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John A. Tatom

Stock Prices, Inflation and Monetary Policy
Some analysts suggest that the Fed should target equity prices. This article questions this proposal on both theoretical and empirical grounds. There is a negative correlation between the fed funds rate and the price-earnings ratio, but it arises from a significant correlation of each measure with inflation. In the long run, stock prices are independent of the fed funds rate. The real fed funds rate is stationary. Cointegration evidence indicates a negative long-run relationship between stock prices and inflation, in turn implying that higher stock prices are associated with lower inflation and a lower fed funds rate, contrary to recent proposals. Taylor Rule estimates show that the Fed has implicitly acted on this well-founded relationship, exactly the opposite reaction that has been proposed recently. More important, such reactions take into account the correct indicator properties of stock prices, that they anticipate lower inflation, instead of acting as an independent cause of higher inflation.
(PDF, 158 K)

Jim Deegan

Age Cohort Analysis and the S&P 500 Dividend Yield: The Pig in the Python in a Bear Market
This paper presents the theory and analysis of a partial equilibrium econometric model of capital market supply and demand. A major feature of the model is its emphasis on the role of demographics. The most important implication of this analysis is that demographic factors are likely to result in the S&P 500 trading in the 850 to 1500 range for the next ten years, even given a strong economy. The S&P 500 dividend yield should increase about one-third by 2013 as foreign capital inflows wane, government surpluses disappear, and the baby boom generation approaches old age.1 Yields on long term bonds will likely tend to drift upward along with increases in the S&P 500 dividend yield. A secondary conclusion is that investment and consumer durable goods industries will grow much faster than the economy as a whole through the year 2011.
(PDF, 108 K)

Debra A. Valentine and Raj De

Transatlantic Similarities And Differences In Merger Policy: How the United States and the European Union Evaluate Transactions
The future welfare and prosperity of the United States and the European Union (E.U.) countries will be enhanced by approaching consistency in transatlantic merger policies. Despite one hundred jurisdictions presently having competition laws and/or merger notification laws, the costs and administrative burdens of compliance are not insurmountable if those regimes’ requirements are ultimately predictable, measurable, and reasonable. However, uncertainty of outcome and unpredictable delay impose significant costs. This paper explores the similarities and differences in policies and procedures concerning transatlantic mergers in the United States and the European Union. It concludes that while the similarities are much greater than the differences, differences in culture and legal systems still impose significant barriers.
(PDF, 93 K)

Paul Horne and Albert Merlin

Does Enronitis Threaten the Dollar and the Economy? American and French Views: Is the Glass Half-Empty or Half-Full?
An American and a French economist debate whether the dollar is vulnerable because “Enronitis,” the bear equity market, and the weak economy may make foreign financing of the U.S. external deficit problematic. The dollar appears vulnerable because foreign financing of the U.S. external deficit is being slowed by corporate mal-governance nicknamed “Enronitis,” the bear equity market, and economic weakness. Foreign investors may fear that once-respected U.S. corporate management, accountancy, legal counsel, profit quality, and regulatory institutions may be less trustworthy and that U.S. economic growth and fiscal policies are relatively less attractive. If the level of foreign investment slows below that of the current account deficit for a significant time, not only would the dollar weaken but U.S. consumption, investment, and savings patterns might have to change. Paul Horne (the American economist) argues these negative factors make the dollar more vulnerable than at any time since 1985. Albert Merlin (the French economist) responds that despite the bear market, Enronitis, and the weak economy, the U.S. lead over Europe and Japan remains so great that the dollar is not fundamentally at risk.
(PDF, 157 K)

Douglas J. Lamdin

New Estimates of the Equity Risk Premium and Why We Need Them: Sharpening Estimates of an Important Financial Variable
This article discusses the definition and importance of the equity risk premium (ERP), describes conventional approaches to measurement and their weaknesses, and presents a new and more comprehensive measure. New historical estimates of the ERP are presented, along with description of data problems and means of resolving them. Implications of the new estimates are discussed. The results suggest that ERP values are lower than they have been in the past.
(PDF, 95 K)

Richard J. Boden and Brian Headd

Race and Gender Differences in Business Ownership and Business Turnover: An Empirical Study Using a New, Unique Data Series
Empirical analyses of business turnover have heretofore been confined mostly to the manufacturing sector, largely due to the lack of suitable data for other industries. Moreover, empirical inquiries into business turnover by demographic category of ownership have been few and of questionable quality, again owing to inadequate data. This study uses a novel longitudinal Bureau of the Census employer data series to examine the survival prospects of new employer businesses (business started in 1992) for four different, mutually exclusive classifications of business ownership-–namely, White non- Hispanics; White Hispanics; Blacks; and Asian and other minorities. Regression-like proportional hazard models are specified and estimated to produce insight into the impact of certain business, industry, and geographic characteristics on businesses’ risk of dissolution over the 1992-1996 time period. The results show that there are differences across race and gender of ownership in business dissolution rates and factors related to dissolution.
(PDF, 133 K)

Focus on Statistics

Robert P. Parker

The American Time Use Survey
(PDF, 42 K)

Focus on Emerging Issues

William F. Ford

Economic Implications of an Attack on Iraq
(PDF, 94 K)

Book Reviews

Edmund Mennis

Alsi Demirguc-Kunt and Ross Levine, editors. Financial Structure and
Economic Growth: A Cross-Country Comparison of Banks, Markets, and Development(2002)

James A Hayes

David A Moss. When All Else Fails -- Government as the Ultimate Risk Manager. (2000)

(PDF, 72 K) Available to the public