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Business Review

Fourth Quarter 2008

Whether policymakers should commit to a certain course of action or have the flexibility to approach each situation as it arises continues to be a central question in the design of monetary policy. A seminal article written by two prominent economists in 1977 analyzed the benefits of carrying out plans based on commitment rather than discretion. Since then, others have joined the debate. In "Commitment Versus Discretion in Monetary Policy," Mike Dotsey elaborates on the merits of commitment versus discretion in setting monetary policy. PDF (209 KB, 8 pages)

People make decisions based on information. Often, with hindsight, they could have made better choices. Economics faces a similar problem: Economic data, when first released, are often inaccurate and may subsequently be revised. In "The Mismeasured Personal Saving Rate Is Still Useful: Using Real-Time Data to Improve Forecasting," Leonard Nakamura uses the U.S. personal saving rate — a statistic that has often been initially low, then substantially revised upward — to discuss how modern economic statistical techniques can improve forecasting. PDF (290 KB, 12 pages)

National trends such as slower population growth, an aging population, and immigrants as a larger component of the population are mirrored in the Third District states (Pennsylvania, New Jersey, and Delaware). These trends are likely to persist and perhaps even accelerate well into the future. In "Growing Slowly, Getting Older: Demographic Trends in the Third District States," Tim Schiller reviews these trends and their possible interaction with health care and retirement benefit programs nationally and in the Third District states. PDF (205 KB, 8 pages)

Latest issue of Research Rap PDF (159 KB, 4 pages)

Third Quarter 2008

In the U.S., metropolitan areas contain the largest concentrations of people and jobs. Despite some drawbacks, these so-called agglomeration economies also have benefits, such as the cost savings that result from being close to suppliers and workers. Spatial concentration is even more pronounced among establishments that do basic research and development (R&D). In "The Geography of Research and Development Activity in the U.S.," Kristy Buzard and Jerry Carlino show that geographic concentration of R&D extends beyond locations such as Silicon Valley. In fact, many types of R&D establishments are highly concentrated geographically. PDF (4.30 MB, 11 pages)

Productivity growth is the engine of economic growth and is responsible for rising standards of living. But all firms do not partake equally in the nation's productivity growth. Rather, according to economist Joseph Schumpeter's theory, firms undergo a process of "creative destruction": New firms that adapt to new knowledge cause the decline and eventual demise of incumbent firms. In "Creative Destruction and Aggregate Productivity Growth," Shigeru Fujita surveys recent studies that examine the role of creative destruction in aggregate productivity growth. PDF (190 KB, 9 pages)

In recent years, the courts have determined that business methods can be patented, and the United States Patent and Trademark Office has granted some 12,000 patents of this sort. Has the availability of patents for business methods increased the rate of innovation in the U.S. financial sector? The available evidence suggests that there has been no significant change in the aggregate trend of R&D investments made by financial firms. In "Ten Years After: What Are the Effects of Business Method Patents in Financial Services?," Bob Hunt discusses how recent court decisions and proposed federal legislation may change how firms enforce their patents. In addition, he outlines some of the remaining challenges that business method patents pose for financial companies. PDF (290 KB, 14 pages)

Summary of the 2007 Philadelphia Fed Policy Forum PDF (267 KB, 7 pages)

Latest issue of Research Rap PDF (160 KB, 3 pages)

Second Quarter 2008

Looking around the world, we observe substantial differences across countries in prices for most goods. These price differences also tend to be positively correlated with income differences, so that citizens of high-income countries tend to pay more for the same goods than citizens in low-income countries. In 'Why Are Goods So Cheap in Some Countries?," George Alessandria and Joseph Kaboski summarize some of the evidence related to the big price differences across countries for a broad set of goods. They then discuss the relationship between prices and income levels and some possible explanations for that relationship. PDF (263 KB, 12 pages)

Financial markets have experienced several episodes of 'liquidity crises" over the past 20 years. One prominent example is the collapse of the Long Term Capital Management hedge fund in 1998. The recent market disruption brought about by the downturn in subprime mortgages also shares many features with liquidity crises. What is liquidity? Why does it sometimes seem that the market's supply of it is insufficient? Can anything be done about it? In 'Liquidity Crises," Ronel Elul outlines some theories of market liquidity provision, how it breaks down in times of crisis, and some possible government responses. PDF (209 KB, 10 pages)

There is tremendous disparity in the levels of individuals' incomes across countries. However, this disparity in per capita income has not always existed. In 'The Evolution of the World Income Distribution," Keith Sill investigates some facts about the evolution of per capita income across countries and reviews a simple model that broadly captures the observed evolution of the world income distribution since 1800. He then discusses what predictions can be made about future cross-country distributions of income and some policy prescriptions that follow from our understanding of the past and our predictions about the future. PDF (210 KB, 10 pages)

First Quarter 2008

A debtor's right to have his or her debts dismissed or discharged via a bankruptcy proceeding is referred to as the law's "fresh start" provision. Fresh start has been — and continues to be — a controversial feature of the U.S. bankruptcy law. Lately, the law has come under scrutiny because of the dramatic rise in personal bankruptcy filings over the past 25 years. In "The Economic Logic of a Fresh Start," Satyajit Chatterjee explains the economic logic underlying the fresh start concept. He also argues that this logic can explain why opposition to a discharge policy has waxed and waned over time. PDF (165 KB, 8 pages)

In the 19th century, the United Kingdom began a period of economic transformation known as the Industrial Revolution. It's commonly believed that this era opened as new inventions improved the technologies used to produce goods and provide services. However, we now know that such improvements affected only a relatively small part of the economy. Nonetheless, output rose during the first stage of the Industrial Revolution because of capital accumulation. One explanation for this increase in capital may be that another revolution occurred in Britain around the same time: the demographic transition. In "The Industrial Revolution and the Demographic Transition," Aubhik Khan outlines some evidence on the Industrial Revolution and the demographic transition, then presents two economic theories that link the two phenomena. PDF (168 KB, 7 pages)

The number of people in a given state or region with a college education varies across the nation. States in the Third Federal Reserve District (Pennsylvania, New Jersey, and Delaware) compare favorably with the nation on measures of college education and the three states as a whole are close to the national average. Despite its average ranking in educational attainment, the area is a premier location for colleges and universities. In "Human Capital and Higher Education: How Does Our Region Fare?" Tim Schiller evaluates the region's standing with respect to college education by reviewing data on individual and social returns to education, looking at college education as a stimulant to local economic growth, and comparing the tri-state area with the nation as a source of and a destination for college graduates. PDF (182 KB, 11 pages)

On September 20-21, 2007, the Research Department and the Payment Cards Center of the Federal Reserve Bank of Philadelphia held their fourth joint conference to present and discuss the latest research on consumer credit payments. Approximately 75 participants attended the conference, which included six research papers on topics such as liquidity constraints, the rise in bankruptcy, and the financial mistakes made by credit card holders. In "Recent Developments in Consumer Credit and Payments," Mitchell Berlin summarizes the papers presented at the conference.PDF (152 KB, 7 pages)

The Federal Reserve System's 2007 Community Development Research Conference was held in Washington, D.C., on March 29-30, 2007. This conference was the fifth in a biennial series that the Federal Reserve System established in 1999. In "Financing Community Development: Learning from the Past, Looking to the Future," Loretta Mester provides a summary of the conference. PDF (260 KB, 17 pages)

Latest issue of Research Rap PDF (90 KB, 2 pages)

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