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Business Review

Fourth Quarter 2004

Should monetary policymakers in the U.S. adopt explicit inflation targeting? After all, the Fed has steadily reduced inflation over the past 25 years without resorting to an explicit inflation target. But having achieved price stability, we must now deal with the matter of maintaining it. In "Monetary Policy and Inflation Targeting in the United States," President Anthony Santomero returns to the topic of inflation targeting, which he first discussed in the spring of 2003. This time, he expands that discussion by proposing a specific inflation targeting program.

Next, economist Mitchell Berlin examines disclosure requirements for banks. Can market participants play a significant role in ensuring that banks limit their risk-taking? Although regulators find this idea increasingly attractive, economists generally have two schools of thought: Such monitoring could substitute for regulatory discipline to a significant extent or the roles of regulators and market participants could be complementary. But to evaluate banks' risk-taking, investors would want good information about a bank's activities and balance sheet. In light of this, would more disclosure by banks be a good thing? While there are no definitive answers to this question, in "True Confessions: Should Banks Be Required to Disclose More?" Berlin reviews some recent economic literature that can offer useful insights to policymakers.

Our next article raises yet another question: What accounts for the sharp increase in the number of hours worked by married women? Although the number of hours worked per person in the U.S. has changed very little over the past 60 years, the labor force has undergone some pronounced shifts over that same period. One prominent change is this sharp increase. In "Why Are Married Women Working More? Some Macroeconomic Explanations," Aubhik Khan discusses how the composition of the labor force has changed since 1945, how women's work in the marketplace has increased so dramatically, and how macroeconomists explain these changes.

Finally, we look at an issue that has received a lot of attention in recent years: sprawl. What lies behind concerns about the way metropolitan areas have been spreading out over the past several decades? This spreading out, or sprawl, is reflected in lower density and centralization in metropolitan areas. In "Sprawl: What's in a Name?" Tim Schiller highlights some recent trends toward lower population and employment density in metro areas and discusses some of the underlying forces propelling these trends.

Third Quarter 2004

U.S. consumers are catching up with their counterparts in the rest of the world in their use of electronic payment methods, but paper checks remain a popular way to make payments here. How is the Federal Reserve supporting an orderly evolution of the payment system as consumers shift away from paper? One way is the Fed's advocacy of legislation such as Check 21. In "Banking in the 21st Century," President Anthony Santomero describes some of the implications of this new legislation for both the Federal Reserve System and depository institutions.

Our next article, "What Test Scores Can and Cannot Tell Us about the Quality of Our Schools," by Ted Crone, recognizes that how to best judge the quality of our schools is a thorny issue. The No Child Left Behind Act, which was signed into law in January 2002, mandates standardized testing in math and reading for students in grades three through eight. The test scores will then be used both to gauge the students' level of proficiency in these subjects and to evaluate the schools' performance. But emphasizing test scores as a measurement of the quality of schools raises several questions. Crone looks at some of these questions and warns us to be cautious in how we use test scores.

Next we turn to a discussion of software patents. Over the past two decades, the scope of technologies that can be patented has been expanded to include many items previously thought unsuitable for patenting, for example, computer software. Today, the U.S. Patent and Trademark Office grants 20,000 or more software patents a year. Conventional wisdom holds that extending patent protection to computer programs will stimulate research and development and, thus, increase the rate of innovation. In "The Software Patent Experiment," Bob Hunt and Jim Bessen investigate whether this has, in fact, happened. They describe the spectacular growth in software patenting, who obtains patents, and the relationship between a sharp focus on software patenting and firms' investment in R&D.

Finally, Leonard Nakamura suggests that a new era of heightened creative destruction that began in the late 1970s also ushered in a new era of heightened competition. Such intensified competition has made leaders of large industrial enterprises vulnerable to a level of uncertainty previously reserved for managers of small and new firms. Consequently, managerial careers now less often have benign endings. The story was much different during the previous 100 years. From the 1870s to the 1970s, however, the large industrial corporation was highly stable partly because of investments in a corporate structure that centered on a sales and administrative staff. In "CEOs, Clerks, Computers, and the Rise of Competition in the Late 20th Century," Nakamura argues that the electronics revolution of the 1970s sharply reduced the value of this corporate asset and made corporations more susceptible to competition.

Second Quarter 2004

Whether one looks at consumers or businesses, expectations — people's beliefs — are driving forces of every economy. The economic outcomes one can expect from public policy are affected by the way beliefs are formed and how they vary over time. In "Great Expectations: The Role of Beliefs in Economics and Monetary Policy," President Anthony Santomero presents his perspective on the important role beliefs play in economic decisions and policymaking. He also offers some observations on the important role the policymaker's credibility plays in determining the outcome of any monetary policy action.

The next article, "Should Cities Be Ready for Some Football? Assessing the Social Benefits of Hosting an NFL Team," tackles the question: Are large public expenditures on new stadiums a good investment for cities? Although public subsidies for professional sports teams are controversial, the answer to our question may well be yes. In this article, Jerry Carlino and visiting scholar Ed Coulson from Penn State report the results of their 2003 study: When quality-of-life benefits are included in the calculation, building new stadiums and hosting an NFL franchise may indeed be a good deal for cities and their residents.

We stay local with our next article, which offers a snapshot of the history of the Philadelphia Stock Exchange (PHLX), the nation's oldest. How has the PHLX managed to survive alongside much larger and more liquid securities markets? In "The Evolution of the Philadelphia Stock Exchange," one of our visiting scholars, Swarthmore College professor John Caskey, explains some of the factors that account for the PHLX's long life. Although Caskey focuses on the evolution of the PHLX, he also profiles some of the seismic shifts in U.S. securities markets in recent decades and illuminates the role of the largely overlooked regional stock exchanges.

The last article highlights an important macro- economic issue: "Deficit-Financed Tax Cuts and Interest Rates." Why do proposals to lower taxes often meet with opposition in Congress. One argument is that lowering taxes without an equivalent fall in government spending may lead to future budget deficits, which will translate into higher long-term interest rates and a lower level of income. Sylvain Leduc discusses the theoretical arguments under which budget deficits lead to higher interest rates. He also surveys empirical studies that used data on expected budget deficits to document the possibility that increases in future budget deficits are associated with higher real long-term interest rates.

First Quarter 2004

The recent business cycle has been driven by two forces: a series of extraordinary events and some longer term secular trends. In "Monetary Policy: Stability Through Change," President Anthony Santomero discusses how these extraordinary events, including the bursting of the tech bubble, the aftermath of 9/11, the wars in Afghanistan and Iraq, and the corporate accounting and governance scandals, have affected the U.S. economy. He then turns his focus to the longer term trends, including rapidly changing technology and the increasingly integrated global marketplace, which he expects to be the key drivers of our economy in the future.

Our next article delves further into the topic of monetary policy. Until recently, when assessing the economic effects of monetary policy, economists have emphasized the role of unanticipated changes in policy. But are these policy shocks likely to be the most important influence on the economy? Mike Dotsey believes not. It seems more likely that the Fed's systematic behavior plays a bigger part in what happens in the U.S. economy. In "How the Fed Affects the Economy: A Look at Systematic Monetary Policy," Dotsey explains the ways in which systematic policy influences economic activity.

In the third article this quarter, Yaron Leitner discusses liquidity, a desirable feature of a well-functioning market. In "Liquidity and Exchanges, or Contracting with the Producers," Leitner explains how exchanges can provide liquidity. He also discusses his recent research, which explains some contractual problems that may arise in very liquid markets, as well as the potential role of an exchange in overcoming these problems.

Finally, we look at the broader picture to determine why the U.S. economy has had fewer and shorter recessions over the past 20 years. Over time, swings in the growth of many macroeconomic variables, such as gross domestic product, have become smaller. Why this decline in economic volatility? In "What Accounts for the Postwar Decline in Economic Volatility?" Keith Sill highlights some of the facts about the increased stability of the U.S. economy and assesses the contribution of policy and other factors to the decline in volatility.

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