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Economic Review
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A number of developments in recent years have combined to put the issue of financial stability at the top of the agenda, not just of supervisory authorities, but of public policymakers more generally. These developments include: the explosive growth in the volume of financial transactions, the increased complexity of new instruments, costly crises in national financial systems, and several high-profile mishaps at individual institutions. Policymakers care about financial instability because of the close linkages between financial stability and the health of the real economy. Recent examples of these linkages include the banking crises in Scandinavia and Japan, the 1995 peso crisis in Mexico, and the current exchange rate and banking problems in the emerging market economies of Southeast Asia. In remarks made before the Federal Reserve Bank of Kansas City’s 1997 symposium, “Maintaining Financial Stability in a Global Economy,” Mr. Crockett examines the role of public policy in maintaining financial stability. In particular, he addresses the following questions: What do we mean by financial stability? Why should official intervention (as opposed to reliance on market forces) be required to promote stability? And what concrete approaches can be employed? Back to top Economic Review home
World financial markets have experienced tremendous growth in recent years. New financial instruments have emerged, transaction volumes in markets has skyrocketed, and capital flows across countries have risen dramatically. While these developments have made financial markets more efficient, they have also increased the risk that events at one institution or in one market will have immediate and wide-ranging effects on the entire global financial system. To better understand how policymakers can keep financial systems safe, efficient, and stable, and how policymakers can respond to financial crises when they occur, the Federal Reserve Bank of Kansas City sponsored a symposium entitled “Maintaining Financial Stability in a Global Economy.” The symposium, held at Jackson Hole, Wyoming on August 28-30, 1997, brought together a distinguished group of central bankers, academics, and financial market representatives from around the world. Morris and Parrish summarize the papers and commentaries presented at the symposium. The participants generally agreed that, to maintain financial stability, regulation of financial institutions is important and that financial regulators should focus on making regulation more consistent with market forces. In addition, financial stability requires a sound macroeconomic environment, particularly price stability and, for most countries, an exchange rate regime that does not attempt to permanently fix exchange rates. Finally, participants agreed that both domestic and international safety nets should be used cautiously in financial crises to avoid the destabilizing effects of moral hazard. Back to top Economic Review home
Analysts often use financial variables to help predict real activity and inflation. One of the most popular of these variables is the spread between yields on long-term and short-term government instruments, also known as the yield spread. Researchers have shown the spread is a good predictor of real activity. For instance, in a recent issue of the Economic Review, Bonser-Neal and Morley found that the spread helps predict real activity over the next year, the next two years, and the next three years. Kozicki examines the predictive power of the yield spread for real growth and inflation in a collection of industrialized countries. She extends the analysis of Bonser-Neal and Morley by examining in greater detail the horizons at which the yield spread helps predict real growth and by investigating whether information on the level of yields contains additional predictive power beyond that summarized by the spread. She also adds to the existing literature by examining a broader collection of countries than has previously been analyzed and a wider array of forecast horizons. In addition, restrictions imposed in earlier studies are relaxed. For real activity, Kozicki finds that the predictive power of the yield spread largely derives from its usefulness over horizons of a year or so and generally dominates the predictive power associated with the level of yields. For inflation, although the yield spread helps predict inflation at moderate horizons of a few years, the level of yields is a more useful predictor of inflation. Back to top Economic Review home
With the year 2000 rapidly approaching, stored-value cards are already popular in some countries and are being introduced into the United States by private companies. Stored-value cards are one form of electronic cash—electronic substitutes for paper currency. Digital cash (also known as cybercash or ecash) is the other form of electronic cash coming into use today. It consists of bits and bytes in cyberspace and substitutes for paper currency in transactions made over the Internet. Someday privately issued electronic cash may be a common means of payment in the United States. Looking forward to that day, government policymakers need to assess the impact these new forms of currency might ultimately have on the nation’s currency stock. If privately issued electronic cash, once commonplace, could threaten the long-standing safety, uniformity, and relative stability of the U.S. currency, then policy-makers must decide what, if any, forms of government intervention are appropriate. Schreft argues there is a limited role for government in ensuring the quality of the nation’s currency when private issuance is allowed. She first describes the emerging forms of electronic cash and how they differ from today’s paper currency. She goes on to argue that the concern for policymakers is not that electronic cash is electronic, but rather that private firms are issuing it. Looking forward from the perspectives of economic theory and economic history, she explores the impact privately issued electronic cash might have on the nation’s currency and the potential role for government. Finally, she considers some specific regulatory alternatives for ensuring that the U.S. currency remains stable, safe, and uniform. Back to top Economic Review home
Farmland values in the states of the Tenth Federal Reserve District rose about 5.5 percent over the year ended June 30, 1997. Indeed, over the past two years prices in many parts of the country have risen sharply. The jump in farmland values comes at a time of dynamic change in the farm sector. Last year, the federal government enacted sweeping farm legislation that both lowers payments to producers and removes many government controls on farm production. Government payments have been an important source of farm income for many years, and have likely been capitalized into farmland values. Changes in federal subsidies could have important implications for values. Since farmland is three-fourths of the asset base of the farm sector, the impact of changes in policy on farmland values is crucial to the financial health of the sector. What effect will the new farm bill have on farmland values? Lamb argues that the final impact of program reform will depend on two forces. In isolation, the removal of government subsidies will depress farmland values. On the other hand, agriculture’s newly found freedom could further lift land values. Subsidies have come with a price attached in the form of restrictions on planting flexibility and production, limiting farmers’ ability to take advantage of expanding export markets. Freed from such restrictions, farmers may find that expanding export markets will lift farm commodity prices and farm income enough to outweigh the loss of income from declining subsidy payments. |