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Economic Review

Economic Review
C O N T E N T S
Second Quarter 2005/Volume 90, 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

EXECUTIVE 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

ELLIS W. TALLMAN
Vice President, Macropolicy

JOHN C. ROBERTSON
Assistant Vice President, Regional

PUBLIC AFFAIRS
BOBBIE H. MCCRACKIN
Vice President

LYNN H. FOLEY
Editor

TOM HEINTJES
Managing Editor

JILL DIBLE AND
PETER HAMILTON
Designers

ALISON BOUNDS
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 the Federal Reserve Bank of Atlanta or the Federal Reserve System.

Material may be reprinted or abstracted if the Economic Review and author are credited.

Please use the WebScriber Service to order free subscriptions and additional copies as well as to receive e-mail notifications when articles are published online. For further information, contact the Public Affairs Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470 (404.498.8020).

ISSN 0732-1813

Payroll Employment Data: Measuring the Effects of Annual Benchmark Revisions
Nicholas L. Haltom, Vanessa D. Mitchell, and Ellis W. Tallman

During the recovery from the 2001 recession, the business press and economic analysts used payroll employment data released monthly by the U.S. Bureau of Labor Statistics (BLS) as evidence of protracted weakness in the labor market. But using these monthly releases for this type of analysis can be premature and potentially misleading. The initial BLS releases can differ substantially from payroll employment data that are revised to incorporate information from less timely but more complete sources.

This article highlights the historical revisions to the aggregate nonfarm payroll employment series. Examining both monthly survey-based revisions and the more extensive annual benchmark revisions, the authors focus specifically on how the sequence of data revisions modifies payroll employment estimates from their initial release. The graphs in the article display the magnitude and direction of each revision from the initial estimate for a particular month to its currently published value, demonstrating that the largest portion of enduring change for the estimates occurs in the benchmark revisions.

The authors then investigate empirically whether these revisions contain information that can be exploited to anticipate future revisions. The analysis shows that previous benchmark data revisions are useful for explaining the variation in subsequent payroll employment benchmark data. Such information, the authors note, could prove useful for further research aimed at modeling better real-time estimates of employment conditions.


Happy-Hour Economics, or How an Increase in Demand Can Produce a Decrease in Price
Mark Fisher

The standard supply-and-demand model is typically an economist’s most important analytical tool, but in some situations it does not capture the features of interest. For example, during “happy hour,” bars near workplaces sell a higher-than-usual quantity of alcoholic beverages at a lower-than-usual price. This practice makes little sense using the standard competitive model, but an alternative model—the model of monopolistic competition—provides the needed analytic framework.

This article provides a step-by-step construction of a monopolistic competition model in which many firms each produce the same product, and thus bear the same production costs, as their competitors. Yet each firm’s product is differentiated from its competitors’, resulting in a falling demand curve.

These seemingly contradictory conditions can be rationalized by assuming the firms are separated in space and that consumers bear costs to travel to the firms. A local firm has some monopoly power because local consumers may be willing to pay a higher price for the convenience of shopping nearby. Conversely, local consumers may be willing to travel farther for a lower price. Firms charging a lower price may also be able to attract faraway consumers who are willing to travel.

Thus, when consumers’ demand increases, the demand curve facing a local monopolist becomes more sensitive to changes in its own price. This increase in sensitivity in turn can cause the equilibrium price to be lower during periods of high demand.


Smoothing the Shocks of a Dynamic Stochastic General Equilibrium Model
Andrew Bauer, Nicholas Haltom, and Juan F. Rubio-Ramírez

In some ways, the recession of 2001 and the recovery that followed it were unique: During the recession, the contraction in measured output was driven almost entirely by a retrenchment in business capital spending while consumer spending and residential investment remained positive. And the recovery was marked by moderate, uneven gross domestic product growth and job market weakness that were historically unusual. These events raise questions about the conventional wisdom on post–World War II business cycles.

To help answer these questions, the authors use a general equilibrium model with sticky prices and sticky wages as a framework for exploring the effects of structural shocks to the U.S. economy. Using the Kalman filter, the authors estimate the parameters of the model and then back out the unobservable shocks that make the model’s observed variables match the observable data.

The model shows that during the 1990–91 and 2001 recessions demand shocks turned sharply negative as output growth weakened. However, the model attributes the relatively small decline in output during the 2001 recession to a positive productivity shock. Both the 1990–91 and 2001 recessions exhibited a sudden loosening of monetary policy greater than would be predicted by a Taylor rule. The model does not capture inflation dynamics during these periods and attributes frequent changes in inflation to the markup shock.