Economic Letter

Well before the merger of BankAmerica Corporation and Security Pacific Corporation in 1992, California had a “rate gap”–that is, interest rates on small denomination (retail) deposits tended to be lower at California banks than at banks nationwide. According to economic theory, an increase in banking market concentration due to, say, a large bank merger, may decrease deposit interest rates.

As awareness of Japan’s importance in the world economy has increased in recent years, interest in whether the dollar is likely to retain its pre-eminent role in world markets also has grown. Some observers have speculated that the yen is likely to be used more widely in international transactions, perhaps to the point of assuming some of the U.S. dollar’s role as a key international currency.

August 20, 1996, President Clinton signed a bill passed by Congress that raises the federal hourly minimum wage from $4.25 to $5.15; this is scheduled to occur through increases of 50 in October 1996 and 40 in September 1997. Leading up to this increase has been a heated debate within the economics profession over the past several years regarding the employment and other economic effects of the minimum wage.

Monetary policy actions are widely considered to be better implemented and more effective when they are credible–that is, when the goals and strategies of the central bank have been clearly and believably communicated to the public. Thus, credibility is highly valued by central banks. Indeed, among some central banks, credibility is almost a mantra of policy.

Quality of life increasingly is identified as important to the economic well-being of a state or area. Quality of life is a catchall concept, covering a myriad of local amenities, such as air quality, traffic congestion, crime, tax burdens, public school quality, and the quality of other government services.

Two recent news stories offered examples of dramatically contrasting relationships between a government and the authority charged with monetary policy. In Russia, President Boris Yeltsin pressured the Central Bank of Russia into providing $1 billion for new government spending, even though officials of the central bank protested that Yeltsin’s demands were a threat to the bank’s independence.

One of the major barriers to resolving the Latin American debt crisis of the 1980s was the “collective action” difficulties among creditors–that is, the difficulty of getting the lenders to take actions that would benefit them as members of the group but that might not be in their individual interest. In the case of sovereign lending, for example, where enforceable legal mechanisms are absent, collective action difficulties arise for two reasons.

In September of 1995 the Bank of Japan (BOJ) reduced its discount rate to 0.5 percent, a post-war low not only for Japan, but for the entire OECD. The usual interpretation of interest rate movements would imply that the BOJ has been engaged in an aggressively expansionary monetary policy, as lower interest rates tend to stimulate demand.

A rising tide raises all ships. That is good news for community banks in California, where the economic tide continues to flow in after the pronounced ebb of the past recession.