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Economic Review

Economic Review
C O N T E N T S
Second Quarter 2000/Volume 85, Number 2

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.

These files are in PDF format, which requires Adobe Acrobat Software (links off-site)

PRESIDENT
JACK GUYNN

SENIOR VICE PRESIDENT AND
DIRECTOR OF RESEARCH

ROBERT A. EISENBEIS

RESEARCH DEPARTMENT
B. FRANK KING
Vice President and
Associate Director of Research

THOMAS J. CUNNINGHAM
Vice President, Regional

GERALD P. DWYER JR.
Vice President, Financial

ELLIS W. TALLMAN
Assistant Vice President, Macropolicy

ROBERTO CHANG
Research Officer, Macropolicy

WILLIAM ROBERDS
Research Officer, Macropolicy

LARRY D. WALL
Research Officer, Financial

PUBLIC AFFAIRS
BOBBIE H. MCCRACKIN
Vice President

JOYCELYN TRIGG WOOLFOLK
Editor

LYNN H. FOLEY
Managing Editor

CAROLE L. STARKEY
Designer

LYNNE ANSERVITZ
Marketing and Circulation

LINDA MUNDY AND
LISA LEE-FOGARTY
Administrative Assistance

The Economic Review of the Federal Reserve Bank of Atlanta, published quarterly, presents analysis of economic and financial topics relevant to Federal Reserve policy. In a format accessible to the nonspecialist, the publication reflects the work of the Research Department. It is edited, designed, produced, and distributed through the Public Affairs Department.

Views expressed in the Economic Review are not necessarily those of this Bank or of the Federal Reserve System.

Material may be reprinted or abstracted if the Review and author are credited. Please provide the Bank's Public Affairs Department with a copy of any publication containing reprinted material.

Free subscriptions and limited additional copies are available from the Public Affairs Department, Federal Reserve Bank of Atlanta, 104 Marietta Street, N.W., Atlanta, Georgia 30303-2713 (404/498-8020). Internet: http://www.frbatlanta.org. Change-of-address notices and subscription cancellations should be sent directly to the Public Affairs Department. Please include the current mailing label as well as any new information.

ISSN 0732-1813

Bank Loan-Loss Accounting: A Review of Theoretical and Empirical Evidence
Larry D. Wall and Timothy W. Koch

The philosophy underlying a bank's accounting for loan losses might have a material effect on the net income the firm reports to investors, which is a concern for securities regulators. A bank's loan-loss accounting philosophy might also significantly affect its ability to absorb unexpected future losses, which is a concern for bank supervisors. For example, a bank that follows a conservative loan-loss philosophy (maintains a higher loan-loss allowance) may be better able to absorb unexpected losses but also may have more freedom to manage reported earnings. This article focuses on the extent to which securities regulators and bank supervisors should be concerned about banks' accounting.

The authors' conclusion is that neither the bank supervisors' nor the securities regulators' concern is as serious as it may seem at first glance. Using currently available data, investors can and do form estimates of the "economically true" amount of banks' loan-loss allowances, provisions, net income, and equity capital. Strict adherence to Securities and Exchange Commission guidelines may improve the quality of the data, but the guidelines may not eliminate the benefit or reduce the cost of investors' making their own estimates. However, bank supervisors have the authority to require banks to hold additional equity capital if the bank's loan-loss allowance is judged inadequate to absorb future losses.


Central Bank Forecasting: An International Comparison
John C. Robertson

Forecasts, whether explicit or implicit, are at the heart of policy making. In considering forecasting for monetary policy, this article contrasts the forecasting processes at three central banks?the Reserve Bank of New Zealand, the Bank of England, and the U.S. Federal Reserve.

In the United States policymakers consider confidential staff forecasts in policy discussions, but these do not necessarily represent the consensus forecasts of the policy committee. At the Bank of England, official published forecasts are the product of bank staff and the policy committee working closely together, and the forecasts therefore come much closer to representing the central view of the policymakers. A similar, but less formal, interaction takes place at the Reserve Bank of New Zealand, which on a regular basis publishes forecasts based on staff models under the name of the bank's governor.

The discussion pays particular attention to the differences and similarities among the core models used by staff at these institutions. The analysis suggests that there is considerable similarity across central banks in the basic mechanics in producing forecasts. However, the author observes differences in the emphasis given to model-based forecasts relative to judgmental forecasts and those based on expert opinion. Banks with mandated inflation objectives have tended to favor model-based approaches as part of a strategy of ensuring that policy decisions are consistent with their inflation objectives and are as transparent to the public as possible.


Are Displaced Workers Now Finished at Age Forty?
Daniel Rodriguez and Madeline Zavodny

In recent years, the media has devoted considerable attention to the effects of downsizing and corporate restructuring on U.S. workers. Economists as well as the media have focused in particular on the plight of laid-off, or "displaced," middle-aged workers. Because many displaced workers incur significant costs, the displacement rate and the effects of displacement on workers are of concern to policymakers.

The conventional wisdom that middle-aged workers face an increased risk of being displaced and increased difficulties after displacement is partially borne out by this article's analysis. Displacement rates among middle-aged workers rose relative to younger workers during the 1990s recession, and the relative likelihood of displacement for middle-aged workers has not returned to the levels of the 1980s. Thus, workers in their forties are relatively more likely to have been displaced in the 1990s than in the 1980s. However, the two postdisplacement outcomes examined here, reemployment and earnings losses, have not changed significantly over time for older workers relative to younger workers.

According to the authors, the data also suggest that much of the concern about displacement may soon begin to abate. Displacement rates during 1995–97 returned to levels similar to those during the 1980s expansion. Reemployment rates for workers displaced during 1995–97 were at their highest levels for all age groups since the mid-1980s, and the gap between pre- and postdisplacement earnings has shrunk during the most recent period.


Atlanta Fed Conference on Fiscal Policy in Latin America

Fiscal policy is at the very core of the profound economic transformation under way in Latin America. While price stabilization and liberalizing reforms have placed regional economies in a much more competitive position over the past two decades, the need for additional reform efforts—so-called second-generation reforms in areas like fiscal policy—is increasingly apparent.

Because sound fiscal policy is key to viable monetary policy and sustainable economic growth, few issues are as critical to the region's economic future. Recognizing the increasingly global setting in which the Federal Reserve carries out its responsibilities, in late 1999 the Federal Reserve Bank of Atlanta sponsored a conference on sustainable public sector finance in Latin America. Conference participants brought a variety of disciplinary approaches to examining the wide-ranging nature of fiscal policy. This summary provides an overview of the papers and presentations from the conference and highlights insights into the timely issues discussed.