Third Quarter 2000
Federal Reserve Bank of Dallas

Economic and Financial Review was published from 1999 until 2001.

The Transition to Consumption Taxation, Part 1: The Impact of Existing Capital
Alan D. Viard

Alan Viard reviews the transitional impact on existing capital from replacing the income tax with a consumption tax. This replacement generally reduces the real value of existing capital because it does not receive the tax relief given to new investment. If the income and consumption taxes had stylized forms and capital were produced without adjustment costs, the proportional decline would equal the consumption tax rate—a 25 percent tax would uniformly reduce the value of existing capital by 25 percent. Under more realistic assumptions, however, the actual decline is likely to be smaller and less uniform and some types of capital may even increase in value. The burden on owners of existing capital is also mitigated because the tax reform increases the rate of return they earn from reinvestment.

Gasoline and Crude Oil Prices: Why the Asymmetry?
Stephen P. A. Brown and Mine K. Yücel

Many consumers complain that gasoline and crude oil prices have an asymmetric relationship in which gasoline prices rise more quickly when crude oil prices are rising than they fall when crude oil prices are falling. Many also regard the asymmetry they observe as evidence of market power in the petroleum industry. Most previous research provides econometric evidence of the asymmetry, confirming at least part of what consumers suspect. In this article Stephen Brown and Mine Yücel extend the inquiry by examining the market conditions underlying the asymmetric relationship between gasoline and crude oil prices. They find the observed asymmetry is unlikely to be the result of monopoly power. The remaining explanations for the asymmetry suggest that policies to prevent an asymmetric relationship between gasoline and crude oil prices are likely to reduce economic efficiency.

Financial Statements and Reality: Do Troubled Banks Tell All?
Jeffrey W. Gunther and Robert R. Moore

Each quarter, banks file a call report, or Report of Condition and Income, containing hundreds of accounting items pertaining to their financial condition. This article analyzes call report revisions to assess the extent to which regulatory exams promote accurate data. The findings indicate banks with new or emerging difficulties often significantly underreport these problems, intentionally or not. In addition, the findings point to a significant role for exams in uncovering financial problems and ensuring bank accounting statements reflect them. To the extent the loan-loss accounting in call reports is widely used to assess loan quality, these results support the view that exams are important in the public dissemination of accurate information on banks' financial condition.