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Economic Review
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Chronic government budget deficits and escalating government debt have become major concerns in both developed and developing countries. To address the far-ranging implications, the bank's 1995 symposium in Jackson Hole, Wyoming, brought together a distinguished group of central bankers, finance ministers, academics, and financial market representatives from around the world. Weiner summarizes the papers and commentary presented at the symposium. The discussions were marked by unusually strong agreement on several points. First, most participants agreed that government deficits and debt are already excessive and will become unsustainable as aging populations increasingly draw on unfunded pension and health care programs. Second, large and growing fiscal imbalances harm economic performance, impose unacceptably large burdens on future generations, and raise the risk of major financial market disruptions. Third, solutions to the deficit and debt problem should stress spending reductions, not tax increases. And fourth, fiscal reforms will need to be decisive, transparent, and equitable if they are to receive public support. Back to top Economic Review home
The U.S. Congress is evaluating several proposals to reform the federal income tax system. Proponents of tax reform want to simplify tax preparation and stimulate economic growth by increasing the incentives for taxpayers to work, save, and invest. While the primary objective of tax reform is a more productive economy, changing the tax laws would also affect financial markets. Several of the proposals would change the way interest expenses are deducted and change the way income from interest, dividends, and capital gains is taxed. These changes would affect interest rates and the prices of stocks. Golob analyzes the effects of income tax reform on U.S. financial markets. He reaches three conclusions. First, most proposals would reduce interest rates in credit markets where interest income is currently taxable, including bank loans, Treasury securities, and corporate securities. Second, all proposals would increase interest rates in municipal credit markets where interest income is not currently taxable. And third, most proposals would increase stock prices. All three of these effects could be substantial. Back to top Economic Review home
In the 1990s, conventional measures of productivity growth, or the growth in output per worker, have indicated a dramatic rise. If these measures are correct, the economic benefits are clear. In the short run, sustained, faster productivity growth would enable the economy to expand more rapidly without intensifying inflationary pressures. In the long run, sustained, faster productivity growth would boost real incomes and improve the standard of living. Despite signs that productivity has recently begun to follow a steeper path, some analysts are skeptical. Episodes of faster productivity growth in the past have often reflected cyclical influences rather than fundamental trend shifts. And, the conventional productivity measure, which is based on fixed-weighted productivity data, has recently shown an upward bias. To address these concerns, Filardo reexamines the conventional, fixed-weighted productivity measure and also uses a new chain- weighted measure to assess productivity growth. He concludes that the productivity trend has not steepened in the 1990s. Back to top Economic Review home
Manufacturing is a major force in the Tenth District economy, accounting for the largest share of output in the region and one of the largest shares of employment. Moreover, many manufacturing jobs are among the highest paying jobs in the district. Yet little information is available to track the performance of this major sector. Monthly employment data provide the most current information, but these data are only available with a considerable lag. To provide up-to-date information about manufacturing conditions in the Tenth District, the Federal Reserve Bank of Kansas City has developed a quarterly survey of manufacturing plants. Smith provides background information for users of the manufacturing survey. Beginning in the fourth quarter of 1995, the survey results will be published in each issue of the bank's Regional Economic Digest. Back to top Economic Review home
It is generally believed that monetary policy actions are transmitted to the economy through their effect on market interest rates. According to this standard view, a restrictive monetary policy by the Federal Reserve pushes up both short-term and long-term interest rates, leading to less spending by interest-sensitive sectors of the economy such as housing, consumer durable goods, and business fixed investment. Conversely, an easier policy results in lower interest rates that stimulate economic activity. Unfortunately, empirical studies and the observed behavior of interest rates appear to challenge the standard view of the monetary transmission mechanism and raise questions about the effectiveness of monetary policy. Roley and Sellon attempt to reconcile theory and reality by reexamining the connection between monetary policy and long-term interest rates. Using a framework that emphasizes the importance of market expectations of future monetary policy actions, the authors argue that the relationship between policy actions and long-term rates is likely to vary over the business cycle as financial market participants alter their views on the persistence of policy actions. Accordingly, the standard view of the monetary transmission mechanism appears to provide an overly simplistic view of the policy process. In addition, by capturing the tendency of market rates to anticipate policy actions, the authors find a larger response of long-term rates to monetary policy actions than reported in previous research. |