Economic Letter

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).

In the wake of the East Asian, Russian, and Brazilian currency crises of the 1990s, a growing chorus of observers and economists (for example, Radelet and Sachs 1998, and Stiglitz 2000) has argued that an underlying cause of – or at least a contributing factor to – such disruptions is the liberalization of international capital flows, especially when combined with fixed exchange rates. A common policy prescription that follows from this argument is to impose restrictions on capital flows and other international payments with the hope of insulating economies from speculative attacks and thereby creating greater currency stability.

The recent passage of a tax cut package in the U.S. raises an interesting and important question for monetary policy: Will the tax cuts create inflation that the Fed cannot contain? According to conventional wisdom, the answer is “no.” So long as a central bank is independent and well run, it can control inflation, irrespective of the stance of fiscal policy.

This Economic Letter is adapted from several recent presentations by Robert T. Parry, President and Chief Executive Officer of the Federal Reserve Bank of San Francisco, to civic and professional organizations in California.

Stock prices have been on an extraordinary ride in the last two and a half years, soaring to phenomenal heights and then plunging at head-spinning rates. At their peaks, the NASDAQ composite and the S&P 500 were up 579% and 233%, respectively, compared to the beginning of 1995.

Controlling inflation is a key concern of central bankers around the world. But how best to control inflation differs across countries according to their individual characteristics; for example, small open economies tend to import more goods as a percentage of GDP than larger, more closed, economies, such as the United States.

On April 26, 2001, Junichiro Koizumi was elected Prime Minister of Japan by the Parliament, winning a popular mandate to reform the ruling Liberal Democratic Party (LDP) and lead the country out of a decade of economic and financial distress. Koizumi is known as a maverick—a title of honor he will richly deserve if his proposal to privatize Japan’s Postal Savings System (PSS) succeeds: It would represent the most significant and difficult structural change in Japanese finance in the postwar period.

The increase in productivity growth rates beginning in the mid-1990s has helped boost economic growth and speed the rate at which living standards rise in the United States. Between 1995 and 2000, productivity growth averaged 2.8%—almost double the rate during the preceding 22 years! This increase in productivity growth is thought by many observers to be associated with the increased importance of information technology (IT), a hypothesis often referred to as the “New Economy” view.