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Dallas Fed analyzes monetary policy, the Texas economy and Japan's economic policy

For immediate release: July 25, 2003

DALLAS—As short-term interest rates fall toward zero, it may be necessary for the Fed to rethink how it conducts monetary policy, according to Dallas Fed economists in the latest issue of the Federal Reserve Bank of Dallas Southwest Economy. The Texas economy and Japan’s economic policy are also topics for this edition.

In “Monetary Policy in a Zero-Interest-Rate Economy,” Dallas Fed vice president Evan F. Koenig and senior economist Jim Dolmas examine why conventional policy loses its effectiveness at very low interest rates and review alternative tools, ranging from the controversial to the mundane, for stimulating the economy. The authors note that although low short-term interest rates do not preclude Fed action to boost the economy, none of the available alternatives to conventional policy is problem-free.

In a second article, associate economist D’Ann Petersen notes that the Texas economy is warming up. Petersen writes that midway through 2003, it appears the Texas economy has bottomed out and is tilted toward expansion. Despite this good news, improvement in the economy has been so moderate that it still feels like a recession to many. Overall job growth is lukewarm at best, with large numbers of Texans still seeking work.

Petersen summarizes current activity in Texas' major economic sectors and ranks the sectors based on the contribution each is making to current economic growth. She concludes that a more robust pickup in the Texas economy depends on the strength of the U.S. recovery, because many of the state's key sectors will benefit from stronger U.S. growth.

Finally, economist Jahyeong Koo writes that the most notable sources of current economic woe in Japan have been the lack of policy coordination and a rigid labor market. In "Japanese Economic Policy Conundrums,” Koo finds it unlikely that an acute financial crisis looms in the near future, especially in view of some positive signs for the Japanese economy. Frozen labor markets are thawing, and the Bank of Japan and the Ministry of Finance have begun to coordinate economic policy. Koo concludes that Japan's economic future depends on whether and how fast these positive changes can revitalize the economy.


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James Hoard
Phone: (214) 922-5307