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Economic Review

Economic Review
Third Quarter 2003/Volume 88, Number 3

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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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.

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ISSN 0732-1813

Monetary Policy and Learning: Some Implications for Policy and Research
Ellis W. Tallman
In March 2003 the Federal Reserve Bank of Atlanta hosted a conference focusing on the relationship between monetary policy and learning. The conference papers and discussions are part of an emerging literature that introduces learning—about the economy or the model used by policymakers—into dynamic macroeconomic models. In some models, monetary policymakers learn about how the economy works while in others private agents learn about the model(s) the central bank uses to formulate monetary policy.

This article outlines key issues, raised in a 1999 book by Thomas Sargent, about how to interpret monetary policy behavior and economic performance over the past thirty years using the Phillips curve framework and different assumptions about learning. To a large extent, several conference papers follow from Sargent’s work. Some conference papers focus on understanding recent inflation history, attempting to detect monetary policy’s role in generating the recent, more benign inflation performance. Other conference papers investigate the role of learning behavior in a variety of settings. The article outlines the implications from some of the papers.

Finally, the article describes economic literature relating to central bank transparency, its relevance for effective communication to the public about monetary policy, and its likely role in future learning models. Through the transparency discussion, the article foreshadows Lars Svensson’s keynote address at the conference (reprinted here), citing it as a “suggested user’s guide for monetary policymakers to improve policy effectiveness.”

Monetary Policy and Learning
Lars E.O. Svensson
A new strand of macroeconomic literature examines the relationship between learning and monetary policy—how monetary policymakers learn about the economy as they try to achieve their goals, how the public learns about policymakers’ objectives, and how the public’s learning, in turn, changes the way monetary policy works. An Atlanta Fed conference in March 2003 brought together some of the main contributors to this emerging literature.

In the conference keynote address, reprinted here, Lars Svensson focused on what constitutes good monetary policy and how it is related to central-bank learning, how private-sector learning benefits from central-bank transparency, and how good monetary policy is best modeled.

Good central banks, he noted, engage in forecast targeting: setting interest rates so that their projections of inflation and the output gap are consistent with their objectives. In particular, he argued, good central banks must devote considerable resources to monitoring and extracting private-sector expectations from various sources, use these expectations among other inputs in the forecasting process, and respond appropriately when the expectations affect the central bank’s projections of inflation and the output gap.

Svensson also stressed that central-bank transparency can improve private-sector learning and thereby induce better private-sector decisions.

Finally, Svensson emphasized that good monetary policy is best modeled in the same way the private sector is modeled—not with ad hoc reaction functions, or instrument rules, but as goal-directed, optimizing policy with the help of targeting rules.

Federal Home Loan Bank Mortgage Purchases: Implications for Mortgage Markets
W. Scott Frame
The Federal Home Loan Bank (FHLB) System is a government-sponsored enterprise created by Congress to support residential housing finance. Historically, the twelve regional wholesale banks that constitute the FHLB System have pursued this goal by making loans to their depository institution members secured by residential mortgage loans. In 1997, however, the Federal Home Loan Bank of Chicago began purchasing pools of conforming mortgages under its Mortgage Partnership Finance Program. Today, nine FHLBs offer this program, and the remaining three offer their own Mortgage Purchase Programs.

The FHLB mortgage programs represent a small but growing part of the secondary conforming mortgage market, which has traditionally been dominated by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). This article examines the various FHLB mortgage programs offered, analyzes the evolving competitive environment in the secondary conforming mortgage market, and identifies implications for this market.

Consumers could ultimately benefit from lower mortgage costs because of a lower cost of guaranteeing mortgage credit, the author contends, but the savings per borrower would likely be small. He also notes that increased competition may reduce the franchise value of Fannie Mae and Freddie Mac, in turn possibly increasing risk-taking incentives for these firms. The author concludes that the evolution of this competitive landscape bears close attention as it could have important implications for mortgage markets.

The H-1B Program and Its Effects on Information Technology Workers
Madeline Zavodny
Employment in the information technology (IT) field rose rapidly during the late 1990s. Many IT employees are foreign born and are working in the United States with H-1B visas—temporary nonimmigrant visas issued for terms of up to six years. Critics of the H-1B program contend that it reduces job opportunities and wages for native workers. The programs’ supporters argue that H-1B workers—who typically have at least a bachelor’s degree in a specialty such as computer programming—help address a shortage of skilled native workers and fill positions that would otherwise go vacant.

This article examines whether the H-1B visa program negatively affects IT workers’ wages. The author uses data on labor condition applications (LCAs) filed with the U.S. Department of Labor to investigate whether the number of H-1B workers in an area, relative to the total number of IT workers in that area, is negatively associated with the level of and change in average IT wages and the unemployment rate among IT workers in that area.

The results provide little support for claims that the program has a negative impact on wages. However, some results do suggest a positive relationship between the number of LCA applications and the unemployment rate a year later. The failure to find an adverse wage effect does not necessarily indicate that H-1B workers do not depress wages but perhaps signals that any effect is difficult to find, as previous studies concluded.

Modern Economic Growth and Recent Stagnation
Scott L. Baier, Gerald P. Dwyer Jr., and Robert Tamura
During the past 200 years, most countries have entered a period of modern economic growth—consistent increases in output, input, and productivity per worker that were rare in previous centuries. Even so, a few regions of the world have experienced stagnant or falling living standards in recent years, which some have interpreted as typical of modern economic growth in the last two centuries.

Using data for most countries in the world since the 1800s and early 1900s, the authors find that (1) economic growth has improved the lives of people all around the world compared to those of their ancestors and (2) the economic stagnation or decline in some parts of the world in recent decades is unusual in the broader context of the history of the world since 1800.

The authors find that economic growth had become nearly global by the 1950s, and the recent economic declines in four regions in recent decades are atypical. Decreases in income and productivity are likely to be transitory in Central and Eastern Europe but may be longer lasting in the Middle East and Latin America. While modern economic growth may never have begun in Sub-Saharan Africa, government policies in that region have done more to throttle economic growth than to encourage it.