St. Louis Fed's Review: The Effectiveness of Monetary Policy; Currency Design in the United States and Abroad; Experiments in Financial Liberalization: The Mexican Banking Sector; How Well Does Employment Predict Output?

ST. LOUIS — The September/October issue of Review, the Federal Reserve Bank of St. Louis' journal of economic and business issues, features the following articles. The publication is also available on the St. Louis Fed's web site: https://research.stlouisfed.org/publications/review/.

• "The Effectiveness of Monetary Policy." A long-standing question among monetary economists and in central banking literature is: How effective is monetary policy? Researcher Marcela M. Williams and economist Robert H. Rasche analyze the changing views of the role and the effectiveness of monetary policy, inflation targeting, and short-run stabilization. They find that the Federal Reserve's success over the past two decades in stabilizing the inflation rate without using an explicit, numeric inflation target would seem to question the marginal benefit of targeting, at least in the United States.
• "Currency Design in the United States and Abroad: Counterfeit Deterrence and Visual Accessibility." Despite the increasing use of electronic payments, cold, hard cash retains an important role in the payment system of every nation. Researcher Marcela M. Williams and economist Richard G. Anderson compare and contrast trade-offs among currency design features in the United States and foreign countries, including those to deter counterfeiting and those to improve usability by the visually impaired. They find that periodic changes in the design of currency are an important element in deterring counterfeiters, and that currency designers worldwide have been successful in that effort. At the same time, however, currency designers have tried to be sensitive to the needs of the visually impaired. While trade-offs among goals sometimes have forced compromises, new technologies promise banknotes that are increasingly more difficult to counterfeit and more accessible to those who are visually impaired.
• "Experiments in Financial Liberalization: The Mexican Banking Sector." Since the liberalization of its trade in the mid-1980s, Mexico has pursued an aggressive globalization strategy, making it the country with the most free-trade agreements in the world today. This liberalization has also included banking, particularly since 1997, when all restrictions to the entry of foreign banks were removed. Economist Rubén Hernández-Murillo documents the evolution of Mexico's banking sector, starting from its nationalization in 1982 to the increased entry of foreign banks in recent years, which has driven the recovery of bank credit to the private sector. He concludes that while Mexico has made great strides, the country would gain from continuing development of its banking sector and modernization of its legal infrastructure, particularly contract enforcement and greater definition and defense of private property rights.
• "How Well Does Employment Predict Output?" Economists, policymakers and financial market analysts usually pay close attention to aggregate employment trends, since employment is thought to be an important indicator of macroeconomic conditions. Economist Kevin L. Kliesen looks at the two surveys of employment published by the Bureau of Labor Statistics. One counts the number of jobs (establishment survey) and the other counts the number of people employed (household survey). The household survey is smaller but is designed to measure both employment and unemployment with significant demographic details. Most economists, however, probably place more emphasis on the establishment survey because it is constructed from a much larger sample and is considered less volatile than the household survey. Results from a pseudo, out-of-sample forecasting exercise in the article suggest that analysts should question whether employment is a useful indicator for predicting output growth.

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