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Economic Review
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Over the past decade, the level of required reserve balances held by depository institutions in the United States has declined dramatically. The decline in reserve balances has fueled a debate over the role of reserve requirements. On the one hand, proponents of reserve requirements argue that low reserve balances may complicate monetary policy operations and increase short-term interest rate volatility. On the other hand, critics of reserve requirements argue that lower reserve requirements remove a distortionary tax on depository institutions and need not complicate monetary policy operations. In a previous article, Sellon and Weiner provided an analytical framework for thinking about these issues. That article suggested that monetary policy can be conducted in a world of low or zero reserve requirements as long as there continues to be a demand for central bank balances. In this article, the authors examine how three countries Canada, the United Kingdom, and New Zealand conduct monetary policy without using reserve requirements. The experience of these three countries provides insight into the linkages between the payments system and monetary policy and into the connection between reserve requirements and interest rate volatility. This insight is particularly helpful in understanding the implications of a further reduction of reserve balances in the United States. Back to top Economic Review home
The concept of a new Industrial Revolution has recently become of great interest to general economists of all persuasions. For example, the New Growth Theory has placed renewed emphasis on the importance of technological change in modern economic growth, and a number of authors have suggested that we are entering a new period of technological advances that could profoundly affect the world economy. In an article based on comments made at the Tenth District Monetary Policy Roundtable, Mr. Mokyr looks at the events of our time in relation to events of the British Industrial Revolution. He cautions that the temptation to look at the past to guide us in making predictions and policy recommendations should be resisted. Historical analogies often mislead as much as they instruct, and in technological progress, where change is unpredictable, cumulative, and irreversible, the analogies are more dangerous than anywhere. Back to top Economic Review home The phenomenal growth of financial market and trading activities worldwide has led to tremendous growth in large-value payments systems. Large-value payments systems are the electronic systems banks use to transfer large payments among themselves. Payment orders processed in such systems in the United States, for example, are typically well above $1 million. The tremendous growth of payments system use throughout the world has increased both the possibility of settlement failures and the potential impact of such failures. In 1996, the average turnover in a single day exceeded the combined capital of the top 100 U.S. banks. Regulators are especially concerned that payments systems might turn a local financial crisis into a global systemic crisis. Shen examines settlement risk in large-value payments systems and discusses some of the measures available to manage such risk. Back to top Economic Review home
Over the last 35 years, the U.S. economy has created service sector jobs at a faster pace than manufacturing sector jobs. Not only has this trend led to a significant shift in the composition of the labor force from manufacturing to services, but it has also fundamentally changed the characteristics of the average workplace. Some economists have argued that the ongoing structural shifts from manufacturing employment to services employment may have had the additional consequence of smoothing the business cycle. A smoother cycle would be welcomed and would yield several benefits. The economy would grow more stably and would provide a more predictable backdrop for working, saving, and investing. Filardo investigates whether the shift from manufacturing to services employment has muted the business cycle. He concludes that the declining manufacturing employment share may have substantially changed the workplace but has had little impact on the smoothness of the business cycle. Back to top Economic Review home
After a steep recession in the 1980s, many rural places are mounting a strong economic comeback in the 1990s. Reflecting the economic turnaround, more people are moving to rural areas. Notwithstanding the improved rural economic picture, rural leaders remain concerned about rural America's economic future. Chief among these concerns is gaining access to capital to fuel continued growth. Many rural communities, especially those traditionally tied to agriculture, are trying to diversify their economic base, and capital is needed to finance new businesses. Housing is in short supply, and many communities are seeking to finance affordable housing. And public infrastructure, such as water and sewer systems, is in need of refurbishment in some communities and expansion in others, pointing to additional capital demands. While capital demands mount, questions linger about the adequacy of rural capital markets to meet those demands. To address this concern, the Federal Reserve Bank of Kansas City sponsored a conference entitled Financing Rural America in Omaha on December 4-5, 1996. In this article, Drabenstott and Meeker review the importance of capital to the rural economy, discuss some apparent shortcomings in the markets, and summarize the options for improving them presented at the Omaha conference. |