Economic Letter

Ever since Mexico’s “Tequila crisis” in 1994-1995, policymakers have debated how best to reduce the cost of protracted sovereign debt restructuring when emerging markets are in financial crisis. Two dominant approaches have emerged. One promotes changes in the bond contracts international lenders offer; in particular, it encourages the use of collective action clauses (CACs) rather than unanimous action clauses (UACs).

In a speech last month to the annual meeting of the American Economic Association, Fed Chairman Alan Greenspan said, “The Federal Reserve’s experiences over the past two decades make it clear that uncertainty is not just a pervasive feature of the monetary policy landscape; it is the defining characteristic of that landscape.” And he gave some examples of how the Fed made decisions about policy in the face of such uncertainty.

The Fed’s job of stabilizing output in the short run and promoting price stability in the long run involves several steps. First, the Fed tries to estimate how the economy is doing now and how it’s likely to do in the near term—say, over the next couple of years or so.

The point of implementing policy through raising or lowering interest rates is to affect people’s and firms’ demand for goods and services. This section discusses how policy actions affect real interest rates, which in turn affect demand and ultimately output, employment, and inflation.

Monetary policy has two basic goals: to promote “maximum” sustainable output and employment and to promote “stable” prices. These goals are prescribed in a 1977 amendment to the Federal Reserve Act.

U.S. monetary policy affects all kinds of economic and financial decisions people make in this country—whether to get a loan to buy a new house or car or to start up a company, whether to expand a business by investing in a new plant or equipment, and whether to put savings in a bank, in bonds, or in the stock market, for example. Furthermore, because the U.S. is the largest economy in the world, its monetary policy also has significant economic and financial effects on other countries.

As more and more people use computers at home, at work, and at school, researchers have found that computer use has important implications for our material well-being. One finding, for example, is that people who use computers in the workplace tend to earn higher wages than those who do not, and available evidence suggests that this reflects, at least in part, the direct impact of skills that are associated with or acquired through computer use.

During the 2001 recession and the recovery, bank performance has been remarkably strong. To be sure, banks tightened their lending standards as the economy softened, lessening their exposures to problem areas such as the technology and telecommunications sectors.

Pacific Basin Notes. This series appears on an occasional basis. It is prepared under the auspices of the Center for Pacific Basin Monetary and Economic Studies within the FRBSF’s Economic Research Department.