Second Quarter 1999
Federal Reserve Bank of Dallas

Economic and Financial Review was published from 1999 until 2001.

The New Budget Outlook: Policymakers Respond to the Surplus
Alan D. Viard

Economic events and policy changes have unexpectedly moved the federal budget into surplus. If current policies are maintained, surpluses are expected to continue for twenty years, although deficits are expected to return after 2020. Congress and President Clinton are considering proposals to reduce the projected surpluses through tax cuts or spending increases. In this article, Alan Viard describes the recent budget events and the new budget outlook. He analyzes the effects of the proposed tax cuts and spending increases, finding that they are likely to reduce national saving and lower future output. He concludes that the desirability of this outcome depends on value judgments about the needs and rights of current and future generations.

Oil Prices and U.S. Aggregate Economic Activity: A Question of Neutrality
Stephen P. A. Brown and Mine K. Yucel

Considerable research finds oil price shocks have had major effects on U.S. output and inflation. Several recent studies argue that the response of monetary policy—rather than the oil price shocks themselves—caused the fluctuations in economic activity. Stephen Brown and Mine Yucel show that an oil price increase will lead to a decline in real GDP and an increase in the price level that are of a similar magnitude if the federal funds rate is unconstrained—a finding consistent with the definition of monetary neutrality in which nominal GDP is constant. Brown and Yucel also find that holding the federal funds rate constant in the face of an oil price increase is an accommodative policy that boosts real GDP, the price level, and nominal GDP. In short, the monetary authority can use accommodative policy to cushion the negative effects of higher oil prices on real GDP, but at the expense of higher inflation.

Industry Mix and Lending Environment Variability: What Does the Average Bank Face?
Jeffery W. Gunther and Kenneth J. Robinson

Diversification opportunities for banks may be greater today because of the lessening of geographic restrictions. In addition, regional economies have undergone vast transformations, with relatively volatile industries often assuming a diminished role. To assess whether these changes have resulted in a more stable lending environment, Jeff Gunther and Ken Robinson form industry portfolios for banks based on their presence in different states and the mix of economic activity found in those states. The authors find that the risk underlying banks' lending environments declined from 1985 to 1996 because of both a geographic restructuring of the banking system and increasing industrial diversification of state economies.

Between a Rock and a Hard Place: The CRA—Safety and Soundness Pinch
Jeffery W. Gunther

A statistical model of regulatory exam ratings provides evidence of conflict between Community Reinvestment Act (CRA) objectives, on one side, and safety and soundness standards, on the other. In his analysis of supervisory goals, Jeff Gunther finds that concentrating bank assets in loans and managing capital at relatively low levels tend to help CRA ratings while hurting CAMEL ratings. Also, banks with financial problems are more likely to receive substandard CRA ratings, even though a shift in resources away from CRA objectives may be necessary to facilitate financial recovery. These findings point to a supervisory process in pursuit of conflicting goals and highlight underappreciated costs of the CRA.