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Economic Review

Economic Review
C O N T E N T S
Fourth Quarter 2000/Volume 85, Number 4

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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PRESIDENT
JACK GUYNN

SENIOR VICE PRESIDENT AND
DIRECTOR OF RESEARCH

ROBERT A. EISENBEIS

RESEARCH DEPARTMENT
THOMAS J. CUNNINGHAM
Vice President and
Associate Director of Research

GERALD P. DWYER JR.
Vice President, Financial

WILLIAM ROBERDS
Vice President, Macropolicy

LARRY D. WALL
Research Officer, Financial

JOHN C. ROBERTSON
Assistant Vice President, Regional

ELLIS W. TALLMAN
Assistant Vice President, Macropolicy

TAO ZHA
Assistant Vice President, Macropolicy

PUBLIC AFFAIRS
BOBBIE H. MCCRACKIN
Vice President

JOYCELYN TRIGG WOOLFOLK
Editor

LYNN H. FOLEY
Managing Editor

NANCY PEVEY
Editorial Assistant

CAROLE L. STARKEY,
PETER HAMILTON, AND JILL DIBLE
Designers

LYNNE ANSERVITZ
Marketing and Circulation

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

Monetary Policy and Racial Unemployment Rates
Madeline Zavodny and Tao Zha

When the Federal Open Market Committee began raising interest rates in June 1999 to forestall inflationary pressures, concern mounted that monetary policy moves might slow the pace of economic growth, undoing the employment gains minorities and other disadvantaged groups made during the 1990s. Implicit in such concern is the idea that these groups will be disproportionately affected by an economic slowdown.

To explore this issue, this article analyzes the effect of exogenous movements in monetary policy and other macroeconomic variables on the overall and black unemployment rates. These exogenous movements are shifts in the federal funds rate not explained by movements in the other variables included in the econometric model estimated here. The analysis focuses on how the implementation of exogenous monetary policy during the 1980s and 1990s affected the black unemployment rate relative to the overall unemployment rate. Results suggest that the black unemployment rate tends to be slightly more responsive to exogenous monetary policy moves than the overall unemployment rate is. However, exogenous monetary policy moves during the 1980s and 1990s did not have significantly more adverse effects on African Americans than on the total population and may even have had positive net effects on African Americans.


The Economics of Check Float
James McAndrews and William Roberds

Checks continue to dominate the market for noncash retail payments in the United States. Each year, U.S. residents write between 65 billion and 70 billion checks, an average of one check per business day per resident. This dependence on checks is unique among developed countries. It is also extremely costly: by switching from checks to other forms of payment, U.S. residents would save between $60 billion and $100 billion dollars per year.

Why do checks continue to see such wide use within the United States? Economists' explanations have focused on check "float," which is the interest earned by a check writer between the time a check is received as payment and the time the payment is settled. This article explains how check float arises within the U.S. payment system and how float can discourage the adoption of other types of payment. The authors also consider several proposals for reforming the U.S. payment system. While these proposals hold some promise, they are also subject to criticisms. The authors conclude that over the near future, policymakers will need to weigh the drawbacks of these proposals against the benefits of a faster transition to a more efficient payment system.


Perspectives on a Potential North American Monetary Union
Michael Chriszt

The idea of a single currency for the United States, Canada, and Mexico usually refers to one of two approaches: the unilateral adoption of the U.S. dollar by Canada and Mexico—dollarization—or monetary union, the development of a joint currency that could be managed by all three countries.

This article examines the idea of monetary union in North America. The author discusses specific criteria for a single currency for North America as well as the pros and cons of a monetary union and dollarization in the North American context. The evidence presented suggests that Canada and perhaps even Mexico are candidates for forming a single-currency area with the United States at some stage. The article concludes that monetary union appears to hold several advantages over dollarization from the perspective of both the United States and its NAFTA partners. However, an important question remains to be answered: Are the NAFTA countries currently ready for a monetary union? The answer involves both economic and political variables as well as some practical implications. It seems unlikely that the United States, Canada, and Mexico will pursue this goal in the near future.


Is Commercial Banking a Distinct Line of Commerce?
Lynn W. Woosley, B. Frank King, and Michael S. Padhi

In analyzing the competitive impacts of bank consolidations, banking agencies and the U.S. Department of Justice tend to rely on the assumption that the market for bank services is local and is for services offered only by banks. This approach allows analysts to merge all products and services into a “cluster of services” for analysis of competition. Increases in types and locations of competitors have cast doubt on whether a cluster of services exists, however.

These changes have induced the U.S. Department of Justice to do separate analyses of small business lending when analyzing consolidations. This article compares measures of market concentration across deposit and small business loan products to answer two questions crucial for antitrust analysis: Are small business lending markets local, and are deposits an adequate proxy for small business loans? For their analysis, the authors use new information provided by Community Reinvestment Act data, which give a broader picture of out-of-market participation in a local small business lending market and therefore an indication of the degree of competitive pressure applied by these institutions. The findings indicate that the convenience of local offices can be overcome at least partly by distant lenders offering, for example, better rates, greater access to credit, or more flexible products or hours of service. The authors conclude that, while additional research is needed, using multiple measures of market concentration is likely to give a truer picture of competition, especially in marginal cases.