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

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2006 Academic Publications

Do Historical Events Matter in Geographic Agglomeration? The Case of South Korea
Applied Economics Letters, December 2006
Jahyeong Koo and Yune Lee
Abstract: This paper examines whether historical events are as important as Krugman (1991a) had suggested they are in determining geographic agglomeration. Using the time series of Korean manufacturing (1955-2003), which is longer than other country studies, we also examine how the mean reversion factor and dispersion factor have evolved during substantial economic development. Our results confirm that industry mobility in Korea is high and the historical events may not be so important in geographic agglomeration of industries. The analysis of the mean reversion factor and dispersion factor supports the argument that transport costs are a major source of change in geographic agglomeration in the long run.

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.

The Private Sector Impact of State and Local Government: Has More Become Bad?
Contemporary Economic Policy, October 2006
Stephen P.A. Brown and Lori L. Taylor
Abstract: Early research into regional economic growth suggests some increases in state and local government spending more than offset the negative effects of the tax increases needed to fund them. More recent research finds the growth of state and local government generally discourages private sector growth. Using panel data on private employment, capital and output for the 48 contiguous states over the period 1979-97, we find that government size greatly affects whether additional government helps or hinders private sector growth. The rapid growth of state and local government in the late 1980s likely outstripped the willingness to pay. With government growth moderating in the 1990s, however, the private sector response to state and local government spending has become more favorable.

Are Labor Markets Segmented in Developing Nations?
European Economic Review, October 2006
Erwan Quintin and Sangeeta Pratap
Abstract: We evaluate the hypothesis that observably identical workers earn higher wages in the formal sector than in the informal sector in Argentina. Using data from Argentina's household survey and various definitions of informal employment we find that, on average, formal wages are higher than informal wages. Parametric tests suggest that a formal premium remains after controlling for individual and establishment characteristics. However, this approach suffers from several econometric problems, which we address with semiparametric methods. The resulting formal premium estimates prove either small and insignificant, or negative. Neither do we find significant differences in measures of job satisfaction between the two sectors. We invoke these results to question the mainstream view that labor markets are segmented along formal/informal lines in developing nations such as Argentina.

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.

A Competitive Model of the Informal Sector
Journal of Monetary Economics, October 2006
Erwan Quintin and Pedro S. Amaral
Abstract: In developing nations, formal workers tend to be more experienced, more educated, and earn more than informal workers. These facts are often interpreted as evidence that low-skill workers face barriers to entry into the formal sector. Yet, there is little empirical evidence that such barriers are important. This paper describes a model where, in equilibrium, the characteristics of formal and informal workers differ systematically even though labor markets are perfectly competitive. The informal sector emphasizes low-skill work, as in the data, because informal managers have access to less outside financing, and choose to substitute low-skill labor for physical capital.

The Control of Money
Journal of Private Enterprise, Volume XXII, Number 1, 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.

Ireland’s Great Depression
Economic and Social Review, Summer/Autumn 2006
Mark A. Wynne, Finn Kydland, 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.

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.

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.