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Business Review

Fourth Quarter 2001

The first two articles in this quarter's Business Review deal with the topic of financial modernization. In "The Causes and Effects of Financial Modernization," President Santomero outlines financial legislation since the 1930s and discusses the impact that the Gramm-Leach-Bliley (GLB) Act has had and will continue to have on the financial services industry. The second piece, "Privacy Matters: Payments Cards Center Workshop on the Right to Privacy and the Financial Services Industry," summarizes the main points of a workshop sponsored by the Bank's Payment Cards Center. The workshop, led by University of Pennsylvania law professor Anita L. Allen, covered the privacy provisions of GLB.

The third article in this issue looks at how forecasts respond to changes in monetary policy. When monetary policy shifts, forecasters change their predictions about growth and inflation. But does the economy change to the same extent that forecasts do? In "How Do Forecasts Respond to Changes in Monetary Policy?" Laurence Ball and Dean Croushore look at forecasts from the Survey of Professional Forecasters to determine if forecasts and the economy respond in tandem or if there are significant differences.

The last two articles switch our attention to the “new economy.” In
"'Knowledge Spillovers: Cities' Role in the New Economy,"
Jerry Carlino points out that cities, no longer centers of manufacturing, now serve as centers of creativity and innovation. The resulting “knowledge spillovers” are important components of today's economic growth.

The last article delves into the new economy's increased investment in intangibles and the concomitant rise in capital gains. These larger capital gains have helped fuel the astonishing increase in households’ net worth over the past two decades. And net worth grew in spite of a low savings rate. In "Investing in Intangibles: Is a Trillion Dollars Missing from GDP?" Leonard Nakamura examines this paradox of low savings accompanied by increased wealth.


The first three articles in the third-quarter Business Review share a common theme: consumer credit transactions. President Santomero's message this quarter reprises his speech to the economists who gathered for the Philadelphia Fed's Conference on Consumer Transactions and Credit, which was held at the Bank earlier this year. In "Perspectives on Research Issues in Consumer Behavior," he offers some explanations as to why economists have, until recently, generally ignored the broader issues involved in consumer credit. The second article offers "A Summary of the Conference on Consumer Transactions and Credit." Topics of papers presented at the conference include consumer response to changes in credit supply, switching costs, and bank consolidation and consumer loan rates. The third piece, "Changes in the Use of Electronic Means of Payment," updates an article first published in the March/April 2000 Business Review. Loretta Mester, author of the original article, has recently produced an update (2006).

The other three articles in this issue cover a wide range of topics. The first of these three tackles the question: How should a bank (or any firm) decide how much of the chain of production and distribution it should carry out on its own? In "'We Control the Vertical': Three Theories of the Firm," Mitchell Berlin discusses three broad approaches to vertical integration. He then uses each approach, in turn, to examine the pros and cons of a firm's decision to integrate forward.

Next, Keith Sill takes a look at "The Gains from International Risk-Sharing." He examines the data on just how much risk-sharing currently takes place in both developed and developing countries. He also considers the question of whether significant unexploited gains from risk-sharing exist across borders.

Finally, public policies from zoning to income-tax deductions for mortgage interest affect the price of residential land. Richard Voith's estimates in "How Responsive Is the Demand for Residential Land to Changes in Its Price?" help measure the effect of public policies on land consumption in the United States.


What happens when an academic researcher becomes a policymaker? Recently, President Anthony Santomero shared some thoughts on this topic with members for the Downtown Economists Club in New York City. In particular, he talked about several conundrums he's encountered since moving from the academy to the central bank. We've reprinted his speech "The Complexities of Monetary Policy" in this issue of the Business Review so that we can share President Santomero's insights with our readers as well. And President Santomero isn't the only contributor visiting the topic of monetary policy in this issue.

In "Why Does Countercyclical Monetary Policy Matter?" Satyajit Chatterjee outlines the mainstream view of the benefits of countercyclical monetary policy and the challenge posed to it by recent microfoundations-oriented research. He also considers how this challenge may alter our views about the benefits of countercyclical monetary policy.

The next topic under consideration in this Business Review concerns firms' expenditures on equipment and structures, also known as business fixed investment. Such expenditures are commonly held to be an important determinant of long-term economic growth. But short-term changes in such expenditures also have implications for the business cycle. In "Understanding Changes in Aggregate Business Fixed Investment," Aubhik Khan explains some of the things economists have learned about how investment changes over the business cycle.

We haven't forgotten the domestic — as in household — economic scene, either. But official measures of economic activity do just that — ignore household decisions about allocating resources between production for pay in the marketplace and production at home. Most economic models ignore home production as well. Nonetheless, such household decisions do influence official economic measures. In "The Interplay Between Home Production and Business Activity," Jeff Wrase explores this influence and discusses the potential gains from incorporating household decisions about allocating resources between the home and the marketplace into models used to forecast and account for changes in economic conditions.


In his first column, President Santomero talks about "New Beginnings" by introducing himself to the Business Review audience and by listing some of the challenges facing the Philadelphia metropolitan area and some options for dealing with them.

On an international level, countries often engage in vigorous debate about which type of exchange-rate system to follow — fixed or flexible? A question central to that debate is: Does one particular exchange-rate system promote a more stable economic environment? Sylvain Leduc considers this question in "Who Cares About Volatility? A Tale of Two Exchange-Rate Systems."

In the United States, significant changes have taken place in the structure of electricity markets. Twenty-three states, including Pennsylvania, New Jersey, and Delaware, have changed or will be changing their laws to allow consumers to switch electricity suppliers. In some states, millions of consumers have already switched. What brought about the deregulation of an industry previously considered a "natural monopoly"? In "Rewiring the System: The Changing Structure of the Electric Power Industry," Tim Schiller describes the changes in law and the developments in economic theory that have led to the restructuring of energy markets.

In other parts of the economy, firms are increasingly turning to patents to protect not just physical inventions but more abstract ones such as computer programs or ways of doing business. Just two decades ago such patents would have been impossible to obtain, let alone enforce. In "You Can Patent That? Are Patents on Computer Programs and Business Methods Good for the New Economy?" Bob Hunt describes the changes in patent law that have given rise to this phenomenon.

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