EconSouth (Fourth Quarter 2003)

Research Notes and News highlights recently published research as well as other news from the Federal Reserve Bank of Atlanta.

Patents on Wall Street are uninvited guests
For at least the past 25 years, financial services industries have been creating innovative products and services without the help of patents. The 1998 State Street Bank case changed all this, making patents freely available in these industries. Will patents help or hurt financial services innovation in the long run? An article by Robert P. Merges sheds some light on this issue.

Before the advent of patents, several “appropriability” mechanisms protected financial services innovation: “first mover” advantages, complementary or “cospecific” assets, and trade secrecy. Evidence suggests that, in the immediate post-patent era, financial firms’ first order of business was to protect these traditional appropriability practices. This attitude explains the early push to secure a “prior use rights” defense to protect established firms against patent claims by upstart outsiders. From a historical perspective, this reaction to the “patent threat” tracks that of other industries: in particular, 19th-century railroads and the software industry of the 1980s.

In the end, Merges argues, patents are not likely to cause any real and lasting problems. Although patents may increase the costs of interchanging innovative ideas, they may bring some unintended benefits as well — by fostering spin-offs and facilitating entry by start-ups, for example. Like random shocks in the natural world, the new patent regime provides a shakeup that could bring some good but unpredictable consequences.

Economic Review
Fourth Quarter 2003

International business method patent law
Before the landmark State Street case in 1998, the courts and the U.S. Patent and Trademark Office (USPTO) had often denied patents to inventions that were no more than methods of doing business. But State Street swept away three decades of complex, inconsistent case law, firmly establishing the patentability of business methods and computer software.

An article by John M. Conley reviews the current state of U.S. and international patent law with respect to business methods. After outlining the basic U.S. and international requirements for patentability, the author describes the evolution and current state of both American law and international law, particularly in the European Union, various European countries and Japan.

After reviewing a number of case histories, Conley argues that the differences between U.S. and international law that appear so striking in theory are probably less profound in practice. While the American patent system has seemingly become more lenient in granting business method patents, the USPTO has taken steps to scrutinize such patents more rigorously on certain grounds. In contrast, Europe and Japan, which have apparently more rigorous business method patent standards than the United States does, may in practice be somewhat more liberal than their policies would indicate.

Eventually, Conley predicts, U.S. and international business method patent standards will converge, with the United States being more permissive in theory but more demanding in practice and Europe and Japan displaying the opposite tendency.

Economic Review
Fourth Quarter 2003

ATLANTA FED DOLLAR INDEX
Dollar Index Chart

In July 2003 the dollar gained ground against the 15 major currencies tracked by the Atlanta Fed. This gain represented the dollar’s first monthly increase since October 2002. The dollar rose again in August, increasing on the Americas and European subindexes and posting no change on the Pacific and Pacific-excluding-Japan subindexes. In September the dollar fell back, registering declines in all subindexes.

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 your model bowling
During the past two decades, dynamic stochastic general equilibrium (DSGE) models have taken center stage in academic macroeconomics. Nonetheless, these models are still rarely used in policy-making and forecasting.

An article by Marco Del Negro and Frank Schorfheide describes the workings of the DSGE-VAR, a procedure that combines DSGE models and vector autoregressions (VARs). The procedure uses DSGE models as priors to restrict the VAR’s parameters. Since the VAR’s parameters are imprecisely estimated unless a very long time series of data is available, using DSGE priors can improve the VAR’s forecasting performance. Moreover, the Lucas critique implies that DSGE priors can be particularly useful when forecasting the impact of policy changes.

Del Negro and Schorfheide assess DSGE-VAR’s forecasting performance in terms of three variables that most interest monetary policymakers: real output growth, inflation, and the federal funds rate. Their results show that the DSGE-VAR forecast is superior to that of unrestricted VARs and comparable to that of VARs with Minnesota priors.

The article also discusses how DSGE-VAR can be used to identify the fundamental shocks that hit the economy and to forecast the impact of changes in the policy rule followed by the monetary authorities.

Perhaps in the not-too-distant future, practitioners and policymakers will be able to use a full-fledged DSGE model for both forecasting and policy assessment. In the meantime, the authors argue, DSGE-VAR may provide a viable alternative to the models currently used.

Economic Review
Fourth Quarter 2003

Summit charts course to better economic education
Earning money is difficult, and spending money is easy. But spending and investing money wisely are not easy for those unfamiliar with economic and financial concepts. Unfortunately, many of today’s high school graduates lack the knowledge required to make wise financial decisions.

To focus attention on this issue, the Atlanta Fed and the Georgia Council on Economic Education hosted the Georgia Summit on Economic Education in September. Attending the summit were business, civic and education leaders, including State School Superintendent Kathy Cox, University System of Georgia Chancellor Thomas Meredith and Federal Reserve Governor Edward Gramlich. The summit focused on three issues: economic education curriculum, teacher training and program assessment.

William Walstad, a national economic education expert from the University of Nebraska–Lincoln, set the tone by stating “the voices for economic education are far too soft. We need more people saying that economics is just as important as math, science or language arts.”

In the area of curriculum, Cox assured participants that the revisions now under way to Georgia’s Quality Core Curriculum include a strong infusion of economics education from kindergarten through 12th grade.

Meredith recognized that a partnership between Georgia’s university system and the Department of Education is critical to defining the qualifications for economics teachers. Cox also stressed the importance of identifying ways for teachers to get a better grounding in economics, either through workshops or college-level courses, at no expense to the teacher.

In the area of program assessment, Jeanne Hogarth, an economist at the Federal Reserve Board, said that research shows many disconnects between what people have learned in regard to finance and actual changes in behavior. Behavioral change, she said, should be the ultimate goal of financial education programs. A report is being prepared to help put some of the ideas from the conference into action.

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