EconSouth (First Quarter 2001)

Research Notes & News highlights recently published research as well as other news from the Federal Reserve Bank of Atlanta. For complete text of summarized articles and publications, see the links below.

The economics of Americans’ love affair with checks

Checks continue to dominate the market for noncash retail payments in the United States. Each year, U.S. residents write between 65 billion and 70 billion checks, an average of one check per business day per resident. This U.S. dependence on checks is unique among developed countries. It is also extremely costly: by switching from checks to other forms of payment, Americans could save between $60 billion and $100 billion dollars per year.

In a recent article, James McAndrews and William Roberds explore the question of why checks continue to see such wide use within the United States. Economists’ explanations have focused on check “float,” which is the interest earned by a check writer between the time a check is received as payment and the time the payment is settled. McAndrews and Roberds explain how check float arises within the U.S. payment system and how float can discourage the adoption of other types of payment. The authors also consider several proposals for reforming the U.S. payment system. While these proposals hold some promise, they are also subject to criticisms.

The authors conclude that over the near future policymakers will need to weigh the drawbacks of these proposals against the benefits of a faster transition to a more efficient payment system.

Economic Review
Fourth Quarter 2000

Is North America ready for a monetary union?

The idea of a single currency for the United States, Canada and Mexico usually refers to one of two approaches: the unilateral adoption of the U.S. dollar by Canada and Mexico — dollarization — or monetary union, the development of a joint currency that could be managed by all three countries.

In a recent article, Michael Chriszt examines the idea of monetary union in North America. He discusses specific criteria for a single currency for North America as well as the pros and cons of a monetary union and dollarization in the North American context. The article presents evidence suggesting that Canada and perhaps even Mexico are candidates for forming a single-currency area with the United States at some stage.

Chriszt concludes that monetary union appears to hold several advantages over dollarization from the perspective of both the United States and its NAFTA partners. However, an important question remains to be answered: Are the NAFTA countries currently ready for a monetary union? The answer involves both economic and political variables as well as some practical implications. It seems unlikely that the United States, Canada and Mexico will pursue this goal in the near future.

Economic Review
Fourth Quarter 2000

Dollar Index Chart

From October through December 2000, the dollar registered an overall increase versus the 15 major currencies tracked by the Atlanta Fed despite a downturn in December, its first monthly decline in six months. During October and November, the dollar rose against currencies in all the subindexes. Weakness against currencies in the European and Americas subindexes accounted for the dollar’s downturn in December.

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

Does monetary policy affect racial unemployment rates?

When the Federal Open Market Committee began raising interest rates in June 1999 to forestall inflationary pressures, concern mounted that monetary policy moves might slow the pace of economic growth, undoing the employment gains minorities and other disadvantaged groups made during the 1990s. This concern focuses on the idea that these groups will be disproportionately affected by an economic slowdown.

Madeline Zavodny and Tao Zha examine this issue in a recent article that assesses whether monetary policy shifts have a different effect on African Americans than on the total labor force. Their analysis focuses on how exogenous, or unpredictable, components of monetary policy during the 1980s and 1990s affected the black unemployment rate relative to the overall rate. The model the authors used indicates that the black unemployment rate tends to be more sensitive to cyclical fluctuations and slightly more responsive than the overall rate to exogenous changes in the federal funds rate and other macroeconomic variables.

The study concludes that monetary policy moves during the 1980s and 1990s did not have significantly more adverse effects on African Americans than on the total population and may even have affected blacks positively overall.

Economic Review
Fourth Quarter 2000

Sizing up the competition in banking markets

In analyzing the competitive impact of bank consolidations, banking agencies and the U.S. Department of Justice tend to rely on the assumption that the market for bank services is local and is for services offered only by banks. This approach allows analysts to merge all products and services into a “cluster of services” for purposes of analyzing competition. But increases in the types and locations of competitors have cast doubt on whether a cluster of services exists.

A recent article examines how these changes have led the Justice Department to do separate analyses of small business lending when analyzing consolidations. Authors Lynn W. Woosley, B. Frank King and Michael S. Padhi compare measures of market concentration across deposit and small business loan products to answer two questions crucial for antitrust analysis: Are small business lending markets local, and are deposits an adequate proxy for small business loans?

The authors use new Community Reinvestment Act data for their analysis. This information provides a broader picture of out-of-market institutions’ participation in local small business lending markets and thus gives an indication of the degree of competitive pressure applied by these institutions. The findings show that the convenience of local offices can be overcome at least partly by distant lenders who offer, for example, better rates, greater access to credit or more flexible products or hours of service.

The authors conclude that, while additional research is needed, using multiple measures of market concentration is likely to give a truer picture of competition, especially in marginal cases.

Economic Review
Fourth Quarter 2000

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