EconSouth (Second Quarter 2003)

Research Notes and 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 “Publications” section of the Atlanta Fed’s World Wide Web site.

Are online currencies “virtual banknotes”?
The history of money is marked by innovations that have expanded the role of “inside money” — money created by the private sector. For instance, the past few years have seen the development of several types of online payment arrangements, some of which have been dubbed “online currencies.”

An article by Stephen F. Quinn and William Roberds examines the likely success or failure of online currencies by means of a historical analogy. The discussion compares the introduction of online currencies to the debut of the bearer banknote, the direct predecessor to modern currency, in London in the late 1600s.

The key innovation of the earliest banknotes, the authors argue, was to provide final payment under circumstances in which extant payment systems could not. The discussion considers how online currencies may be able to fill the same role in the context of e-commerce.

The authors note some conspicuous similarities between online currencies and physical banknotes. Both payment methods emerged to meet the need to conduct remote transactions (via the Internet or across physical distance), both face the risk of buyer-side fraud, and both have responded to the need for a new payment technology to allocate this risk. The authors stop short of calling online currencies “virtual banknotes” because it remains to be seen whether online currencies will gain sufficiently widespread acceptance to become a circulating medium of exchange.

Economic Review
Second Quarter 2003

Emotion and financial markets
Psychologists and economists hold vastly different views about human behavior. Psychologists contend that economists’ models bear little relation to actual behavior. This view is supported by a large body of psychological research that shows that emotional state can significantly affect decision making.

Economists, on the other hand, argue that psychological studies have no theoretical basis and offer little empirical evidence about people’s decision-making processes. The reigning financial economics paradigm — the efficient market hypothesis (EMH) — assumes that individuals make rational investment decisions using the rules of probability and statistics. A newer branch of financial economics called behavioral finance applies lessons from psychology to financial decision making, but most of these studies have focused on cognitive biases rather than emotion.

An article by Lucy F. Ackert, Bryan K. Church, and Richard Deaves argues that emotion has important, and possibly beneficial, influences on financial behavior. After defining the term emotion and describing how emotions can be categorized, the authors consider how emotions influence human behavior. The discussion focuses particularly on three aspects of emotion and financial decision making: emotional disposition and stock market pricing, the feeling of regret, and investors’ emotional response to information.

No new financial economics paradigm that incorporates behavioral influences and better models actual behavior has yet emerged to replace the EMH. Yet the authors believe that emotional behavior’s influence on financial decision making should be taken into account in future research.

Economic Review
Second Quarter 2003

ATLANTA FED DOLLAR INDEX
Dollar Index Chart

The dollar continued its decline in the first quarter of 2003 against the 15 major currencies tracked by the Atlanta Fed. The drop in March was the dollar’s fifth consecutive monthly decline. In January decreases were registered in all subindexes except the Americas subindex. The Americas and European subindexes fell in February. In March the dollar’s decline was concentrated in the Americas subindex while the European and Pacific subindexes rose.

Note: For more detailed, monthly updates and historical data on the dollar index, see the Atlanta Fed’s World Wide Web site at www.frbatlanta.org/econ_rd/dol_index/di_index.cfm.

Take an online tour
This spring the Atlanta Fed launched an online tour of its Visitors Center and Monetary Museum. The virtual tour “walks” Internet visitors through the central exhibits of the museum, which present the story of money’s evolution from barter to modern currency, focusing particularly on money and banking in America. Ancient Greek coins, African throwing knives, Chinese shoe money, and wampum are just a few examples of the rare and unique artifacts, coins, and currency on display.

The virtual tour of the Visitors Center continues with photos and information about the bank’s interactive and multimedia exhibits. These exhibits offer an in-depth look at the role of the Federal Reserve in the U.S. economy: how and why the Fed conducts monetary policy, the Fed’s role in bank supervision and regulation, and the ways the Fed provides payment system services.

The online exhibits also introduce visitors to the bank’s cash processing operations, where millions of dollars are counted and sorted each day. This portion of the tour offers a glimpse of the bank’s automated vault, a look at the robotic transports that do the heavy lifting of cash and coins, and a close-up view of a currency transport, or cash bus.

For security reasons, the Atlanta Fed currently offers only pre-arranged, guided tours of its facility to school and business groups. But through the online tour, the bank is able to make its Visitors Center and Monetary Museum available to a much broader audience — anyone who has access to the Internet.

Take the virtual tour of the Atlanta Fed’s Visitors Center and Monetary Museum at www.frbatlanta.org/atlantafed/visitors_center/vc_index.cfm.

Managing money matters
Personal financial education is one of the Federal Reserve’s ongoing commitments. As part of a broad initiative to improve financial literacy, the Fed rolled out a grassroots campaign to spread the word about the importance of sensible financial practices across all levels of the economy.

In a public service announcement aimed at raising awareness of the need for financial education, Federal Reserve Board Chairman Alan Greenspan stresses the benefits of sound economic and financial education. “No matter who you are, making informed decisions about what to do with your money will help build a more stable financial future for you and your family,” notes Greenspan in the message, which is airing on major television networks and radio stations.

This initiative builds upon existing efforts to foster financial education. Using the public service message, a new brochure, enhancements to the Fed’s financial education Web site as well as sponsorship of key programs and events, the Fed hopes to make people aware of the need to be knowledgeable about personal finance.

For more information on financial education, visit the Federal Reserve education Web site at www.FederalReserveEducation.org.

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