EconSouth (First Quarter 2000)

Research Notes

Research Notes highlights some of the research recently published by the Federal Reserve Bank of Atlanta. For complete text of these articles on this Web site, see the links below.

Using economic models to evaluate monetary policy effects

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, nor 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.

In a recent article, Tao Zha assesses the usability of a specific economic model for policy evaluation on the basis of certain criteria the economic literature recognizes. He 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. Zha 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.

Economic Review
Fourth Quarter 1999

Social security systems — fully funded or pay-as-you-go?

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 such programs 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.

Marco Espinosa-Vega and Steven Russell describe, in a recent article, 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.

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.

Dollar Index Chart

From October through December 1999, the dollar registered a slight overall decline versus the 15 major currencies tracked by the Atlanta Fed despite a small upturn in November. During the three-month period, the dollar fell consistently against currencies in the Pacific subindex — which includes Australia, China, Hong Kong, Japan, Malaysia, Singapore, South Korea and Taiwan — while its performance versus the Americas and European currencies was mixed.

Note: For more detailed, monthly updates and historical data on the dollar index, see the Atlanta Fed's World Wide Web site at

Economic Review
Fourth Quarter 1999

Benefits of large bank mergers still in doubt

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 market place or to provide for the controlled exit of inefficient firms from the financial services industry.

In a recent article, Simon Kwan and Robert A. Eisenbeis explore the question of whether the various expected performance and earning benefits of mergers are in fact realized by analyzing consolidations between 1989 and 1996. 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 MacFadden Act.

Consistent with the findings of the limited number of earlier studies, Kwan and Eisenbeis’ 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 Review
Fourth Quarter 1999

Economic policy trends in Latin America since World War II

Economic disturbances in Latin America in recent years — 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.

Author Carlos Lozada demonstrates, in a recent article, that 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.

Lozada surveys the evolution of economic policy and performance in Latin America in the post–World War II period. He 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.

Economic Review
Fourth Quarter 1999

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