Fourth Quarter 1992
Federal Reserve Bank of Dallas

Economic Review was published until 1999.

Do Interest Rates Help Predict Inflation?
Kenneth M. Emery and Evan F. Koenig

Accurate forecasts of inflation are important to policymakers and to individuals who must make decisions on the basis of expectations about the future purchasing power of the dollar.

Recent research on forecasting inflation has shown that interest rates, by themselves, may provide useful information about future inflation. In this article, Kenneth M. Emery and Evan F. Koenig investigate whether interest rates contain information about future inflation beyond that found in traditional inflation-forecasting models. In other words, does adding interest rates to traditional inflation models enhance the models' forecasting ability? Emery and Koenig find that including interest rates does significantly improve the forecasting ability of traditional models. They also find, in contrast to recent research focusing on the forecasting ability of interest rates in isolation, that the information content of interest rates did not diminish in the 1980s.

Emery and Koenig point out that whether the historical forecasting ability of interest rates can be exploited by policymakers is problematic. Because interest rates reflect expectations of future monetary policy, if the Federal Reserve were to begin relying more on interest rates as a guide to policy, the relationship between interest rates and inflation would likely change.

Trade Policy and Intellectual Property Protection: The North-South Dispute
William C. Gruben

News about foreign-made counterfeit products that range from pharmaceuticals to tennis shoes and about processes that have been copied without payment of royalties to patent holders has become commonplace. Many of these appropriations of intellectual property originate in developing countries, where intellectual property laws and enforcement have traditionally been less restrictive than in developed countries. These differences between the North-the developed countries that produce most intellectual property-and the South-the developing countries that consume more than they produce-have generated much international friction.

Recently, however, some developing countries have begun to tighten these laws and their enforcement. A few analysts have been quick to explain why: these countries are simply reacting to increasingly tough U.S. pressure. But are they? Not all countries under the most intense U.S. pressure have reacted to it, and there is a difference between those that have and those that have not. The difference turns out to be these individual countries' own trade policies.

Focusing primarily on the experiences of Latin American countries, William C. Gruben shows how and why a nation's own trade policy influences its intellectual property laws and enforcement and why conventional arguments about U.S. trade pressures may be only part of the story. Gruben shows why developing countries that practice strong trade protectionism are motivated toward weak intellectual property protection, but those that have liberalized trade may find strong intellectual property protection more attractive.

Regional Wage Divergence and National Wage Inequality
Keith R. Phillips

Throughout much of the 1980s, wage inequality increased in the United States. Previous research has found that a rise in earnings by educational level and increased wage dispersion across occupations were important factors in the rise in wage inequality. Researchers, however, have noted that much of the rise in wage inequality was left unexplained by the demographic and industry factors that they examined. In this study, Keith R. Phillips extends the analysis by examining the impact on wage inequality of a divergence in regional wages that occurred during the 1980s.

The author finds that regional shocks, such as the recessions in the oil and farm belts, pushed wages lower in these below-average-wage areas, and increased defense spending pushed up wages in many above-average- wage areas. While these regional shocks increased overall wage inequality, Phillips finds that regional wage divergence accounted for only 2.1 percent to 5 percent of the rise in national wage inequality. Other factors, such as increased wage dispersion across educational and occupational groups and a reduction in the male-female wage gap, played larger roles.