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Business Review

Fourth Quarter 2007

Following Hurricane Katrina, many people were shocked by the extent of racial segregation in the New Orleans housing market. And yet, New Orleans is far from an isolated case. Forty years after passage of the Fair Housing Act, racially segregated neighborhoods are all too common in the United States. The reasons usually offered for this continued segregation include discrimination in the real estate and housing markets. Recently, these reasons have been challenged by a theory claiming that segregation exists because African Americans prefer to live together for positive reasons, such as to share and support a common heritage. In “Do African Americans Prefer to Live in Segregated Communities,?” Bob DeFina examines the evidence and notes that it casts doubt on the viability of the so-called self-segregation hypothesis.
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Is there a link between the stock market and business investment? Empirical evidence indicates that there is. A firm tends to invest more when its stock price increases, and it tends to invest less when the price falls. In “Stock Prices and Business Investment,” Yaron Leitner discusses existing research that explains this relationship. One question under consideration is whether the stock market actually improves investment decisions.
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Since 1980, the number of households filing for bankruptcy has more than tripled. This drastic increase in personal bankruptcy filings led to substantial debate among economists and policymakers. That debate subsequently resulted in the enactment of extensive reforms in 2005 when Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act. Ultimately, the rationale for this legislation is the presumption that Chapter 13 leads to more appropriate outcomes compared with either Chapter 7 filings or other options outside bankruptcy. In “What Do We Know About Chapter 13 Personal Bankruptcy Filings,?” Wenli Li outlines the results of two recent studies that have taken a more detailed look at actual outcomes in Chapter 13.
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Research Rap: Abstracts of research papers produced by the economists at the Philadelphia Fed.
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Third Quarter 2007

A firm’s passage from borrowing from a single lender to using multiple lenders is often viewed as an inevitable progression in the life of a firm. While there is a strong element of truth in this view, it is also incomplete. The underlying economics of moving from one lender to many involves more than simply asking whether the firm’s revenues are large enough to cover the costs of adding more lenders or of acquiring a public debt rating. The U.S. syndicated loan market provides a useful laboratory for exploring the economics of multiple lenders. In “Dancing with Wolves: Syndicated Loans and the Economics of Multiple Lenders,” Mitchell Berlin discusses recent research on the syndicated loan market that has attempted to answer questions related to firms’ use of multiple lenders. PDF Icon (PDF, 148 KB, 8 pages)

Although there is only one national monetary policy, that does not mean that monetary policy does not affect some regions of the country more than others. We know that business cycles differ across states and regions, and a number of studies have examined how monetary policy may affect regions differently and why. A review of these studies reveals that certain parts of the country are consistently more affected by monetary policy than others. Identifying the reasons for regional differences in the effects of monetary policy may help us better understand how changes in monetary policy ripple through the economy. In “A Pattern of Regional Differences in the Effects of Monetary Policy,” Ted Crone reviews where the research has brought us so far.
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Globalization has led to an enormous increase in international trade. Over the past 40 years, world exports as a share of output have doubled to almost 25 percent of world output. However, despite this enormous increase, economic evidence suggests that significant barriers to international trade still exist. In “International Trade: Why We Don’t Have More of It,” Edith Ostapik and Kei-Mu Yi summarize the latest developments in the measurement of international trade barriers.
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Finally, Loretta Mester summarizes the discussion at the 2006 Philadelphia Fed Policy Forum in “Economic Growth and Development: Perspectives for Policymakers.”
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Research Rap: Abstracts of research papers produced by the economists at the Philadelphia Fed.
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Second Quarter 2007

Many official surveys give us important information about labor markets and unemployment, as well as other statistics. However, these surveys reveal only the net gains or losses in employment over a given period. Consequently, how many gross hires and separations lie behind the net changes is missing from these statistical releases. Data on gross flows turn up additional valuable information. In “What Do Worker Flows Tell Us About Cyclical Fluctuations in Employment?,” Shigeru Fujita uses such data to examine cyclical changes in the pace of the worker reallocation process and its effects on the U.S. labor market.
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Why should economic scholars study the consumer debt collection process? First, the cost and effectiveness of the collections process has implications for the pricing and availability of consumer credit. Second, changes in technology and the structure of credit markets have transformed the collections industry. Small, mom-and-pop operations are increasingly being replaced by firms operating nationally, collecting on billions of dollars in bad debt purchased from creditors. In “Collecting Consumer Debt in America,” Bob Hunt explores how creditors and their agents attempt to collect past-due consumer debt, particularly unsecured debt. Creditors have a number of remedies open to them, but their effectiveness is limited by the fact that consumers can file for bankruptcy. Even outside of bankruptcy, consumers enjoy a variety of legal protections, including some they may not be aware of.
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Two recent studies have concluded that for roughly four decades the measure of inflation for rents in the U.S. consumer price index was substantially underestimated. Why should this mismeasurement be of concern? In “Gimme Shelter! Rents Have Risen, Not Fallen, Since World War II,” Len Nakamura explains that rents are important in measuring the price of housing services for homeowners as well as renters. They are also the main standard against which market participants and others weigh the reasonableness of house prices. In addition, such mismeasurement affected the estimated rate of overall inflation faced by U.S. households during this historical episode.
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Research Rap: Abstracts of research papers produced by the economists at the Philadelphia Fed.
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First Quarter 2007

Although the amount of U.S. imports and exports has varied greatly over time, in recent years, the U.S. has been running trade deficits. Some people react to such trade deficits with doom and gloom; others cite them as evidence that foreign governments are not playing fair in U.S. markets; still others argue that deficits demonstrate that we are living beyond our means. In “Trade Deficits Aren’t as Bad as You Think,” George Alessandria offers an alternative view: Trade deficits have benefits. They shift worldwide production to its most productive locations, and they allow individuals to smooth out their consumption over the business cycle.
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Since the middle of the 1980s, economic growth in the U.S. has become much more stable than it was in the preceding three decades, and the magnitude of the decline is substantial. What accounts for the decline in volatility, and why is the decline important for policymakers? In “The Great Moderation in Economic Volatility: A View from the States,” Jerry Carlino discusses these questions and makes the case that using state-level rather than just national data offers a much larger testing ground for analyzing the decline in economic volatility.
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For various reasons, oil-price increases may lead to significant slowdowns in economic growth. Five of the last seven U.S. recessions were preceded by significant increases in the price of oil. In “The Macroeconomics of Oil Shocks,” Keith Sill examines the effect of changes in oil prices on U.S. economic activity, focusing on how runups in the price of oil can affect output growth and inflation. He also discusses the channels by which oil-price increases might affect the economy and the historical evidence on the relationship between oil prices, economic growth, and inflation.
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Research Rap: Abstracts of research papers produced by the economists at the Philadelphia Fed.
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