A list of articles published by members of the Dallas Fed Research staff.

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2006 Academic Publications

A New Monthly Index of the Texas Business Cycle
Journal of Social and Economic Measurement, March 2006
Keith R. Phillips
Abstract: In this article I attempt to measure the Texas business cycle using a technique developed by Stock and Watson that statistically estimates the underlying comovement in broad indicators of the state’s economy. The timing, length and severity of economic recessions and expansions in a state are important to businesses seeking to set up operations or expand in those areas. Given a limited amount of data at the state level and their sometimes inconsistent movements, it is not straight forward to define a state business cycle.

The new Texas Coincident Index (TCI) is constructed with the Texas unemployment rate, a quarterly Real Gross State Product measure due to Berger and Phillips, and a nonfarm employment series that is benchmarked quarterly and is seasonally adjusted using the two-step approach described in Berger and Phillips. Use of these components and the Kalman filter, which smoothes across variables as well as over time, results in an index which is much smoother and gives clearer signals of turning points than the old TCI produced by Phillips. The new TCI exhibits cyclical patterns that are highly correlated with those of employment and RGSP, and matches well with recessions and expansions that were independently identified.

Mutual Funds and the Evolving Long-Run Effects of Stock Wealth on U.S. Consumption
Journal of Economics and Business, June 2006
John V. Duca
Abstract: Lower mutual fund loads have plausibly boosted the stock wealth elasticity of U.S. consumption by enhancing stock liquidity and arguably by inducing stock ownership among middle-income families, consistent with theory and cross-section data. In load-modified models, the stock wealth elasticity is declining in loads and more stable long-run wealth and income coefficients arise, especially controlling for mortgage refinancing and equity withdrawal activity. Modified models imply that the stock wealth elasticity has risen, while conventional models overestimate the wealth and underestimate the income elasticities of consumption.

Ireland’s Great Depression
Economic and Social Review, Summer/Autumn 2006
Mark A. Wynne, Finn Kydland, and Alan Ahearne
Abstract: We argue that Ireland experienced a great depression in the 1980s comparable in severity to the better known and more studied depression episodes of the interwar period. Using the business cycle accounting framework of Chari, Kehoe and McGrattan (2005), we examine the factors that led to the depression and the subsequent recovery in the 1990s. We calculate efficiency, labor, investment and government wedges and evaluate the contribution of each to the downturn and subsequent recovery. We find that the efficiency wedge on its own can account for a significant portion of the downturn, but predicts a stronger recovery in output than occurred. The labor wedge also helps account for what happened during the depression episode. We also find that the investment wedge played no role in the depression.

Consumer Sovereignty in the Modern Global Era
Journal of Private Enterprise, Fall 2006
Jason L. Saving
(No abstract)

Strengthening Globalization’s Invisible Hand: What Matters Most?
Business Economics, October 2006 (winner of NABE’s 2006 Edmund A. Mennis Contributed Paper Award)
Thomas F. Siems and Adam S. Ratner
Abstract: In this paper, we investigate what matters most to sustaining strong economic growth in today’s more globalized, knowledge economy. An examination of 2005-2006 statistical and survey data across 52 countries reveals that economic growth is driven mainly by developed and trustworthy financial markets, a well-educated and skilled workforce and access to information and communications technologies. Moreover, we find that creditworthy financial markets are strengthened by free and open economies based on the rule of law and legal protections. Our findings support the notion that innovative ideas and entrepreneurship are at the heart of economic growth. However, these ideas need support from institutional policies and practices that create and sustain growth by providing needed protections and a market in which to finance them.

Financial Sector Weakness and the M2 Velocity Puzzle
Economic Inquiry, October 2006
Cara Lown, Stavros Peristiani, and Kenneth J. Robinson,
Abstract: Deterioration in the link between M2 and GDP, along with large prediction errors, led the Federal Reserve to downgrade M2 as a reliable indicator in 1993. We argue that the financial condition of depository institutions was a major factor behind this unusual pattern of M2 growth. When constructing measures of M2 based on banks’ and thrifts’ capital positions, we obtain superior M2 forecasting results and a more stable relationship between M2 and the ultimate goals of policy. M2 may contain useful information when there are no major disturbances to depository institutions.

Nonparametric Conditional Density Estimation of Labour Force Participation
Applied Economics Letters, October 2006
Anil Kumar 
Abstract: Labour force participation decision has been studied primarily in a parametric framework. The weaknesses of the parametric estimators to misspecification of the error distribution and to functional form assumptions are well known. This paper compares the predictive performance of widely used parametric and semiparametric estimators with results obtained from nonparametric kernel conditional density estimation with likelihood cross-validated bandwidth selection and mixed data type. The results are striking. The predictive performance of the nonparametric estimator is 95% against 71% to 77% of the parametric and semiparametric estimators. The nonparametric estimator is able to correctly predict the outcome for 83% of non-participants in the labour force as against 15% by probit and logit models. This underscores the need to use nonparametric estimators in studying labour market behaviour.

The Control of Money
Journal of Private Enterprise, Fall 2006
Mark A. Wynne
Abstract: In Capitalism and Freedom, Milton Friedman argued that monetary policy should be determined by a rule, specifically a money growth rule, and that the exchange rate between national monies should be flexible and market-determined. This paper reviews the arguments Friedman made to support his case, and considers the impact of Friedman’s proposals on the theory and practice of monetary policy over the past forty years.

Argentina's Feeble Recovery: Insights from a Real Business Cycle Approach
Journal of Policy Reform, 2006
Carlos E.J.M. Zarazaga
Abstract: Argentina's GDP increased 30% between 2002 and 2005, prompting optimistic assessments that the country had finally left behind its secular stagnation. However, this strong performance followed a sharp decline in economic activity and therefore could be the manifestation of a bounce-back effect with no lasting impact on Argentina's mediocre long-term growth rates. The paper examines this conjecture with the quantitative discipline imposed by a Real Business Cycle methodology and concludes that the 2002-05 expansion was not only a rebound, but also considerably weaker than the model predicts, a finding not consistent with upbeat views about the country's long-term prospects.