Statements to Congress.
Statement by Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System, before the Committee on Ways and Means, U.S. House of Representatives, January 25, 1990.
I am pleased to appear before this committee today to discuss foreign investment in the United States. Over the past decade, foreign investment in the United States has increased dramatically, reflecting both the increased integration of world financial markets and the financial flows that are the necessary counterpart to large U.S. current account deficits. In my testimony today, I would like to put these developments in perspective and analyze their longer-run implications.
Both direct and portfolio investment by foreigners in the United States have soared in the past decade. Since 1980 the position of foreign direct investors in the United States has increased 300 percent. Private foreign holdings of U.S. Treasury securities have increased 500 percent, and holdings of equities have increased 200 percent. Holdings of corporate and U.S. government agency bonds also have grown rapidly, as have liabilities of banks in the United States to foreigners; growth of the latter was spurred by regulatory changes in late 1981 that permitted the creation of international banking facilities.
These statistics on foreign investments in the United States tell only part of the story of increased foreign participation in U.S. financial markets. Foreign-based financial intermediaries play an increasingly prominent role in U.S. banking and securities markets. The volume of transactions by foreigners in U.S. securities markets has increased even more dramatically than foreign holdings. For example, foreign purchases and sales of U.S. Treasury securities surpassed $3 trillion on a gross basis in 1988, up from $100 billion to $200 billion earlier in the decade. Similarly, foreign purchases and sales of U.S. corporate stocks and bonds also have been running dramatically above levels earlier in the decade, although they are off from their peak levels of a couple of years ago.
U.S. investment abroad also has grown in the 1980s, but not as rapidly as foreign investment in the United States. Although the position of U.S. direct investors abroad as measured by book value increased about 50 percent between the end of 1980 and the end of 1988, the book value of foreign direct investment in the United States rose from much lower levels to about the same total--$325 billion as of the end of 1988. However, the market value of U.S. direct investments abroad, which have accumulated over many years, undoubtedly still exceeds the market value of foreign direct investments in the United States by a substantial margin. U.S. holdings of foreign stocks and bonds also have grown in the 1980s, as have the activities abroad of U.S. financial intermediaries.
This surge in cross-border financial transactions has paralleled a large advance in the magnitude of cross-border trade of goods and services. A key factor behind these trends in international trade and securities transactions is a process that I have described elsewhere as the "downsizing of economic output." The creation of economic value has shifted increasingly toward conceptual values with decidedly less reliance on physical volumes. Today, for example, major new insights have led to thin fiber optics, replacing vast tonnages of copper in communications. Financial transactions historically buttressed with reams of paper are being progressively reduced to electronic charges. Such advances not only reduce the amount of human physical effort required in making and completing financial transactions across national borders but facilitate more accuracy, speed, and ease in execution.
Underlying this process have been quantum advances in technology, spurred by economic forces. In recent years, the explosive growth in information-gathering and processing techniques has greatly extended our analytic capabilities of substituting ideas for physical volume. The purpose of production of economic value will not change. It will continue to serve human needs and values. But the form of output increasingly will be less tangible and hence more easily traded across international borders. It should not come as a surprise therefore that in recent decades the growth in world trade has far outstripped the growth in domestic demand. As a necessary consequence, imports as a share of output, on average, have risen significantly. Since irreversible conceptual gains are propelling the downsizing process, these trends almost surely will continue into the twenty-first century and beyond.
New technology--especially computer and telecommunications technology--is boosting gross financial transactions across national borders at an even faster pace than the net transactions supporting the increase in trade in goods and services. Rapidly expanding data processing capabilities and virtually instantaneous information transmission are facilitating the development of a broad spectrum of complex financial instruments that can be tailored to the hedging, funding, and investment needs of a growing array of market participants. These types of instruments were simply not feasible a decade or two ago. Some of this activity has involved an unbundling of financial risk to meet the increasingly specialized risk management requirements of market participants. Exchange rate and interest rate swaps, together with financial futures and options, have become important means by which currency and interest rate risks are shifted to those more willing to take them on. The proliferation of financial instruments, in turn, implies an increasing number of arbitrage opportunities, which tend to boost further the volume of gross financial transactions in relation to output. Moreover, these technological advances and innovations have reduced the costs of managing operations around the globe, and have facilitated direct, as well as portfolio, investment.
Portfolio considerations also are playing an important role in the globalization of securities markets. As the welfare of people in the United States and abroad becomes increasingly dependent on the performance of foreign economies, it is natural for both individual investors and institutions to raise the share of foreign securities in investment portfolios. Such diversification provides investors a means of protecting against both the depreciation of the local currency on foreign exchange markets and the domestic economic disturbances affecting asset values on local markets. As international trade continues to expand more rapidly than global output and domestic economies become even more closely linked to those abroad, the objective of diversifying portfolios of international securities will become increasingly important. Moreover, since the U.S. dollar is still the key international currency, such diversification has been, and may continue to be, disproportionately into assets denominated in the dollar.
Another factor facilitating the globalization of capital markets and the growth of foreign investments in the United States has been deregulation. Technological change and innovations that have tied international economies more closely together have increased opportunities for arbitrage around domestic regulations, controls, and taxes, undermining the effectiveness of these policies. Many governments have responded by dismantling domestic regulations designed to allocate credit and by removing controls on international capital flows, relying more heavily instead on market forces to allocate capital. An additional factor contributing to an increase in Japanese gross investment abroad may have been the rise in stock and land prices in Japan that has been leveraged to finance these increased investments.
The 1980s were marked not just by the expansion of gross capital flows into and out of the United States but also by very large net capital inflows. As I noted earlier, foreign investment in the United States has grown faster than U.S. investment abroad. During the decade of the 1980s, the U.S. net international investment position, as published by the Department of Commerce, fell sharply from a positive $141 billion at the end of 1981 to a negative $533 billion by the end of 1988. However, these numbers should not be viewed as precise measures of U.S. net international indebtedness. Because of valuation problems in the U.S. international transactions accounts, the measurement of U.S. indebtedness could be overstated by several hundred billion dollars. Much of this overstatement is the result of the inclusion of direct investment assets in the data at book rather than market value. Nonetheless, while the precise level of our net investment position is uncertain, the direction and magnitude of recent changes are clear. They are the consequence of our large current account deficits.
The growing U.S. net international indebtedness and our large current account deficits are two sides of the same coin. Over the past decade the United States bought more goods and services from the rest of the world than it sold, and it has paid for the difference, in essence, by borrowing from, and selling assets to, foreigners. The U.S. current account moved from approximate balance in the early 1980s to a deficit of more than $140 billion in 1987. More recently, the deficit has declined, but it remains substantial.
The most important underlying cause of the surge in our net borrowing from foreigners and the deterioration in our external balance has been the substantial decline in our national savings rate against the background of a relatively stable domestic investment rate. As you are well aware, the decline in our savings rate reflected both the expansion of the fiscal deficit and some downtrend in the U.S. private savings rate. The fundamental accounting identity between savings and investment, of course, requires that any shortfall of domestic savings below domestic investment be made up in the form of a net inflow of savings from abroad.
It is important to understand just how this link between lower domestic savings and increased inflows from abroad worked in practice. The increased demand for funds to finance both the gaping budget deficit and growing private investment in the face of a declining private savings rate put substantial upward pressure on U.S. interest rates. Higher interest rates made investment in the United States more attractive to foreigners, increased demand for dollars to implement such investments, and, thereby, pushed up the foreign exchange value of the dollar. The higher dollar, in turn, reduced U.S. international price competitiveness and contributed to the widening of the external deficit. The fiscal stimulus and downtrend in private savings also led to strong growth in U.S. domestic demand, which raised demand for imports and contributed further to the external deficit.
The behavior of the U.S. national savings rate during most of the 1980s contrasted with events abroad. Over much of the past decade, other major industrial countries generally were moving fiscal policies toward restraint. In Germany and Japan, especially, government deficits were being reduced, which contributed to their external surpluses and to the outflow of financial resources from those countries.
The widening of the U.S. external deficit also was facilitated by the enhanced mobility of capital; the tremendous growth in gross capital flows undoubtedly permitted the emergence of very large net flows. On balance, though, the global integration of financial markets was probably only a facilitating factor, not a motivating force, behind the growth and persistence of U.S. net capital inflows.
The progress that has been made in reducing the budget deficit from its earlier peak levels, along with declines in U.S. interest rates and the dollar since the mid-1980s, can explain much of the more recent improvement in the external deficit. Nonetheless, we still have a long way to go to establish equilibrium in our international accounts.
The persistence of inadequate domestic savings, large current account deficits, and continued deterioration of the U.S. net international investment position remain matters of serious concern. Current U.S. savings levels are inadequate to finance the domestic investment necessary to provide rising living standards for future generations on the scale enjoyed by previous generations.
The most important contribution the Congress can make to remedying this problem is to continue the progress made in recent years in reducing the federal budget deficit. As I have stated here before, the ultimate target should be a budget surplus.
Efforts to limit directly or to discourage the inflow of capital from abroad would aggravate the problem by raising real interest rates in the United States and lowering domestic investment toward levels consistent with already low domestic savings. Even limited measures affecting only certain capital flows, such as direct investment, would necessitate larger inflows through other channels that could only be attracted at higher rates of return or with a weaker dollar.
Measures to restrict or discourage foreign investment in the United States would be undesirable for other reasons as well. The United States has benefited, and will continue to benefit, from the inevitably closer integration of world markets for goods, services, and capital. As unfolding events in Eastern Europe indicate, countries that attempt to isolate their economies from the rest of the world and do not heed market signals in allocating scarce resources pay a high price in terms of low levels of economic welfare.
The globalization of capital markets offers many benefits in terms of increased competition, reduced costs of financial intermediation that benefit both savers and borrowers, more efficient allocation of capital, and the more rapid spread of innovations. However, this internationalization does pose certain risks as well: The United States has become more vulnerable to disturbances originating outside its borders. The Federal Reserve has been actively interested in efforts to limit risks in international payments and settlement systems. In cooperation with authorities in other countries, the Federal Reserve has pressed for improved capital adequacy for banks and other financial intermediaries.
These measures to protect the soundness and integrity of our financial system are necessary regardless of whether the United States is a net debtor or a creditor. It should be noted that in the 1970s, when the United States was still a substantial net creditor, unfavorable developments led to repeated episodes of downward pressure on the foreign exchange value of the dollar. Given the vast array of financial products currently available, and the wealth of U.S. residents themselves, the size of net holdings of U.S. assets by foreigners bears little relationship to the magnitude of pressures that can arise in foreign exchange markets.
Concern about foreign investment in the United States tends to focus on direct investment; highly visible purchases, such as Rockfeller Center, Columbia Pictures, and Bloomingdales, have given rise to fears about the selling of America at bargain basement prices. However, little attention is paid to the benefits of direct investment. The operations of multinational companies play an important role in facilitating the growth of world trade in goods, services, and information. Trade and direct investment are intimately related; transactions between direct investment affiliates and their U.S. or foreign parents accounted for 35 percent of U.S. merchandise exports and 40 percent of U.S. imports in 1987--the latest year for which data are available. It is essentially impossible to separate trade from investment and vice versa. Foreign investment in the United States spurs competition, provides infusions of new capital and technology into industries like steel, and speeds the spread of technological advances.
Concerns about direct investment in the United States are understandable because these investments sometimes disrupt established patterns of doing business. But, on the whole, such concerns are overblown. It is ironic that if a Japanese real estate company buys a building in the United States, we record it as a direct investment and a possible source of concern. If, however, the real estate company dismantles the building brick by brick and ships it to Japan, it is recorded as a U.S. export, a positive event.
Acquisitions of U.S. companies by foreigners present somewhat different issues. The analysis of mergers and acquisitions in general is controversial, but one conclusion with which nearly all investigators would concur is that the American stockholders of takeover targets are big gainers. The former owners of acquired U.S. companies can reinvest these funds in other enterprises that they judge to have the highest returns. As for foreigners who outbid U.S. competitors for U.S. companies, recent news indicates that overly optimistic estimates of future earnings may have been an important factor in several important cases.
Although foreign direct investment in the United States has grown very rapidly, it is still relatively small. For manufacturing as a whole, direct investment affiliates accounted for 13 percent of assets and 11 percent of sales in 1987, the latest data available. Comparison of the role of direct investment affiliates in U.S. sales, manufacturing employment, and assets with ratios for other countries indicates that direct investment in which earlier activity was so robust that the actual stocks of residential and nonresidential structures exceed desired levels--at least in some locales. Moreover, in the housing market longer-run demographic factors also are having an effect on the underlying stock demand--especially the rate of household formation. This rate has been slowing and will slow further as more and more of the low birth cohort of the 1960s and 1970s matures into adulthood. What this means, of course, is that we need to lower our sights about what constitutes "normal" levels of home-building activity during the 1990s compared with the 1980s.
How the broad decade averages of demand get distributed from year to year depends in large part on financial conditions. Interest rates on home mortgages have been around 10 percent since mid-1989, and so, from the homebuyer's perspective, financial considerations have not varied to a great extent. In recent months, however, segments of the construction industry have reported difficulty in obtaining credit in the wake of newly imposed restrictions on lending by thrift institutions. Some added caution in acquisition, development, and construction lending was called for, given the riskiness of this activity, but the difficulties now being experienced by builders should diminish considerably over time as these businesses secure other financing sources for their creditworthy projects.
Despite the reduced pace of housing construction, there continues to be an overhang of new single-family homes and condominiums for sale in a few regions of the country, and rental vacancy rates in the multifamily market remain high. But, it is important to note that much of the market overhang is concentrated in the Northeast and shows few signs of leading to a national real estate market contraction. The reason is that the spread of local problems generally is limited by the geographical segmentation of real estate markets. Because neither residential property nor occupants are perfectly mobile, the market will not necessarily arbitrage away price differences observed in different local markets. Hence, softness in housing prices in some areas is unlikely to prove highly contagious in the short run. Indeed, in most areas, and on average nationally, real estate values have continued to increase.
In the case of nonresidential structures, there also is an indication of stock overhang, with vacancy rates for office space in metropolitan areas at near-record levels. Moreover, lending institutions--stung by a long series of questionable investments--are scrutinizing loan applications more carefully than in the past so that highly risky projects are not getting funded as readily. Reflecting these developments, building permits have turned down and new construction spending has been stagnant over the past year in all major sectors except industrial building.
Business demands for new equipment also reflect, to a large degree, stock-adjustment motives. Recently available data for the fourth quarter show that a sizable deceleration in business equipment spending is under way, reflecting the general slowdown in economic activity and expected sales. Real spending on producers' durable equipment fell more than 4 percent at an annual rate in the fourth quarter. Part of the decline resulted from the work stoppage at Boeing; but even allowing for that special factor, real equipment outlays still declined somewhat.
Looking forward, recent data are offering mixed signals about future capital spending. For example, orders for nondefense capital goods received in November and December show a bounceback from the decline that had occurred in the third quarter. Other indicators of capital spending, however, give the impression of softness ahead. For example, recent declines in real cash flow of nonfinancial corporations do not bode well for investment spending in the near term. In the 1980s, growth in cash flow--measured as the sum of undistributed after-tax profits and depreciation allowances--tended to move with growth in real gross business fixed investment. Thus the recent cash-flow experience--which has signaled a deterioration in the availability of internal funds--is one factor likely to be a restraining influence on capital spending in 1990. Moreover, this signal is being reinforced by surveys of plant and equipment expenditures taken this past fall that indicate real capital spending will grow less this year than last, the deceleration being most noticeable among non-durable manufacturing and nonmanufacturing firms.
Until now, I have been sketching the negative side of the economic landscape. Let me now suggest where we can look for more favorable signs. First, demand for long-lived assets is still growing in some areas, creating opportunities for strong production growth. This is most clearly evident in the case of civilian aircraft for which the level of the orders backlog has doubled over the past two years. Second, in contrast to some past cycles, we have not seen the type of speculative buildups of materials and finished goods by businesses that can exacerbate the effects of any weakening in sales trends. I believe one reason for this is that thus far we have avoided a cyclical upswing in inflation, so that the buy-in-advance motive has been less of an influence. Third, foreign demand for many of our manufactured products is strong. Real export growth of manufactured goods, although down somewhat from the torrid pace of 1988, remains sizable. Strength runs across a wide variety of consumer and capital goods as well as industrial supplies.
Fourth, there is evidence from labor markets that the spillover effects from durable manufacturing have been limited. Although manufacturing employment has fallen nearly 195,000 jobs since last March, total private nonfarm payrolls have continued to rise, with the increase totaling about 1 1/2 million over that period. The contribution from the health services area to the overall increase has been especially noteworthy. Employment in medical care, which made up about 7 percent of total payroll employment early last year, has increased nearly 400,000 since then. Other sizable employment contributions have come from business services and state and local governments.
Favorable signs about the economy's economic health are also revealed by comparing recent movements in an index of leading economic indicators with its pattern of movements just before and during previous recessions. Recently, statistical procedures have been developed that allow such a comparison to be translated into the likelihood of a recession. These procedures have been applied by Board staff to the Commerce Department's index of leading economic indicators, which comprise several real and financial market variables. The resulting measure suggests that the probability of a recession developing in the next six months increased last spring to almost 30 percent, but according to the most recent estimates has declined to about 20 percent.
A second probability-of-recession measure is based on a leading index recently compiled by economists at the National Bureau of Economic Research, which relies less heavily on data from the manufacturing sector than does the Commerce Department index and does not include stock prices. The probability of a recession in the next six months based on the National Bureau of Economic Research (NBER) index also has declined since last spring and according to the December reading stands at about 10 percent. Both probabilities are much smaller than those occurring at the beginning of each of the four recessions since the late 1960s. For example, the probability exceeded 50 percent shortly before each of the previous recessions using the NBER index.
I wouldn't want to "bet the ranch" on such statistical measures. I think we must continue to monitor developments closely and stay alert to the possibility that, perhaps reinforced by some adverse shock not now visible, the weakness in the several sectors I have discussed might cumulate and lead to a more widespread downturn in activity. But such imbalances and dislocations as we see in the economy today probably do not suggest anything more than a temporary hesitation in the continuing expansion of the economy.
Statement by E. Gerald Corrigan, President, Federal Reserve Bank of New York, before the Subcommittee on Domestic Monetary Policy of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, February 6, 1990.
I am pleased to appear before you this morning to lend my support to House Joint Resolution 409, which calls for Federal Reserve monetary policy to be conducted with a view toward achieving price stability in five years. I want to applaud your efforts for taking the initiative on this important matter. There is no doubt in my mind that our economy would perform better, our citizens would be better off, and our international competitiveness would improve in a setting in which the goals of this resolution were achieved. There is also no doubt in my mind that the primary (but not sole) mission of the central bank should be to promote a noninflationary economic environment. Finally, I believe that monetary policy in the United States is capable of achieving that result, but how quickly it is achieved, at what cost, and how sustainable that environment proves to be will depend importantly on other aspects of economic policy both here and, increasingly, in other countries as well.
In this context, it seems to me that the resolution raises two basic issues that warrant the careful consideration of the subcommittee and the Congress as a whole. The first relates to the definition of price stability and the second relates to the costs that may be incurred in moving what we, as a nation, can do to minimize such costs.
Let me turn first to the definition question. The resolution incorporates a definition of price stability that is couched in terms of a pattern of behavior in which expectations of future price changes play no role in decisionmaking on the part of businesses, households, and governments. This definition is conceptually sound because inflation is at least as much a state of mind as it is a statistic. To be a bit more concrete, I would suggest that the spirit of the resolution would be essentially attained if we were able to return to the pattern of behavior that characterized the period from 1955 through 1965, when the average annual change in the consumer price index (CPI) was only 1.5 percent. Such an outcome would also closely approximate experience over the past few years in Japan, Germany, and the Netherlands, the industrial countries that have been among the leaders with regard to containing inflation over most of the 1980s. In short, the goal of seeking to replicate a pattern of price performance that approximates our own national experience between 1955 and 1965 and to realize that goal in the timeframe of the mid-1990s strikes me as appropriate.
The second major issue relates to the costs incurred in the transition to such an environment and the sustainability of that environment once it is achieved. There is absolutely no question that bringing the underlying inflation rate down from its current level of about 4.5 percent to about 1 or 1.5 percent will involve costs in terms of at least some shortfall of actual output relative to potential output over the transition period. Moreover, history here in the United States, as well as experience in all other countries, suggests that such costs could be large. Indeed, I am very hard pressed to recall a single case in which a significant reduction in inflation was accomplished in a major industrial country without relatively large costs. And, in cases in which the costs were more moderate and the success more lasting, the adjustment process typically has been assisted by complementary moves on the part of fiscal or other elements of economic policy. But, even under the best of circumstances, some costs will be incurred. For example, over the last decade, in both Germany and the Netherlands--the European superstars on the inflation front--the unemployment rate has been quite high by historic and international comparative standards.
Having said that there will be at least some costs associated with the transition, let me hasten to add that it is not easy to judge just how small or how great those costs might be. This is true, in part, because these costs can vary significantly, depending on the broad economic and expectational environment in which the transition is made. To illustrate some of the dimensions of this situation, I have attached to my statement a table containing a cross section of economic statistics covering the 1955-65 and the 1983-89 periods. Clearly a handful of statistics cannot begin to capture all the elements and all the dynamics of a multitrillion dollar economy, but I believe they convey many useful insights.
The first cluster of those statistics provides a quick comparison of five measures of overall economic performance over the two periods. These statistics suggest that the growth of real GNP was not, on average, wildly different in the two periods. In fact, the similarity in the average growth rates of real GNP in the two periods is very striking. However, the "core" inflation rate was much higher in the 1980s and unemployment materially lower in the earlier period even though the unemployment rate at the end of the 1980s had converged significantly toward its level in 1965.
To some extent, these differences in inflation and unemployment may reflect changed structural features in the economy. To illustrate this, the second set of statistics shows that over the interval spanned by the two time periods, we have experienced a significant increase in the following: (1) labor force participation rates; (2) the share of the population in the household formation age bracket of 25 to 44 years of age; and (3) the share of GNP that is accounted for by consumer spending on services, in which inflation rates tend to be relatively high.
However, even after allowing for these changed structural features of the economy, the "core" rate of inflation in the 1980s is both too high and is materially higher than it was in the 1955-65 interval. To shed further light on this, the third set of statistics presents data on compensation per hour, productivity, and unit labor costs for the private nonfarm economy. At least in a proximate sense, these data provide particularly good insights into the dynamics of the core inflationary process. In looking at these data, it is important to keep in mind that the aggregate compensation bill represents a sizable fraction of GNP. Therefore, as an approximation over time, it follows that the only way in which the core inflation rate can rise at a materially slower rate than the rise in unit labor costs would be when profitability is falling. That is particularly important in the current setting in which profits already are squeezed and the share of "economic" profits in GNP is near to an all-time postwar low.
With those qualifications in mind, the most striking feature of the third set of statistics is that by far the largest factor contributing to the more rapid rise in unit labor costs in the 1980s is not the rate of increase in compensation but the distinct slowing of productivity growth. The immediate situation is even worse than the average for 1983-89 since over the past four quarters productivity growth has slowed to only 1 percent and unit labor costs are rising at 4.3 percent. I might also add in this regard that recent patterns of productivity increases in the United States not only look poor relative to the 1955-65 period but also look quite poor by international standards as well. For example, overall productivity increases not only in Japan and Germany, but also in France and the United Kingdom, have outpaced those in the United States during the 1980s. While I will return to this point later, it is quite clear to me that if we want to achieve and sustain major improvements in inflation at modest costs, we are going to have to do much better on the productivity front than has been our recent history. The reason for this is quite straightforward: Namely, the higher the rate of productivity growth, the lower the rise in unit labor costs associated with any given rate of compensation increase and the smaller the amount of slack needed in labor markets to achieve that lower rise in unit labor costs.
The next set of data in the table provides some insights on financial indicators during the two periods under study. These, too, might be surprising to some, especially since the growth of M2 over the two intervals was quite similar. However, there is a striking difference between the inflation-adjusted interest rates on long-term bonds over the two periods--a difference that, at first blush, seems difficult to explain. For the 1983-89 period as a whole, the very high, real long-term interest rates are somewhat exaggerated by extraordinarily high rates earlier in the period as the economy adjusted from the very high inflation rates of the early 1980s. However, even at the end of 1989 the inflation-adjusted long-bond rate of about 4 percent was still about 1.5 percentage points above its average during the 1955-65 period. The last set helps shed some light on this difference and, in my judgment, gets right to the heart of many of our current economic difficulties.
There are truly massive differences in the behavior of the federal budget and current account relative to GNP in the two periods, as well as associated sharp differences in the private savings and investment rates relative to GNP (bottom panel of the table). These differences can have profound implications both for how the economy works and for the costs associated with the transition to price stability. For example, with the investment rate as low as it is, should we be all that surprised that productivity behavior has been so poor? In fact, the investment situation may be even worse than indicated; some analytical work by my colleagues at the Federal Reserve Bank of New York suggests that the stock of net capital per worker has been essentially flat over the past three years.
As another example that can be drawn from the lower panel of the table, should we be surprised that real interest rates are so high when our domestic credit demands far exceed our domestic savings and, as a result, we must finance much, and at times virtually all, of our budget deficit by attracting savings flows from the balance of the world in a setting in which our net external liabilities are now so large. To be sure, other factors such as volatility in economic growth patterns and high and volatile inflation rates also play a role in explaining the relatively high level of U.S. real interest rates in recent years. But, the persistent domestic savings gap and the resulting need to attract so much savings from abroad in recent years have to be recognized as significant factors in this regard.
As I mentioned earlier, I am under no illusion that these few statistics can tell the whole story about a large and complex economy such as that of the United States. Despite these limitations, I think the message from these statistics is clear: We have some major imbalances in our economy, which, among other things, have a direct bearing on the relative ease--or lack thereof--with which the transition to price stability can be managed. For example, to the extent that the savings gap is eliminated by balancing the federal budget, we would at least have much more room to finance domestically a higher rate of private investment, which, in turn, would assist productivity performance over time. Similarly, in those same circumstances, the potential for some decline in real interest rates is clear, although we must recognize that our status as a large net debtor nation may limit the scope of these gains.
To put it differently, moving toward and sustaining a noninflationary environment will be even easier if we have genuine success in implementing policies that will deal with the closely interrelated problems of low savings, low investment, and low productivity growth. But, these gains will only come slowly.
There is one other crucial variable that could make an enormous difference with regard to containing the costs of the transition to price stability, and that is the role of expectations. Many models of the economy and most elements of casual observation suggest that expectations of future inflation are importantly, if not decisively, influenced by experience with inflation in the recent-to-intermediate-term past. Econometric analysis also suggests that the deeper those expectations are entrenched, the more difficult and more costly will be the task of winding down inflation. By the same token, the less entrenched, and even more important, the more forward looking such expectations are, the lower will be the cost of moving toward and achieving price stability.
For this reason, if the American public were convinced that the national commitment to price stability was real and lasting, the transition problem would be much easier and less costly. However, it is going to take much more than rhetoric to produce that change in expectations. Even if H.J. Res. 409 were to become law with broad-based bipartisan support, I am not at all sure that the public would immediately and fully adjust their expectations in a major way so long as perceptions about our national economic imbalances in areas such as the budget deficit remain unchanged. In other words, a change in expectations about future inflation would make a very major contribution to our success in achieving a noninflationary environment, but that change will not come easily or automatically.
In closing, I think that it is essential that any discussion of the costs of moving to price stability also includes a parallel discussion of the costs of coexisting with something like the current rate of inflation and the ever-present danger that the inflation rate could move still higher. Virtually every observable facet of economic and financial history--here in the United States and around the world--tells us that high or rising rates of inflation are simply incompatible with sustained economic prosperity. Inflation inevitably undermines economic and financial discipline; it can arbitrarily redistribute income; it surely undercuts international competitiveness; and it can induce wholly unnecessary and costly elements of volatility in interest rates and exchange rates. Moreover, so long as an inflationary environment persists, these costs are ongoing and cumulative. Looked at in this light, the costs of gradually winding down inflation--especially if we are able to maintain the discipline to keep the inflation down--look far less foreboding. Nevertheless, both minimizing the transition costs and maximizing the prospects of sustaining a noninflationary environment make it all the more clear to me that those complementary efforts aimed at the savings gap, the investment rate, and productivity growth are very important indeed.
Statement by W. Lee Hoskins, President, Federal Reserve Bank of Cleveland, before the Subcommittee on Domestic Monetary Policy of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, February 6, 1990.
I am pleased to appear before this subcommittee to testify on House Joint Resolution 409. I strongly support your resolution directing the Federal Reserve System to make price stability the main goal of monetary policy. Ultimately, the price level is determined by monetary policy. While economic growth and the level of employment depend on our resources and the efficiency with which they are used, the aggregate price level is determined uniquely by the Federal Reserve. Efficient utilization of our nation's resources requires a sound and predictable monetary policy. H.J. Res. 409 wisely directs the Federal Reserve to place price stability above other economic goals because price stability is the most important contribution the Federal Reserve can make to achieve full employment and maximum sustainable growth.
THE BENEFITS OF PRICE STABILITY
Price Stability Leads to Economic Stability
An important benefit of price stability is that it would stabilize the economy. High and variable inflation has always been one of the prime causes of financial crises and economic recessions. Certainly U.S. experience since World War II reaffirms the notion that inflation is a leading cause of recessions. Every recession in our recent history has been preceded by an outburst of cost and price pressures and the associated imbalances and distortions. A monetary policy that strives for price stability, or zero inflation, as mandated by H.J. Res. 409, would help markets avoid distortions and imbalances, stabilize the business cycle, and promote the highest sustainable growth in our economy.
Price Stability Maximizes Economic Efficiency and Output
A market economy achieves maximum production and growth by allowing market prices to allocate resources. Money helps make markets work more efficiently by reducing information and transactions costs, thus allowing for better decisions and improved productivity in resource use. Stabilizing the price level would make the monetary system operate more efficiently and would result in a higher standard of living for all Americans. Money is a standard of value. Much of our wealth is held either in the form of money or in claims denominated in and payable in money. Money represents a claim on a share of society's output. Stabilizing the price level protects the value of that claim while inflation reduces it.
When we borrow, we promise to pay back the same amount with interest. When we allow unpredictable inflation, we arbitrarily take from the lender and give to the borrower. When this condition persists, we create an environment in which interest rates rise once to accommodate expected inflation and again to accommodate the increased risk involved in dealing with an uncertain inflation. When inflation rises and becomes uncertain, people are forced to develop elaborate, complicated, and expensive mechanisms to protect their wealth and income, such as new accounting systems, markets for trading financial futures and options, and cash managers who spend all their time trying to keep cash balances at zero. It would be inefficient to allow the length of a yardstick to vary over time, and it is inefficient to allow inflation to change the yardstick for economic value.
While the evidence that price stability maximizes production and employment is not as direct or as extensive as I would like, it is persuasive to me. One source of evidence can be found in the comparison of inflation and real growth across countries. Several studies find that higher inflation or higher uncertainty about inflation is associated with lower real growth.
Inflation adds risk to decisionmaking and retards long-term investments. Inflation causes people to invest scarce resources in activities that have the sole purpose of hedging against inflation. Inflation interacts with the tax structure to stifle incentives to invest.
More evidence comes from the extreme cases, the cases of hyperinflation. There we see that economic performance clearly deteriorates with high inflation. Both specialization and trade decline as small firms go bankrupt and people return to home production for a larger share of goods and services.
Even a relatively predictable and moderate rate of inflation can be quite harmful. During the seven years of our economic expansion since 1982, inflation has averaged between 3 and 4 percent. While that is low by the standards of the 1970s, the purchasing power of the dollar has been reduced about 25 percent. Interest rates continue to include a premium for expected inflation and a premium for uncertainty about inflation.
Research at the Federal Reserve Bank of Cleveland indicates that a fully anticipated inflation, with no uncertainty about future inflation, would reduce the capital stock through taxes on capital income. Using 1985 as a benchmark and using conservative assumptions, we have estimated that the interaction of an expected 4 percent inflation rate with the tax on capital income leads to a present value income loss in the American economy of $600 billion or more. This is an amount much greater than the output loss typically associated with recessions. This estimate is from a policy of a perfectly anticipated 4 percent inflation and includes only the welfare loss associated with the failure to fully index taxes on capital income. It ignores the greater damage done to market efficiency by making our monetary yardstick variable.(1)
Even beyond these costs, I believe that inflation diminishes productivity growth. Because the worldwide slowdown in productivity growth occurred simultaneously with the acceleration in inflation and the oil price shocks, the evidence is very difficult to sort out satisfactorily. But if I am correct in believing that inflation inhibits productivity growth, the present value of lost output from even a very small reduction in the trend of productivity growth would far exceed the adjustment costs associated with the transition to price stability.
THE LIMITATIONS OF MONETARY POLICY
A Fallacious Trade-Off: Inflation for Prosperity
Unfortunately, over the years we have come to believe that we can prolong expansion, or avoid recession, with more inflation. A look at recent history reminds us that there is no trade-off between inflation and recession. Although we do not understand recessions completely, we have seen that they can be caused by monetary policy actions as well as by nonmonetary factors.
In the early 1980s we had recessions caused by monetary policy mistakes. The policy mistake was the excessive monetary growth of the 1970s, which allowed accelerating inflation and rising interest rates and ultimately led to the need for disinflationary monetary policies. The disinflationary policies were necessary to get our economy back to an acceptable level of real activity. Yet even today, we are apt to blame the recessions on policies that reduced inflation instead of blaming the policies that created the inflation to begin with. While recessions will occur even under an ideal monetary policy, they will not be as frequent or as severe. With price stability, we would not have recessions induced by inflation and the subsequent need to eliminate it.
Even if we thought that eliminating the business cycle was a desirable and healthy long-term goal, I believe it is impossible to do so. There are several reasons that prevent us from using monetary policy to offset nonmonetary surprises. First, we cannot predict recessions. Second, monetary policy does not work immediately or predictably; it works with a lag, and the lag is variable and poorly understood.
The Crystal Ball Syndrome
The limitations of economic forecasting are well known. Analysis of forecast errors has shown that we often do not know that a recession has begun until it is well under way. At any point in time, the range of uncertainty around economic forecasts of business activity for one quarter in the future is wide enough that both expansion and recession are plausible outcomes.
The people who make forecasts and those who use them often get a false sense of confidence because forecast errors are not distributed evenly over the business cycle. When the economy is doing well, forecasts that prosperity will continue are usually correct. And when the economy is performing poorly, forecasts that the slump will continue are also usually correct. The problem lies in predicting the turning points. However, the turning points are the things we must forecast to prevent recessions.
Monetary Policy's Long and Variable Lags
We do not know exactly how a particular policy action will affect the economy. Macroeconomic ideas about monetary policy and its effect on real output have changed profoundly in the last decade, as we have recognized that the effect of monetary policy depends importantly on how economic agents form and alter expectations about policy.
Even if we could predict recessions and wanted to vary monetary policy to alleviate them, we still face an almost insurmountable problem--monetary policy operates with a lag. Moreover, the length of the lag varies over time, depending on conditions in the economy and on public perception of the policy process. The effect of today's monetary policy actions will probably not be felt for at least six to nine months, with the main influence perhaps two to three years in the future. The act of trying to prevent a recession may not only fail, but may also create a future recession--via an inflation--where otherwise there would not have been one.
Economic agents, businessmen, and consumers alike do not act in a vacuum. The political forces operating on a central bank make inflation always a possibility. Uncertainty about future inflation adds risk to future investments. Uncertainty about future inflation will raise real interest rates, drive investors away from long-term markets, and delay the very adjustments needed to end the recession. The more certain people are about the stability of future monetary policy, the more easily and quickly inflation can be reduced and the economy can recover.
Lessons We Should Have Learned
If we have learned anything about economic policymaking in the last twenty years, we ought to have learned to think about policy as a dynamic process. To claim that "in order to reduce inflation, we must have a recession," is a wrong-headed notion that completely ignores the ability of humans to adapt their expectations as the environment changes.
People do their best to forecast economic policies when they make decisions. If the central bank has a record of expanding the money supply in attempts to prevent recessions, people will come to anticipate the policy, setting off an acceleration of inflation and misallocation of resources that will lead to a recession.
An economy often goes into recession after an unexpected burst of inflation because people have made decisions that were based on an incorrect view of the future course of asset prices and economic activity. The central bank can help prevent the need for such adjustments by providing a stable price environment. Moreover, price stability will be the optimal setting for adjustments in business inventories and bad debts, should such adjustments be necessary.
THE IMPORTANCE OF ADOPTING HOUSE JOINT RESOLUTION 409
Sound Policies Minimize Uncertainty
Economic policies must have clear objectives, verifiable outcomes, and rules that are consistently adhered to in order to minimize uncertainty. Predictable, verifiable policies ensure that long-term planning and resource allocation decisions will be efficient. Sound policy thus requires a resolute focus on the long term and resistance to policies that, while expedient in the short run, introduce more uncertainty into an already unpredictable world. If enacted, H.J. Res. 409 would make a valuable contribution to this important objective.
In the long run, inflation is the one economic variable for which monetary policy is unambiguously responsible. The zero inflation policy called for in H.J. Res. 409 satisfies the key requirements of sound policy: It is clear, it is verifiable, and it has consistent rules. Unlike other rates of inflation, zero inflation is a policy goal that will be understood by everyone.
Responding to Multiple Goals
The Federal Reserve Reform Act of 1977 amended the Federal Reserve Act so that it now requires the Federal Reserve "...to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." However, it is the Federal Reserve's responsibility to decide how best to pursue those goals.
Because of the multiplicity of goals established by the Congress for the Federal Reserve, the Federal Reserve can choose which goal it emphasizes at any moment. Such discretion increases the likelihood that political and special interest groups could try to influence the Federal Reserve to pursue the policy that is currently important to that group.
In this respect, the Federal Reserve's situation is different from that of West Germany's central bank, which is also independent. More than one goal is specified by law for that bank, but German law states that the goal of price stability is to be given highest priority whenever another goal might conflict with maintaining price stability. This stipulation is a major reason why West Germany's price level only doubled between 1950 and 1988, while the U.S. price level quadrupled.
Since current law requires the Federal Reserve to promote maximum employment, stable prices, and moderate long-term interest rates, the Federal Reserve must choose a viable strategy to accomplish this mission. Two approaches seem plausible.
One approach would be for the central bank to try to achieve a balance among its three congressionally mandated objectives. The Federal Reserve could use its own judgment about what balance among the objectives to pursue, and could change that balance from time to time, depending on its view of how the economy works and what course is broadly acceptable to the public. In essence, this is the practice that the Federal Reserve has followed. It has strived to balance desirable economic conditions such as full employment, economic growth, and low long-term interest rates with low rates of inflation. But the major drawback to this approach is its feasibility. To strike a balance among the mandated goals requires that they be reliably linked to one another. Furthermore, monetary policy would need to be capable of influencing simultaneously all these economic dimensions in the desired directions and quantities.
While monetary policy is capable of influencing the economy in the short to intermediate run, over long periods of time monetary policy can only affect the rate of inflation. The rate of inflation, in turn, affects all dimensions of economic performance, including output, employment, and interest rates. Maximum production and employment and low interest rates can be achieved only with price stability.
By its very nature, a balancing act among complex economic goals causes substantial confusion about the Federal Reserve's intentions. Such confusion could be avoided to a large degree if the Congress or the Federal Reserve assigned priorities to the goals.
A more promising approach is to select one objective--the only one that the Federal Reserve can influence directly. Under the provisions of H.J. Res. 409, the Federal Reserve would seek to maintain a stable price level over time. Price stability is defined as an inflation rate so small that it does not systematically affect economic decisions. The definition may appear less specific than some would like, but I believe that the decisions of economic agents will be very important in monitoring success in achieving price stability. In practice, the size of the inflation premium estimated to be found in long-term interest rates, surveys of the public's inflation expectations, and other market-generated measures of inflation expectations can be very useful. If policy is credible, both the inflation component and the inflation uncertainty risk premium would be eliminated from interest rates. Temporary and unforeseen factors will cause the price level to deviate from the desired course. It would be a mistake to try to keep some inflation index on target each and every quarter, or even each and every year.
Price stability can be achieved by holding the money supply (as measured by M2) on or close to a path that is consistent with price stability over long periods. The relationship between money and the price level over long periods of time is stable and strong. However, the link between money and the economy over periods perhaps as short as a year is loose enough to afford the Federal Reserve considerable leeway in responding to problems and crises--as long as economic agents believe that the future value of money will be stable. Clearly, this resolution would not prevent the Federal Reserve from providing liquidity in times of financial crises, such as the stock market crash in 1987.
Announcing a Commitment to Price Stability
Announcement of a commitment to price stability, as embodied in H.J. Res. 409, would enhance the ability of the Congress to hold the Federal Reserve accountable for achieving the goal. Central bank accountability is appropriate in a democracy and, in fact, the Congress has the ultimate authority to change the Federal Reserve's goal.
A legislative commitment to price stability would also enhance the Federal Reserve's independence from political pressures as it pursued that goal. A commitment by the Congress to price stability would reduce the effectiveness of political pressure to deviate from that goal. Thus, a distinction can be made between a central bank that is accountable for long-run performance and a central bank that can be influenced to pursue short-run goals that might be incompatible with desirable long-term economic performance.
The commitment to price stability supported by a legislative mandate would foster the credibility of the Federal Reserve. Improving the Federal Reserve's credibility would strengthen the expectation that prices will be stable and would contribute to price and wage decisions that would make price stability easier to achieve and maintain.
ARGUMENTS AGAINST ADOPTING HOUSE JOINT RESOLUTION 409 ARE WEAK
What About the Transition Costs?
A commitment by the Congress and the Federal Reserve to achieve price stability would entail adjustment costs. Adjustment costs would arise from two sources: contractual obligations and the credibility problem, or uncertainty about whether price stability would be achieved and maintained. The contractual costs can be alleviated with an appropriate adjustment period. H.J. Res. 409 recognizes that abrupt policy changes can be disruptive and provides a phase-in period to help reduce adjustment costs.
Much of our day-to-day economic activity is conducted under contracts and commitments that extend over longer periods of time and that embody the expectations of a continuing moderate inflation rate. Most of these contracts will expire in the next few years. The disruption to business and the arbitrary wealth redistribution of an abrupt adjustment to price stability would be greatly reduced by an appropriate phase-in period. H.J. Res. 409 gives us five years to get to price stability--a period long enough to reduce substantially the transition costs.
The second set of adjustment costs emanates from the expectations of economic agents. As the Congressional Budget Office (CBO) points out in its recent Economic and Budget Outlook, if everyone believed that inflation would be reduced to zero, and planned accordingly, these costs would be very low. The Federal Reserve has stated that it intends to reduce inflation to zero or to low levels, but it has not committed to a specific timetable for eliminating inflation, or to a plan for doing so. The result is that the public in general and the markets in particular wonder just how serious we are in those intentions, or whether we will switch our priorities to some other goal, as we have in the past.
Large-Scale Econometric Model Estimates of the Transition Cost
Economists have not made much progress in estimating the transition costs of eliminating inflation. Frequently, econometric models that embody a large number of complex relationships and variables are used to estimate the adjustment costs. For manageability, econometric models are built with many simplifying assumptions, one of which is the presumption that economic agents are backward looking in the way they form and change expectations. In these models, expectations, which in effect determine adjustment costs, are formed from past experience, and are changed only slowly as the future unfolds. The presumption that expectations change only slowly inevitably generates estimates of high transition costs. The real question about a change in policy as specified by H.J. Res. 409 is how forward-looking economic agents would behave under a fully credible and fully understood policy change. Backward-looking models are relatively useless in answering this question.
In almost every case, such models are constructed to display the effects that are consistent with the model builder's theories and biases. Almost all of the large models are based on the dual notion that the only way to eliminate inflation is to raise the unemployment rate. Naturally, these models will find that eliminating inflation is very costly. These exercises have been conducted many times in the past, and they have consistently overestimated the costs of eliminating inflation and ignored the benefits of doing so. I might also observe that those who really believe the analytical structures contained in these models logically should advocate an acceleration of inflation because the models would predict great benefits from doing so.
One member of the Council of Economic Advisors, an expert on such matters, has developed large econometric models with sluggish resource adjustment induced by labor contracts. Even in these models, there is almost no short-run cost to eliminating inflation with a credible policy change. The reason is simply that, in these models, people are assumed to change their behavior in response to the policy change.
As the CBO study states, "inflation could be reduced relatively painlessly by lowering inflationary expectations." A commitment by the Congress and the Federal Reserve would enhance credibility and convince economic agents to begin to base decisions on gradual elimination of inflation over a five-year period. The transitional costs presented elsewhere in the CBO study then would be grossly overestimated.
A consistent commitment to a long-run policy goal of price stability is important. One of the worst things we could do is to eliminate inflation for a while and then return to high inflation later. H.J. Res. 409 would contribute to an important change in the policy process, focusing it toward consistent long-run goals and away from reactions to each new report of economic activity. Each policy action would become part of a policy process that is consistent with long-run price stability.
Fiscal Policy Is No Obstacle to Price Stability
Federal budget deficits should not compromise either the Federal Reserve's goal of price stability or the adoption of a specific timetable to achieve it. I do not mean to suggest or imply that current fiscal policy is ideal, appropriate, or the result of bad monetary policy. Savings are too low, at least partly because of budget deficits, and measures to address our savings shortfall must include measures to reduce the deficit. However, while we strive for better fiscal policy, we should recognize that monetary policy cannot offset whatever harm may result from fiscal policy; indeed, it can only add to those costs.
We are all familiar with the argument that large federal budget deficits cause high interest rates, forcing the Fed to ease monetary policy to keep interest rates at levels consistent with full employment. This argument ignores the fact that both the federal budget deficit and, more important, government spending, at least measured relative to the economy, have been falling for the past several years and should continue to do so.
There is, of course, legitimate concern that the progress in deficit and expenditure reduction might cease or even be reversed, for any number of reasons. How should such a reversal influence monetary policy? Even if fiscal policy choices were to put upward pressure on interest rates, and there is little consensus among economists that this is the case, it is far from clear that the Federal Reserve can do anything to alleviate the economic consequences of that problem. Ultimately, it is real interest rates that affect the consumption and production decisions of individuals and businesses and the allocation of resources over time. Real rates of return are based on the productivity of labor, capital, and other real assets in a society, and have very little, if any, connection with monetary policy.
In an inflationary environment, nominal rates of return include an inflation premium to compensate lenders for being repaid in money of reduced purchasing power. The correlation between monetary policy and nominal interest rates that dominates discussion in the financial press tells us next to nothing about the relationship between monetary policy and the real interest rates that govern the allocation of resources over time. Every movement in the federal funds rate does not produce equivalent changes in real interest rates, in the productivity of our capital stock, or in any of the other important real variables that affect economic activity. The fact that monetary policy exerts relatively direct control over the federal funds rate does not imply that real interest rates can, similarly, be controlled by monetary policy.
It is unnecessary and undesirable for sound monetary policy choices to await sound fiscal policy choices. Sound fiscal policy decisions, like sound private economic decisions, require the stable inflation environment that H.J. Res. 409 would direct the Federal Reserve to provide. The tax-related distortions and economic complexities associated even with stable, positive rates of inflation argue strongly for price stability.
If H.J. Res. 409 is enacted and the Federal Reserve commits to an explicit plan for price stability, the transition period will soon be over, and any costs that arise because of this policy change will be outweighed by the benefits. These benefits will be large and permanent, and will far outweigh the costs of getting there. H.J. Res. 409, if enacted, would be a milestone in economic policy legislation because it would shift the focus of monetary policy away from short-term fine tuning to the long term, where it belongs. It would enforce accountability for the one vital objective that the Federal Reserve can achieve. It would officially sanction those sometimes unpopular short-run policy actions that most certainly are in our nation's long-term interest. It would make clear that the Federal Reserve cannot achieve maximum output and employment without achieving price stability. I fully support House Joint Resolution 409.
Statement by Robert P. Black, President, Federal Reserve Bank of Richmond, before the Subcommittee on Domestic Monetary Policy of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, February 6, 1990.
I am delighted to be here today to testify in favor of House Joint Resolution 409, which would instruct the Federal Reserve to achieve price stability within five years. I believe that passage of the resolution by the Congress would significantly improve the overall framework in which monetary policy is conducted and increase our chances of achieving price stability and steady economic growth in the years ahead.
I have been associated with the Federal Reserve Bank of Richmond for more than thirty-five years and have attended at least some of the meetings of the Federal Open Market Committee for about thirty of those years. For seventeen years, I have been the Richmond Bank's official representative at those meetings. My work with the Committee has convinced me that price stability should be the primary long-run objective for monetary policy and that the Federal Reserve can make its greatest contribution to the economic health of our country through pursuit of that objective.
THE CASE FOR MAKING PRICE STABILITY THE OVERRIDING OBJECTIVE OF MONETARY POLICY
The case for making price stability the primary objective of monetary policy is a compelling one. First, inflation imposes pervasive costs on our society, especially if it is not anticipated. Inflation distorts the signals that prices send in our market economy, which leads to serious inefficiencies in the allocation of resources. These distortions and inefficiencies reduce the long-run rate of growth of the economy below its full potential. In a similar way, inflation disrupts the functioning of our financial markets and on balance discourages saving and investment. Moreover, its volatility increases the risk associated with particular business decisions. Finally, inflation redistributes income and wealth in arbitrary ways, which creates dissatisfaction within the social and economic groups whose incomes and wealth are adversely affected.
Although many of these costs are hard to measure, there is good reason to believe that they are significant in the aggregate. First, there is a negative correlation between inflation and long-term economic growth across different countries. Second, our citizens have repeatedly made it clear that they strongly dislike inflation. Finally, persistently high rates of inflation in peacetime in the United States have frequently been associated with relatively low rates of real economic growth.
Inflation is still a major problem today, despite the belief in some quarters that it has been conquered. It disturbs me to hear people talk as if inflation were dead when we have been experiencing an underlying inflation rate of about 4 to 4 1/2 percent. The current rate is clearly an improvement over the very high rates prevailing in the late 1970s and early 1980s, but it is not a particularly low rate when judged by longer-run historical standards. As you may know, the consumer price index rose at an average annual rate of 1.5 percent between the end of the Korean War and 1965. What is now considered by some to be moderate inflation was regarded as an intolerable condition only a few years ago. President Nixon imposed a comprehensive price and wage control program on the economy in August 1971 when the rate of inflation was even lower than the rates of recent years.
Moreover--and I believe that this is one of the critical issues addressed by the resolution--inflation may well reaccelerate in the absence of a clear signal to the public that the Congress fully supports the Federal Reserve's commitment to reduce it further. As we all know, the System is under constant pressure to "do something" with monetary policy in the short run to improve the economy's performance or deal with some other current problem. In the past such pressures have, at times, led the System to take actions that have eventually contributed to an acceleration of inflation. There is obviously a risk that history will repeat itself unless an effort is made to reduce these pressures.
I say this even though I believe that the present members of the Federal Open Market Committee as a group are especially strongly committed to fighting inflation and that the public still has vivid memories of the rampant inflation of the late 1970s and early 1980s. The composition of the Federal Open Market Committee will change, and the memories of double-digit inflation will gradually fade, but the pressures on the Federal Reserve to make its monetary policy decisions on the basis of short-run considerations without adequate regard for the long-run inflationary consequences of these decisions will surely persist in the years ahead.
One problem that the Federal Reserve faces in conducting monetary policy currently, in my view, is that our mandate is too broad. A clear and attainable objective is a necessary condition for the success of any policy strategy. Unfortunately, current law does not provide the Federal Reserve with such an objective. Instead, our current mandate instructs us to consider a wide range of economic conditions in carrying out monetary policy. Specifically, Section 2A of the Federal Reserve Act requires the System to take account of "...past and prospective developments in employment, unemployment, production, investment, real income, productivity, international trade and payments, and prices...." in setting its annual objectives for the growth of the monetary and credit aggregates.
A mandate that instructs the Federal Reserve to consider such a broad range of economic conditions may not be the strongest foundation for an effective strategy for monetary policy. Faced with the requirement to take account of all these conditions, policy choices necessarily are made in a discretionary manner that gives substantial weight to current economic and financial conditions and prospects for the near-term future. This approach to policy fosters the notion that the Fed can fine-tune the economy even though both actual experience and much of the most important recent research in macroeconomics argue persuasively to the contrary. It also encourages special interest groups to try to pressure the System to pursue the particular goals they consider important. These circumstances tend to impart an inflationary bias to monetary policy.
The resolution would help us overcome these problems by specifying clearly a single, feasible objective for monetary policy and instructing the Federal Reserve to achieve that objective. Price stability is obviously an appropriate objective for any central bank. Further, it is a feasible objective since there is no question that the System can achieve price stability over the long run by controlling the rate of growth of the monetary aggregates.
Moreover, I believe price stability is really the only feasible objective for monetary policy. Some might argue that increasing long-run economic growth or fine-tuning economic activity in the short run are alternative objectives. Most economists now agree, however, that the long-run rate of real economic growth is determined by nonmonetary factors such as population growth, increases in productivity, and the rate of saving and investment. Accordingly, most conclude that expansionary monetary policies can raise the growth rate only temporarily, if at all. There is also a growing consensus that the System could make its greatest contribution to long-run economic growth by fostering price stability so that economic decisions could be made on the basis of reliable information on both current and future prices.
There also is very little evidence that the Federal Reserve can use monetary policy to fine-tune the economy in the short run. Monetary policy affects the economy with both long and variable lags. These lags, in conjunction with the inability of economists to forecast future economic conditions with much confidence, make it very difficult for the System to determine what policy actions it should take today to produce a particular result at some point in the near-term future. Moreover, as I indicated earlier, focusing too narrowly on relatively short-run economic conditions tends to give monetary policy an inflationary bias. This is not to say that the Federal Reserve should ignore extraordinary events such as the stock market crash in October 1987. But, as I believe we demonstrated in late 1987, the System can react to such shocks to the economy without weakening its long-run commitment to price stability.
One might argue, of course, that price stability has always been one of the System's primary objectives and therefore that the resolution is not needed since it simply instructs the Federal Reserve to seek an objective it is already pursuing. I strongly disagree with this view. Despite our best intentions, prices have not yet stabilized, as evidenced by the fourfold increase in the price level since 1964. Moreover, surveys of expected inflation consistently indicate that the public does not expect the Federal Reserve to make much further progress in reducing inflation in the future, let alone achieve price stability. Confidence in the System's commitment to price stability suffers because its policy decisions are necessarily influenced by numerous other considerations. Passage of the resolution would send an unambiguous signal to the public and the financial markets that price stability is the over-riding goal of the Federal Reserve. The credibility of the System's efforts to reduce inflation would therefore rise. This increased credibility would, in turn, lower the public's expectations of future inflation because these expectations would be less influenced by the relatively high inflation rates in the recent past. Further, lower expected inflation would tend to reduce the costs of achieving price stability in terms of any temporary loss of output and employment. This reduction would occur, in part, because producers, when faced with monetary restraint, would be more inclined to reduce prices, or raise them at a slower pace, and less likely to reduce output and employment. Similarly, workers would be more inclined to restrain their wage demands. It is worth emphasizing that a truly clear and unambiguous congressional mandate to eliminate inflation would play a vital role in this process.
RESPONSES TO SOME LIKELY ARGUMENTS AGAINST THE RESOLUTION
The major arguments that will be made against the resolution are fairly predictable, and I would like to say a few words about them. One argument obviously concerns the potential transitional cost of implementing the resolution. Specifically, some will argue that trying to eliminate inflation altogether would risk a recession. It is impossible to predict the future, so we cannot dismiss this argument out of hand. In evaluating the argument, however, we should not simply extrapolate from our experience in dealing with past inflationary episodes such as the ones in 1973-74 and 1979-81. In those periods, the System acted forcefully in a crisis atmosphere to reduce the rate of inflation over a short period of time and economic activity contracted sharply. In contrast, H.J. Res. 409 would require a gradual reduction in inflation over a relatively long period of time following an extended period in which substantial progress has already been made. As I indicated earlier, there is good reason to believe that passage of the resolution would enable us to achieve such a reduction in inflation with relatively small costs to the economy. Moreover, it is very important to weigh any short-run costs of achieving price stability as provided by the resolution against the longer-run costs of not achieving it. These latter costs could be particularly great if, at some future time, the Federal Reserve were forced to follow policies resulting in a recession in order to rein in an accelerating rate of inflation.
A second possible argument against H.J. Res. 409 is that it would prevent the Federal Reserve from reacting appropriately to unanticipated "shocks" to the economy, such as the stock market crash in October 1987. As I suggested a moment ago, however, there is simply no reason why shocks that may affect the System's actions in the short run should prevent us from achieving price stability over a period as long as five years. This would be especially true if the policy had credibility in the eyes of the general public and financial market participants, as I believe it would if the resolution were enacted. In evaluating this argument, it is also important to distinguish between temporary adjustments in our policy instruments or intermediate targets and changes in our ultimate policy objectives. Adjustments in our policy instruments or intermediate targets do not require us to alter our long-run objectives. Following the stock market crash in 1987, for example, the System temporarily supplied additional reserves to meet the greater demand for liquidity induced by the crash, but this action did not change our longer-run policy goals.
IMPLEMENTATION OF THE RESOLUTION
A final question regarding H.J. Res. 409 concerns how it would be implemented. I realize that the resolution leaves this matter to the Federal Reserve. Nevertheless, in evaluating the resolution I think it is important to appreciate that from a technical standpoint the System is quite capable of achieving price stability over a five-year period and that pursuing this objective would require at most minor changes in our current procedures.
Recent research both at the Board of Governors and at the Federal Reserve Bank of Richmond has provided strong evidence that the public's total demand for balances included in the monetary aggregate, M2, has remained stable since the early 1950s, despite the substantial amount of financial innovation in recent years. This innovation has affected the behavior of the components of M2, but it has had little effect on the behavior of total M2. Consequently, the velocity of M2, which is simply current-dollar GNP divided by M2, has not exhibited any trend either upward or downward in this period. This constancy in the velocity of M2 over time implies that the System could bring the trend rate of inflation to zero within a five-year period by gradually lowering the trend rate of growth of M2 to the longer-run potential rate of growth of real GNP.
It is worth noting that implementing the resolution would not require any major change in the Federal Reserve's operating procedures, since we already set annual targets for M2 and announce them to the Congress. Under the resolution we would simply have to reduce these targets gradually and persistently until they declined to the trend rate of growth of real GNP, which is probably somewhere in the neighborhood of 2 1/2 to 3 percent a year.
One fairly straightforward change in our procedures that I would favor would be to establish multiyear targets for M2 rather than the one-year targets we currently set. Under the current procedure, growth in M2 above or below the target for a given year is effectively forgiven at the end of the year. Thus, the base for the next year's target is the actual level of M2, the price level can drift up or down over time even though the individual annual M2 targets may be consistent with a zero rate of inflation. Consequently, I believe that the likelihood of achieving true long-run price stability would be increased if we eliminated base drift by setting a multiyear path for M2.
This last point raises a corresponding point regarding how, in practice, the System would pursue the price stability objective mandated by the resolution. One approach would be to seek to hold the price level at a particular permanent level on average over the long run. A second approach would be to try to maintain the price level at its current level at any point in time irrespective of any past movements in the level. Under the first approach, the System would act to bring prices back to their permanent target level if they moved away from that level in response, for example, to an unanticipated change in M2 velocity. Under the second approach, the System would not attempt to offset the one-time effects of such shocks on the price level, but would simply try to hold the price level at its then current level. We prefer the first approach, although we recognize that it might take considerable time to reattain the permanent objective in some instances in order to avoid significant transitory disruptions to real economic activity. Under the second approach, the price level would almost certainly change permanently from time to time, and it is not unreasonable to expect that political and other pressures would tend to bias these movements upward.
In conclusion, I strongly support H.J. Res. 409 and its objective of achieving price stability in five years. The costs of the persistent inflation in this country are substantial. Without a significant change in the framework in which monetary policy decisions are made, inflation is likely to continue to be a serious problem in the years ahead, and it is entirely possible that the rate of inflation could reaccelerate. H.J. Res. 409 goes to the heart of the policy problem, which stems to a large extent from the Federal Reserve's overly broad current mandate. Price stability can, and should, be the overriding objective of monetary policy. Achieving and maintaining price stability is the best contribution monetary policy can make to the successful performance of the economy over the long run.
Statement by Robert T. Parry, President, Federal Reserve Bank of San Francisco, before the Subcommittee on Domestic Monetary Policy of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, February 6, 1990.
I am Robert Parry, President of the Federal Reserve Bank of San Francisco, a position I have held since early 1986. I am pleased to speak on House Joint Resolution 409. Over all, I strongly endorse the resolution--the Federal Reserve should gear monetary policy toward gradually eliminating inflation and maintaining price stability thereafter.
Since inflation is a monetary phenomenon, the central bank is uniquely suited to control inflation in the long run. Monetary policy also can have significant transitory effects on the production of goods and services. As a result, I believe that there is a role for countercyclical monetary policies, although the difficulty of forecasting future economic developments limits the extent to which the Federal Reserve can effectively engage in such policies. More important, monetary policy cannot have any direct control over real variables in the long run. Thus, although the Federal Reserve must consider the transitory effects of its actions on the business cycle, it should orient its efforts mainly around the single variable it can control in the long run--the rate of inflation.
Federal Reserve officials have made it clear that achieving price stability is the long-term goal of the System. H.J. Res. 409 would assist us in pursuing a credible and consistent anti-inflation policy by providing a statement from the legislature that we should focus primarily on achieving that one attainable goal within a specified period of time. Without this support, there is the danger that the pursuit of the long-term inflation goal could be unduly delayed because of pressure to respond to short-run, business-cycle considerations.(1)
Eliminating inflation would help to promote the highest possible standards of living for U.S. residents and greater prosperity around the world. The magnitude of the costs of inflation, in terms of lost output and employment, are notoriously difficult to estimate.(2) However, these costs almost surely are large.
The most worrisome of these costs stem from uncertainty about future prices, which undermines the ability of our market system to function efficiently. Price stability would reduce the risk and uncertainty that have hampered long-term planning and contracting by business and labor and that have reduced capital formation by raising the risk premia in long-term interest rates. Moreover, price stability would lead to the avoidance of the many arbitrary transfers of wealth and income that occur when the general price level changes unexpectedly and thus would reduce wasteful hedging activity designed to protect against these transfers. Eliminating inflation also would avoid confusion between absolute price changes and movements in relative prices, which can lead to inefficient economic decisions by businesses and households.(3)
The foregoing comments make it clear that I strongly support the message of H.J. Res. 409. I also have the following comments on its more specific features.
LENGTH OF THE TRANSITION PERIOD
Few would disagree that the elimination of inflation is a desirable goal for the Federal Reserve. The issues center on the costs of achieving the goal and on how large these costs are relative to the benefits. As I mentioned earlier, it is difficult to produce reliable estimates of the gains in output and employment that would accrue from price stability, although my judgment is that they most likely would be large. Unfortunately, calculations of the costs of eliminating inflation also are problematic.
An upper limit to these costs can be obtained from the so-called Phillips curve, which relates inflation to the actual unemployment rate, an estimate of the unemployment rate consistent with the economy operating at full capacity, and an estimate of expected inflation. The latter estimate generally is based on an assumption that the public's expectations adjust gradually to past observations of inflation.
The Phillips curve suggests that the short-run costs of reducing inflation are relatively high, largely because it assumes that inflation expectations are slow to adjust to the introduction of an anti-inflation regime. For example, work at the Federal Reserve Bank of San Francisco on this relationship suggests that a recession is not necessary to reduce inflation from approximately 4 1/2 percent now to zero percent in 1994. The unemployment rate would need to rise a maximum of about 1 3/4 percentage points above an estimated 5 to 5 percent "full-employment" rate.(4) At the same time, real GNP growth would need to slow from 1 to 2 percent per year below what it would otherwise have been during the five-year transition period.
Two points about these estimates are worth emphasizing. First, the costs would be transitory only. In the long run, there is no trade-off between inflation and unemployment. Thus, once inflation were eliminated, real GNP could go back to its long-run potential path, and the unemployment rate to its "full-employment" level. The benefits of price stability, however, would continue indefinitely. Second, the figures represent average historical relationships over the past twenty-five years and should be taken only as very rough guidelines for the costs of implementing the resolution if inflation expectations were to adjust only gradually.
It seems highly likely, however, that the costs would be smaller than this. Rather than adapting solely to declines in observed inflation, as assumed in the Phillips curve analysis, the public's expectations of inflation probably would adjust directly in response to the implementation of the new anti-inflation regime itself. This direct response might become quite strong over perhaps two to three years, as it became apparent that the Federal Reserve, with legislative support, indeed was acting to eliminate inflation.
Unfortunately, there appears to be little historical evidence available that would provide a reliable estimate of how strong the direct response might be. There is evidence that sweeping institutional changes put in place to limit hyper-inflations have had dramatically beneficial effects, but the relevance of these experiences to moderate inflation is remote.(5) In fact, there is evidence that expectations did not respond directly to the October 1979 change in Federal Reserve monetary policy procedures.(6) However, I seriously doubt that this experience is particularly relevant to the question at hand. The announcement of a policy change by the central bank itself will not carry as much credibility as the same announcement initiated and supported by a resolution of the legislative body. Moreover, the Federal Reserve has much more credibility as an inflation fighter today than it did in the period of double-digit inflation at the beginning of this decade.(7) Finally, as noted by others, I also believe that the attainment of price stability would be expedited if such a monetary policy were supported by other policy actions, such as a credible elimination of the federal deficit.
There is general agreement within the economics profession that the costs of reducing inflation are closely tied to the degree to which the public believes the central bank's anti-inflation policy to be credible.(8) I believe that the resolution as proposed would help in this regard, but I also recognize the possibility that achieving zero inflation in five years might involve high transitional costs. We will only know for sure as such a policy is being carried out. However, I do not favor lengthening the transition period because the resolution's credibility, and thus its impact, would be diluted if the time limit were too far in the future.
PRICE STABILITY OR INFLATION STABILITY
There appears to be some ambiguity in the wording of the resolution concerning what the Federal Reserve would be required to do once zero inflation is achieved: Should it aim at a constant price level over time (price level stability) or at zero inflation over time (inflation stability)? This distinction would become important after an unanticipated price level change. A stable price level objective would require that a period of deflation (inflation) follow a positive (negative) price level shock. As a consequence, this approach might imply a high level of volatility in short- to intermediate-run inflation.
Alternatively, a zero-inflation objective would allow the price level to be permanently affected by a price level shock, while monetary policy would be geared toward permitting no further change in prices: that is, zero future inflation. This approach, by accommodating past price level movements, would involve less short-term volatility in inflation, but would permit more long-run inflation or deflation if shocks or policy errors tended to be one-sided.
I personally prefer a policy of price level stability. First, in my view, the costs of inflation that I discussed earlier relate more closely to uncertainty about the long-run price level than to short-run inflation volatility.(9) Moreover, the credibility of a zero-inflation goal probably would be less than that of a price-level goal. Permitting the price level to drift (upward) under a zero-inflation goal inevitably would raise questions in the minds of the public as to whether the Federal Reserve was serious about controlling inflation or instead was losing control of long-run inflation through a series of "one-time" price-level adjustments.
Finally, there is nothing to be gained, and a lot to be lost, by permitting the price level to drift over the long run. Permitting this drift in response to the influences of fiscal and monetary policies obviously would defeat the purpose of the resolution. In my view the appropriate response to a supply shock, such as the oil embargo of the mid-1970s, also is to maintain price stability in the long run. Following such a shock, real GNP inevitably must fall to reflect the decline in long-run potential output. This decline in output will occur no matter where the price level eventually ends up, and thus there is nothing to gain by allowing prices to rise in the long run.
There are, however, short-run problems to consider. For example, a recession could result from attempts by the Federal Reserve to hold the price level constant immediately after a large oil price shock. This example shows why it is important for the Federal Reserve to have some flexibility in implementing the requirements of the resolution. "Draconian" effects on economic activity could be avoided by permitting some inflation for a time in the wake of the oil shock. The potential damage done by price-level uncertainty simultaneously could be avoided by monetary policies designed to produce a subsequent period of gradual deflation until the price level returned to its original level. Such an approach, once it became credible with the public, would remove the long-run uncertainty about the price level that damages the performance of the economy.
DEFINITION OF PRICE STABILITY
For the reasons just given, there may be some flexibility needed in the implementation of policies designed to achieve price stability. Thus, I support the concept of a functional definition instead of a specific numerical target. It might be argued that a numerical target would enhance the credibility of the objective, since the public then could measure Federal Reserve performance against a published standard. However, it would be difficult to define, in advance, a specific numerical target that reasonably could be adhered to over a long period of time into the future.
First, there would be a great deal of debate over which particular price index to target, and all indexes most likely will not exhibit zero rates of change when "price stability" is achieved. Second, there may be upward biases in the price indexes because they may not adequately adjust for improvements in the quality of goods and services. This difficult-to-estimate bias should be reflected in a change in the price index that is greater than zero, but it would be difficult to estimate the appropriate size of the adjustment.(10) Third, a specific numerical target would reduce Federal Reserve flexibility in responding to relative price shocks. I already have discussed how an inflexible approach in such circumstances could lead to undesirable effects on economic activity.
Of course, relying on a functional definition of price stability inevitably will lead to some debate over how the Federal Reserve's performance stacks up against its objective. This judgment will depend on the evaluation of a large number of different price indexes. Other considerations also could play a role. Does a recent supply shock justify the inflation observed in a given year? Have there been significant biases in price indexes because of mismeasurement of quality change? These issues can be discussed and evaluated in the context of the Federal Reserve's semiannual policy report to the Congress, as specified in H.J. Res. 409.
Although this process may not alleviate everyone's concerns, I would like to point out that specifying a numerical target that later had to be modified in view of unforeseen events might damage credibility more than acknowledging the need to retain some flexibility and judgment. Moreover, I am confident that credibility will develop as the evidence emerges that Federal Reserve policy actions actually are being guided by the resolution, and as the economy moves toward price stability.
To sum up, I enthusiastically support H.J. Res. 409. Eliminating inflation would be the most significant contribution that the Federal Reserve could make to the attainment of the highest possible standards of living in the United States and around the world. H.J. Res. 409 can assist the Federal Reserve in attaining this goal by stating that we should design policies to eliminate inflation within a prescribed deadline. Once this goal is achieved, I believe that monetary policy should be geared toward maintaining a stable price level, so that businesses and individuals do not need to be concerned about long-run inflation in making their economic decisions. (1)David Altig and Charles T. Carlstrom, "Expected Inflation and the Welfare Losses from Taxes on Capital Income," Federal Reserve Bank of Cleveland, February 1990. (2)For more formal discussions of the costs of inflation, see Stanley Fischer, "Towards an Understanding of the Costs of Inflation: II," in Karl Brunner and Allan H. Meltzer, eds., The Costs and Consequences of Inflation, Carnegie-Rochester Conference Series on Public Policy, vol. 15 (Amsterdam: North-Holland, 1981), pp. 5--41; and Michelle R. Garfinkel, "What Is an `Acceptable' Rate of Inflation?--A Review of the Issues," Federal Reserve Bank of St. Louis, Review, vol. 71 (July/August 1989), pp. 3--15. (3)For example, an individual firm may speed up its production schedule because it finds that it can command a higher price for its product, only to subsequently find out that the prices of its materials and other inputs also have risen (along with the aggregate price level). By mistaking inflation for a rise in the demand for its product, the firm makes an inefficient production decision. (4)For a discussion of how estimates of this type are made, see Laurence H. Meyer and Robert H. Rasche, "On the Costs and Benefits of Anti-Inflation Policies," Federal Reserve Bank of St. Louis, Review, vol. 62 (February 1980), pp. 3--14. (5)See Thomas J. Sargent, "The Ends of Four Big Inflations," in Robert E. Hall, ed., Inflation: Causes and Effects (University of Chicago Press for the National Bureau of Economic Research, 1982), pp. 41--97. (6)See Benjamin M. Friedman, "Lessons on Monetary Policy from the 1980s," Journal of Economic Perspectives, vol. 2 (Summer 1988), pp. 51--72. (7)In recent years, long-term interest rates have not risen very much when tighter monetary policies have led to higher short-term interest rates. This development suggests that financial market participants believed that recent periods of tighter monetary policy would be successful in controlling inflation. See Frederick T. Furlong, "The Yield Curve and Recessions," Federal Reserve Bank of San Francisco, Weekly Letter, March 10, 1989. (8)For a discussion of the conceptual basis for this view, see Keith Blackburn and Michael Christensen, "Monetary Policy and Policy Credibility: Theories and Evidence," Journal of Economic Literature, vol. 27 (March 1989), pp. 1--45; and Alex Cukierman, "Central Bank Behavior and Credibility: Some Recent Theoretical Developments," Federal Reserve Bank of St. Louis, Review, vol. 68 (May 1986), pp. 5--17. (9)The one exception may be the problem of confusing price level and relative price movements in making economic decisions. This cost of inflation may be exacerbated more by a price level target than by an inflation target because the former would involve greater volatility in short-run inflation. However, this cost of inflation may be among the least onerous on my list, since information is readily available to businesses and individuals on the general price level each month. (10)See Paul A. Armknecht, "Quality Adjustment in the CPI and Methods to Improve It," in Proceedings of the Business and Economic Statistics Section (American Statistical Association, August 13--16, 1984), pp. 57--63; Martin Neil Baily and Robert J. Gordon, "The Productivity Slowdown, Measurement Issues, and the Explosion of Computer Power," Brookings Papers on Economic Activity, 1988:2, pp. 347--431; and Robert J. Gordon, The Measurement of Durable Goods Prices (University of Chicago Press for the National Bureau of Economic Research, forthcoming).
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|Title Annotation:||policy statements by members of Federal Reserve System|
|Author:||Parry, Robert T.|
|Publication:||Federal Reserve Bulletin|
|Date:||Mar 1, 1990|
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