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Business Review

Fourth Quarter 2006

The popular press would lead us to believe that during the stock market boom of the 1990s just about everyone was buying and selling bonds every day. In fact, evidence shows that most households make only infrequent changes to their investment portfolios. In "The Role of Market Segmented Markets in Monetary Policy," Aubhik Khan discusses this market segmentation and its implication for the way monetary policy affects interest rates and inflation.
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In recent years, the U.S. has seen an extraordinary increase in demand for housing and a rapid rise in house prices. Data show that nationally, the average price of an existing home, adjusted for inflation, rose more than 8 percent in 2004 and 2005, a faster pace than in any previous year. Some people have questioned whether this rapid rise was sustainable, and recent declines in the housing market have made this question more urgent. In "Housing: Boom or Bubble?," Tim Schiller asks whether there was a so-called bubble in house prices or whether fundamental economic factors explain the rapid increase.
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Despite the recent decline in the value of the U.S. dollar, the U.S. trade deficit remains at historic highs. When this deficit eventually shrinks, it will likely be accompanied by an export boom. In "What Will the Next Export Boom Look Like? Some Hints from the Late 1980s," Kei-Mu Yi examines the nature of the last export boom in the United States, which occurred in the late 1980s. He documents whether the increase in exports was accompanied by an increase in the number of export markets, export industries, or exporting firms and plants.
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Research Rap: Abstracts of research papers produced by the economists at the Philadelphia Fed.
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Third Quarter 2006

In “Consumer Confidence Surveys: Can They Help Us Forecast Consumer Spending in Real Time?,” Dean Croushore uses the Philadelphia Fed’s real-time data set to investigate an important question: Does using data available to forecasters at the time — that is, real-time data — make measures of consumer confidence more valuable for forecasting?
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In “A Review of Inflation Targeting in Developed Countries,” Mike Dotsey examines five countries that have been targeting inflation for at least 10 years and whose inflation rates, though fairly well contained before inflation targeting, were nonetheless considered too high by policymakers. For purposes of comparison, he also looks at the economic performance of six noninflation-targeting countries.
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In “Residential Mortgage Default,” Ronel Elul discusses the models that economists have developed to help us understand the default risk inherent in home mortgages and how default risk and house prices are related. He also applies these models to show how falling house prices would affect mortgage default rates today and explores the impact that rising default rates would have on financial institutions and other participants in the mortgage market.
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“Fiscal Imbalance: Problems, Solutions, and Implications” was the topic of the fifth annual Philadelphia Fed Policy Forum held on December 2, 2005. This event, sponsored by the Bank’s Research Department, brought together economic scholars, policymakers, and market economists to discuss and debate the implications of fiscal imbalance for the U.S. economy. Our hope is that the 2005 Policy Forum will serve as a catalyst for both greater understanding and further research on the fiscal challenges facing the U.S. economy.

For a summary of the 2006 Policy Forum, please see the Business Review Third Quarter 2007.
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Research Rap: Abstracts of research papers produced by the economists at the Philadelphia Fed.
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Second Quarter 2006

In “Ups and Downs: How Wages Change Over the Business Cycle,” Kevin Huang discusses the shift in the cyclicality of real wages — from countercyclical before World War II to procyclical postwar. He outlines the standard explanation for this change but offers evidence of an alternative explanation: the increased role that intermediate goods play in the production process in the postwar era.
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In “Using Collateral to Secure Loans,” Yaron Leitner asks: Why is collateral used to secure some loans, but not others? And why does collateral potentially involve more risk? He considers these questions, looking at some of the explanations for using collateral, focusing on its benefits and drawbacks.
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In “Is Technology Raising Demand for Skills, or Are Skills Raising Demand for Technology?” Ethan Lewis describes a common view that recent technological advances, such as the introduction of computers, have rendered obsolete some occupations that require less skill and have increased businesses’ desire to hire skilled workers. But what if the rising skills of U.S. workers are inducing businesses to adopt—and maybe even develop — new technologies that require workers who are more skilled? Lewis assesses this alternative view by examining the evidence that increasing skills are driving technological change.
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In “Changes in the Use of Electronic Means of Payment: 1995-2004,” Loretta Mester has compiled information from the recently released 2004 Survey of Consumer Finances. She updates statistics indicating how the usages of various means of electronic payment have changed between 1995 and 2004.
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Research Rap: Abstracts of research papers produced by the economists at the Philadelphia Fed.
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First Quarter 2006

On March 31, 2006, President Anthony M. Santomero will step down as president of the Federal Reserve Bank of Philadelphia. In “A Farewell from President Santomero,” he reflects on the economic challenges and changes during his tenure as president over the past six years and summarizes some of the Bank’s accomplishments.
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In “Debt Maturity: What Do Economists Say? What Do CFOs Say?,” Mitchell Berlin discusses recent theories of how firms choose their debt maturity. Some of these theories are very useful for explaining how chief financial officers (CFOs) choose the maturity of their firms’ debt. However, CFOs seem to believe that they can predict future interest rates and time their borrowings accordingly, and this behavior fundamentally conflicts with most economic theories.
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In “What a New Set of Indexes Tells Us About State and National Business Cycles,” Ted Crone presents information on a recently constructed set of coincident indexes for the 50 states. These indexes can be used to define business cycles at the state level and can tell us how business cycles and the overall patterns of growth have differed among the states.
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In “Your House Just Doubled in Value? Don’t Uncork the Champagne Just Yet!,” Wenli Li and Rui Yao present their recent research, which tries to quantify the effects of house-price changes on both consumption and the well-being of American households. Their study looks at the economy as a whole, as well as different demographic groups.
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In September 29 and 30, 2005, the Federal Reserve Bank of Philadelphia’s Research Department and Payment Cards Center organized the fourth in a series of conferences exploring new academic research on the topic of consumer credit and payments. Nearly 100 participants attended the conference, which included seven research papers on topics such as the design of consumer bankruptcy law, predatory lending, consumers’ choice of borrowing terms and indebtedness, the function of credit reporting agencies, and pricing in credit card and ATM networks. Read a summary of the conference on "Recent Developments in Consumer Credit and Payments."
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