures: The Great Contagion or the Great Shakeout?

By John R. Walter

Contagion-induced bank runs are widely viewed as the cause of widespread bank failures during the Great Depression. Federal deposit insurance was created in 1934 to prevent future contagion-generated bank failures. Yet the cycle of bank failures appears...

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Banking Markets in a Decade of Mergers: A Preliminary Examination of Five North Carolina Markets

By John A. Weinberg

In the 1990s, a wave of merger activity altered the structure of the banking industry at both the national and local levels. While banking remains a relatively unconcentrated industry at the national level, markets for some banking services continue to ...

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On the Aggregate Labor Supply

By Sun-Bin Kim & Yongsung Chang

The labor supply elasticity of an individual household and the aggregate labor supply elasticity of all households can differ significantly. If individual households not only decide on their hours worked, but also on whether to work or not, then the...

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Inflation and Changing Expenditure Shares

By Fan Ding & Alexander L. Wolman

Inflation reflects the joint behavior of price changes for individual goods and expenditure shares of different goods. We measure the contribution of changing expenditure shares to inflation behavior by constructing alternative inflation measures that...

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