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May/June 2005

In This Edition

  • An Introduction to Two-Rate Taxation of Land and Buildings

    In the U.S., land and improvements to that land (e.g., buildings) are generally taxed at the same rate. This paper describes historic and current arguments for two-rate (or split-rate) taxation, which taxes land at a higher rate than structures. In theory, two-rate taxation reduces deadweight losses associated with distortionary taxation and generates additional economic activity.

  • Evidence on Wage Inequality, Worker Education and Technology

    This paper looks at a sample of 230 U.S. industries between 1983 and 2002 to see how a worker's education level and on-the-job use of “skill-based” technology (i.e., computers) relates to wages. The author uncovers two conclusions: Rising U.S. wage inequality has been caused predominantly by increasing wage dispersion within industries rather than between industries. And within-industry inequality is strongly tied to both the frequency of computer usage among workers and the fraction of workers with a college degree.

  • Monetary Policy and Commodity Futures

    With daily measures of the real interest rate and expected inflation from commodity futures prices and the term structure of Treasury yields, the authors find commodity futures markets respond to surprise increases in the federal funds rate target by raising the inflation rate expected over the next 3 to 9 months (though no evidence is found that the real interest rate responds to surprises in the federal funds target). Yet, the basket of commodities traded daily is narrow and it is not known whether these observable rates are closely connected to the unobservable inflation and real rates that affect economywide consumption and investment.

  • Using Implied Volatility to Measure Uncertainty About Interest Rates

    This article explains implied volatility (IV) and how it can differ from the market's true expectation of uncertainty. It also estimates IV of 3-month eurodollar interest rates from 1985 to 2001 and evaluates its ability to predict realized volatility. IV shows that uncertainty about short-term interest rates has been falling for almost 20 years, as the levels of interest rates and inflation have fallen; and changes in IV are usually coincident with major news about the stock market, the real economy, and monetary policy.