Economic Letter

In the wake of continued weakness in the Japanese economy and recent market turbulence due to the terrorist attacks in the U.S., the Bank of Japan (BOJ) recently increased the intensity of its quantitative easing program, which it had begun in March of this year. The BOJ initially switched from the usual approach to expansionary monetary policy—namely, a reduction in the target short-term interest rate—to quantitative easing because by that time it had been pursuing a target very close to zero (0.15%).

Recession fears greatly intensified after the terrorist attack of September 11, 2001. In a Blue Chip survey of business economists taken one week later, 82% answered yes to the question “Is the U.S. economy currently in a recession?”

During the latter half of the 1990s, productivity grew at almost twice the pace of the preceding ten years. Widely attributed to developments in the information technology sector, this surge in productivity was accompanied by an unemployment rate that dropped to unusually low levels.

With the slowing economy, vacancy rates in commercial real estate markets have risen sharply over the last two quarters. Nowhere is this more evident than in the Twelfth District, where vacancy rates in the key high-tech markets (San Francisco, San Jose, and Seattle) have increased four-fold since the fourth quarter of 2000.

The title of a popular 1987 book by William Greider on the Federal Reserve said it all: Secrets of the Temple conjured up an image of the high priests of monetary policy hidden away behind marble walls in Washington, D. C., making mysterious decisions that affected the lives of all Americans. While the Fed’s policymaking body, the Federal Open Market Committee (FOMC), would eventually release minutes of its meetings, and the Chairman did testify twice a year before Congress and would frequently give public speeches, that image of secrecy was one that central bankers often seemed to enjoy cultivating.

The financial crises in the 1990s resurrected the debate on whether emerging markets should stay open to foreign capital or impose capital controls. The stakes are high.

Broadly speaking, the papers at the conference were concerned with modeling the effects of policy in an economy with nominal rigidities—that is, with prices and wages that are relatively inflexible, or “sticky.” One set of papers focused on determining the characteristics that a model economy would require to plausibly reproduce the observed behavior of key macroeconomic variables such as output and inflation, especially in response to a monetary policy shock.

The Federal Reserve System is an important participant in the nation’s payments system—the infrastructure used for transmitting payments among individuals, firms and government entities. For example, according to the Rivlin report of 1998, the twelve Federal Reserve Banks processed about one-third of the estimated 45 billion checks transferred between banks in the United States in 1996.

The banking sector has posted strong growth in labor productivity for almost two decades. The shift in trend productivity growth for banking predates by more than a decade the much-touted New Economy productivity shock of the second half of the 1990s, which is most often associated with advances in information technology (IT).