Email
Print Friendly
A A A

Economic Review

Economic Review
C O N T E N T S
Fourth Quarter 1999/Volume 84, 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.

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

ELLEN TABER
Editorial Assistant

CAROLE L. STARKEY AND
KELLY D. CHILTON
Designers

TAQIYYAH MUHAMMAD
Circulation

LINDA MUNDY
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

Evaluating the Effects of Monetary Policy with Economic Models
Tao Zha

Because of limited knowledge about how the actual, complex economy operates, policymakers depend on models for understanding its workings. For models to be usable for evaluating monetary policy effects, modelers must recognize that fluctuations or shocks in the actual economy are often driven by developments beyond the central bank's control. There are no simple rules, and neither is there a single model that represents the exact interactions between monetary policy and the rest of the economy. How good a model is depends on particular criteria.

This article assesses the usability of a specific economic model for policy evaluation on the basis of certain criteria the economic literature recognizes. The author uses the model as an example to address a set of recurring questions regularly asked by policymakers, questions concerning projecting multiple key macroeconomic variables under alternative policy scenarios at the time when the policy decision has to be made.

The discussion focuses on the two conceptual issues that are central to answering these questions: the baseline forecast and policy shifts. The author concludes that use of a baseline forecast serves only as a convenient technical tool for computing a menu of policy projections under alternative scenarios. The important message is that a combination, not a separation, of baseline forecast and identified policy shifts provides economically coherent ways of evaluating the effects of monetary policy.


Fully Funded Social Security: Now You See It, Now You Don't?
Marco A. Espinosa-Vega
and Steven Russell

Governments of countries around the world, including the United States, are considering implementing social security reform programs. In most cases, one of the principal goals of the reform program is to convert a pay-as-you-go social security system into a fully funded system. Most economists believe that the long-run macroeconomic benefits of a successful transition to a fully funded system are likely to be large relative to the benefits from social security reforms of other types.

The authors of this article describe the basic differences between pay-as-you-go and fully funded systems and explain why these differences are important. They also point out, using Mexico as an example, that it may be difficult to determine which type of social security system a country actually has and even harder to predict whether it will succeed in switching from one type of system to the other.

As this discussion indicates, the authors believe there may be some room for doubt that Mexico's new social security system is or ever will be fully funded. Instead, the new system may be a pay-as-you-go system of a somewhat different type. This same possibility also applies to other countries that are conducting social security reforms. The authors conclude that the information needed to determine whether these countries are likely to succeed in setting up fully funded systems will be revealed only slowly over time.


Mergers of Publicly Traded Banking Organizations Revisited
Simon Kwan and
Robert A. Eisenbeis

In more than 3,844 mergers and acquisitions between 1989 and 1999, acquiring institutions purchased more than $3 trillion in assets. A number of reasons have been advanced for such a surge in acquisitions, including the need to consolidate to achieve cost savings and operational efficiencies, to be better able to compete in the global marketplace, or to provide for the controlled exit of inefficient firms from the financial services industry.

This article explores the question of whether the various expected performance and earning benefits of mergers are in fact realized. It adds to the limited existing research on the effects of bank mergers by analyzing consolidations between 1989 and 1996, a period of almost unprecedented banking consolidation. Specifically, examining recent data allows considering evidence of efficiency or other gains from the wave of acquisitions flowing from the erosion and final elimination of the McFadden Act.

Consistent with the findings of earlier studies, the results point to mixed efficiency and performance effects. For example, evidence suggests that even though the better-performing institutions tended to target the higher-performing targets, the resulting mergers did not significantly improve profit performance or efficiency. In addition, the authors find only weak evidence that the market viewed acquisitions with favor. The overall conclusion is that the widely touted earnings, efficiency, and other performance and earning benefits of mergers of large banks still remain in doubt.


Economic Policy Trends in Post–World War II Latin America
Carlos Lozada

Recent economic disturbances in Latin America—particularly the currency crises in Mexico in 1994–95 and Brazil in 1998–99—have prompted significant research and debate over financial sector reforms and appropriate monetary and fiscal policy for the region. The recent discussion over dollarization is but one of many such debates.

As the author of this article demonstrates, the current rethinking of economic policy in Latin America is only the latest chapter of a much longer story. Well before the recent episodes of financial turmoil, Latin American economies had already proven vulnerable to external economic shocks. These factors interacted with (and in some cases, prompted) frequent changes in the region's economic policy orientation, resulting in high volatility of key indicators like inflation.

This article surveys the evolution of economic policy and performance in Latin America in the post–World War II period. It highlights the impact of certain economic shocks the region experienced, including the declining terms of trade in the early postwar period, the oil shocks of the 1970s, the debt crisis of the 1980s, and the more recent emerging markets crisis of 1997–99. The author concludes that the recovery time from the recent crisis is expected to be briefer than for previous crises, with Latin America proving more resilient under the market framework of the 1990s than under the state-led economic policies of earlier decades.


Index for 1999