Economic Letter

In December 1998, the current expansion reached a milestone – it became the longest peacetime expansion in post-World War II U.S. economic history, surpassing the record previously held by the 1982-1990 expansion. In fact, if the expansion continues through January 2000, it will tie the expansion associated with the Vietnam War as the longest expansion since our records of such things start in 1854.

The U.S. financial services industry—especially banking—has undergone substantial technological change and industry restructuring during the 1990s. A variety of new techniques and services have been introduced in all areas of the financial services sector, and industry restructuring through mergers and consolidation has been a defining feature of the banking industry in recent years.

The sluggish economic conditions in Japan during most of the 1990s have taken a toll on the activities of Japanese banks’ California branches and agencies. Foreign branches and agencies are direct units of foreign banks and are not separately capitalized.

This Economic Letter summarizes the papers presented at a conference on Monetary Policy and Monetary Institutions held on March 5-6, 1999, under the joint sponsorship of the Federal Reserve Bank of San Francisco and the Stanford Institute for Economic Policy Research.

On a typical day in the foreign exchange market roughly $1.5 trillion changes hands. This means that in less than a week foreign exchange transactions have exceeded the annual value of world trade.

The currency crises of the 1990s—the European Union’s in 1992, Mexico’s in 1994, East Asia’s in 1997, and Russia’s and Brazil’s more recently—raise concerns for a number of reasons. They are not only hard on the countries experiencing them, but if they spread widely they also may disrupt the international flow of credit, hindering trade, investment, and GDP growth in the world economy.

In recent years, a number of economists have expressed concern that the stock market is overvalued. Some have compared the situation with the 1920s, warning that the market may be headed for a similar collapse.

This Letter reviews four papers on the relationship between inflation and economic activity that were presented at a recent macroeconomics workshop organized by the Federal Reserve Bank of San Francisco and the Stanford Institute of Economic Policy Research. The papers focused on the Phillips curve, named for A.W. Phillips (1958); he showed that a plot of (wage) inflation against unemployment for the U.K. produced a downward-sloping curve, indicating that higher unemployment was accompanied by lower inflation.

There is a one- to two-year delay between when the Federal Reserve changes monetary policy and the resulting effects on real output, unemployment, and inflation, so policymakers must be forward-looking and preemptive in order to effectively stabilize the economy and control inflation (Rudebusch 1995). Macroeconomic forecasts are thus a crucial element for the conduct of monetary policy, and good forecasts help ensure good policy.