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Economic Review

Economic Review
C O N T E N T S
Second Quarter 2001/Volume 86, 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.

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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

LYNN H. FOLEY
Acting Editor

NANCY PEVEY
Managing Editor

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

LYNNE ANSERVITZ
Marketing and Circulation

CHARLOTTE WESSELS
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

Turn, Turn, Turn: Predicting Turning Points in Economic Activity
Marco Del Negro

Policy and investment decisions are made with an eye toward future economic conditions, and an econometric model that can correctly forecast directional changes in the business cycle would be a boon to policymakers, the business community, and the general public. This article provides some evidence on econometric models' ability to predict these directional changes, also known as turning points, in an effort to answer the question, How good is the state of the art in turning point forecasting?

The author first discusses the definition of turning points and describes different approaches to turning point forecasting, along with their relative advantages and disadvantages. Next, the article assesses the performance of the Atlanta Fed Bayesian vector autoregression (BVAR) model in terms of forecasting turning points relative to a well-known alternative, the Leading Economic Indicators (LEI) Index. The author concludes that the BVAR model forecasts contain information on future recessions that appears superior to that embodied in the LEI Index, at least when simple rules of thumb are used to extract information from the index.

Relative to a turning point model proposed by Arturo Estrella and Frederic Mishkin, however, the Atlanta Fed BVAR model is far less precise in indicating the exact timing of a recession. In general, the warning signals from models that are specifically designed to forecast turning points appear to be of better quality than those from econometric models like the BVAR model, suggesting that it is worthwhile to supplement the BVAR with a turning point model.


Regional Research and Development Intensity and Earnings Inequality
Susan Dadres and Donna K. Ginther

Investment in technology increased rapidly in the United States during the past two decades, leading some to herald the birth of a “new economy.” This new economy, marked by rapid productivity growth, rising incomes, low unemployment, and moderate inflation, creates a “rising tide that lifts all boats.” However, during the same period U.S. earnings and income inequality increased not only between groups defined by schooling and experience but also within these groups.

Although many researchers point to technology as the leading explanation for the increase, a cause-effect relationship is difficult to establish. In this article the authors examine technology's effect on earnings and income inequality by using interstate differences in technology. Their analysis, using data from the 1979–94 period, shows that workers earn a wage premium in high-technology states. Low-technology states experience higher measures of between-group earnings inequality as measured by the college wage premium—likely the result of the relative scarcity of skilled workers. In addition, higher rates of technological investment are weakly correlated with increased family income inequality, but these effects dissipate when additional variables are added to the model.

The authors also find that technology accounts for approximately one-third of the increase in within-group male earnings inequality. The article concludes that the effects of technological investment are smaller than expected and that technology is not the sole factor contributing to the increase in earnings inequality.


Managed Care for Brazil's Banks
Elizabeth McQuerry

The focus on financial sector reform in emerging market economies often centers on the need to reduce government involvement in markets. Individual countries have taken many different approaches toward reaching this goal. In Brazil, financial sector reform has entailed the need for a large governmental role in structuring reforms, especially in the banking sector. This article explores a key aspect of Brazil's financial liberalization—the reform and opening of the domestic banking sector.

Efforts to liberalize trade that began in the late 1980s and early 1990s in Brazil were hampered by economic and political concerns, chiefly inflation. The Real Plan, introduced in 1994, provided economic stabilization but did not automatically improve the outlook for the financial sector. Instead, policymakers were forced to initiate a managed restructuring of the private and public banking sectors.

This article first discusses policy choices facing government decision makers in opening domestic financial sectors and then examines the basic features of Brazil's banking sector reform within the context of other changes and policy objectives taking place in Brazil. The author concludes that Brazil's banking reform promoted a sweeping reorganization of the banking sector and effectively averted a banking crisis. At the same time, deepening and consolidation of reform in the banking sector will remain incomplete until new legislation can be passed and fiscal reform is further advanced.