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Economic Review

Economic Review
First Quarter 1999/Volume 84, Number 1

Economic Review articles are posted on the Web as they become available. Page numbers in the PDF file posted here may not reflect the page numbers of the printed version.

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Vector Autoregressions:
Forecasting and Reality
Against the Tide: Malcolm Bryan and the Introduction of Monetary Aggregate Targets
John C. Robertson
Ellis W. Tallman
4 R. W. Hafer 20

Constructing forecasts of the future path for economic series such as real gross domestic product growth, inflation, and unemployment forms a large part of applied economic analysis for business and government. Model-based forecasts are easier to replicate and validate by independent researchers than forecasts based on expert opinion alone. In addition, the forecaster can formally investigate the source of systematic errors in model forecasts, and a forecast model s performance can be established before it is used by a decision maker.

The authors of this article describe a particular model-based forecasting approach, a vector autoregression comprising six U.S. macroeconomic variables. They focus attention on the technical hurdles that must be addressed in a real-time application and methods for overcoming those hurdles, such as conditional forecasting to handle the staggered release of data and matching quarterly with monthly data.

By emphasizing the practical problems of forecasting economic data using a statistical model, the authors draw on experience in using such a model at the Federal Reserve Bank of Atlanta. Although the model studied is small and highly aggregated, it provides a convenient framework for illustrating several practical forecasting issues. The focus on a simple model provides potential users with a road map of how one might implement such a forecasting model in specific applications.

Monetary policy was freed from the straightjacket of pegging U.S. Treasury interest rates following the Treasury-Federal Reserve Accord in 1951. This newfound freedom led to a growing debate inside and outside the Federal Reserve System about the appropriate measures to use as operating guides. This article examines the contributions of Malcolm Bryan, president of the Atlanta Fed from 1951 through 1965, to this debate and to the evolution of monetary policy in the postaccord era.

Bryan parted company with most of his colleagues on the Federal Open Market Committee by trying to steer policy away from a focus on interest rates and money market conditions to placing more weight on the monetary aggregates. This article reviews the transcripts of the committee meetings during Bryan s tenure, which reveal his desire to prevent the disruptive effects of short-run fluctuations in money growth and the longer-term effects of expansive Fed actions, namely, inflation.

Bryan's approach to monetary policy was a dramatic departure from the prevailing views of the FOMC at the time. In addition to trying to implement the new and controversial research results coming out of monetary economics, his introduction of short-run aggregate growth targets?growth cones?stands out as a significant and innovative development in U.S. monetary policy. Even though his targets and procedures were not adopted by the FOMC at the time, his strategy for monetary policy would resurface as the inflation produced by the policies against which Bryan fought became unacceptable.

Economics and Crime in the States              
Zsolt Becsi 38

Polls identify crime as the number one public worry. Crime also exacts tremendous costs not factored into official measures of well-being, and it is a favorite subject of political campaign promises. However, the public seems largely unaware that crime responds to economic conditions and incentives and that the results of a substantial body of work by economists have important implications for public policy.

This article introduces the economics and crime literature by describing a simple supply-and-demand crime model in which criminals supply crime, the public demands protection from crime, and the government provides public protection. The author uses the model to show how crime responds to a variety of demographic and economic factors and also what results to expect from public policy proposals.

Using state data from 1971 to 1994, the article outlines broad regional differences and trends in the patterns of crime in the United States. While the nation in the 1990s has seen crime fall dramatically in almost all categories, not all regions have benefited equally. In particular, southeastern states have seen distinct worsening in crime rates relative to other regions.

The author subjects the data to a more in-depth treatment using a panel regression approach that estimates the effects of demographic and economic variables on crime. The results mirror some found by others but also highlight serious issues vexing the empirical literature. Generally, the demographic and economic variables explain crime rather well, and estimates for the most part conform to the economic model of crime.