EconSouth (Third 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 state of the art in predicting economic turning points
Policy and investment decisions are made with an eye toward future economic conditions, and an econometric model that can correctly forecast directional changes in the business cycle would be a boon to policymakers, the business community and the general public.
A recent article by Marco Del Negro provides some evidence on econometric models’ ability to predict these directional changes, also known as turning points.
Del Negro first discusses the definition of turning points and describes the advantages and disadvantages of different approaches to turning point forecasting. The article then assesses the performance of the Atlanta Fed Bayesian vector autoregression (BVAR) model in terms of forecasting turning points relative to a well-known alternative, the Leading Economic Indicators (LEI) Index. The author concludes that the BVAR model forecasts contain information on future recessions that appears superior to that embodied in the LEI Index, at least when simple rules of thumb are used to extract information from the index.
Del Negro also finds that models specifically designed to forecast turning points appear to be more precise than econometric models like the BVAR in indicating the exact timing of a recession. This finding suggests that it is worthwhile to supplement the BVAR with a turning point model.
Technology is not sole factor behind rising income disparity
Investment in technology increased rapidly in the United States during the past two decades, leading some to herald the birth of a “new economy,” marked by rapid productivity growth, rising incomes, low unemployment and moderate inflation. However, during the same period U.S. earnings and income inequality increased not only between groups defined by schooling and experience but also within these groups.
Many researchers point to technology as the leading explanation for the increase, but a cause-effect relationship is difficult to establish. In a recent article, authors Susan Dadres and Donna Ginther examine technology’s effect on earnings and income inequality by using interstate differences in technology.
Their analysis, using data from the 1979–94 period, shows that workers earn a wage premium in high-technology states. Low-technology states experience higher earnings inequality between groups as measured by the college wage premium — likely the result of the relative scarcity of skilled workers.
Dadres and Ginther also find that technology accounts for approximately one-third of the increase in male earnings inequality within groups. The article concludes that the effects of technological investment are smaller than expected and that technology is not the sole factor contributing to the increase in earnings inequality.
Fed’s Beige Book proves a useful economic indicator
In making monetary policy, the Federal Open Market Committee (FOMC) relies in part on the Beige Book, a report on regional economic conditions released publicly about two weeks before each FOMC meeting. The Beige Book summarizes economic conditions in each of the 12 Federal Reserve districts and provides an overview of national conditions based on the regional reports.
According to a recent article, Reserve Banks gather information for their regional summaries from sources that include telephone and written surveys, local news reports and reports on current and expected economic conditions from the Reserve Banks’ boards of directors. Some critics consider this type of anecdotal information too subjective to be of much value. But recent research applying quantitative methods to Beige Book information shows that the reports provide a useful indicator of national and regional economic activity.
Authors Donna Ginther and Madeline Zavodny evaluate the relationship between the Sixth District (Atlanta) Beige Book and regional and state per capita employment, real personal income and real gross state product growth. Their analysis also compares the Atlanta Beige Book to next-quarter estimates of economic activity and examines whether it contains regional information in addition to that contained in the national Beige Book summary.
The authors find that, despite the Beige Book’s anecdotal nature, the report provides timely, reliable information when actual data are not yet available. Thus, the Beige Book gives policymakers an early indication of the direction of the economy that helps them make informed decisions.
How well have Latin America’s monetary policy choices worked?
During the 1990s, many Latin American countries began to address their problems with recession, inflation and unemployment through economic reforms and monetary policy strategies that included exchange rate pegs, monetary aggregate targeting or inflation targeting. Inflation targeting, in particular, had begun to lower inflation rates and to stabilize or increase real economic growth in countries such as New Zealand, Canada and the United Kingdom. But has inflation targeting proved as successful for Latin American economies?
An article by Myriam Quispe-Agnoli describes monetary policy strategies implemented in the 1990s by Argentina, Panama, Ecuador, El Salvador, Mexico, Peru, Chile, Colombia and Brazil. For the most part these policies were successful: the inflation rate was lower in the ’90s than during the previous decade while average real economic growth more than doubled. But financial crises in recent years have highlighted the region’s continuing vulnerability to international capital market volatility and other external and domestic shocks.
Quispe-Agnoli believes that the Latin American experience suggests some lessons about various policies’ relative costs and benefits and the importance of the underlying economic and political environment in determining the ultimate success of alternative monetary policy regimes. She concludes that fiscal discipline, policy credibility and the role of the exchange rate are critical factors that must be addressed to ensure the sustainability of economic policy.