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Complete Issue F EDERAL R ESER VE B FEDERAL RESERVE BANK OF ST. LOUIS ANK OF S T L OUIS R EVIEW NOVEMBER/DECEMBER 2004 VOLUME 86, NUMBER 6 The Increasing Importance of Proximity for Exports from U.S. States R Cletus C. Coughlin EVIEW Monetary Policy and Asset Prices: A Look Back at Past U.S. Stock Market Booms Michael D. Bordo and David C. Wheelock What Does the Federal Reserve’s Economic Value Model Tell Us About Interest Rate Risk at U.S. Community Banks? N Gregory E. Sierra and Timothy J. Yeager O VEMBER Discrete Policy Changes and Empirical Models of the Federal Funds Rate / D ECEMBER Michael J. Dueker and Robert H. Rasche 2004 • V OL UME 86, N UMBER 6 Contents Volume 86, Number 6 R EVIEW 1 The Increasing Importance of Proximity Director of Research for Exports from U.S. States Robert H. Rasche Cletus C. Coughlin Deputy Director of Research Cletus C. Coughlin Changes in income, trade policies, transporta- Review Editor tion costs, technology, and many other variables William T. Gavin affect the geographic pattern of international Research Economists trade flows. This paper focuses on the changing Richard G. Anderson geography of merchandise exports from indi- James B. Bullard vidual U.S. states to foreign countries. Generally Riccardo DiCecio speaking, the geographic distribution of state Michael J. Dueker exports has changed so that trade has become Thomas A. Garrett more intense with nearby countries relative to Hui Guo distant countries. All states, however, did not Rubén Hernández-Murillo Kevin L. Kliesen experience similar changes. As measured by Christopher J. Neely the distance of trade, which is the average Edward Nelson distance that a state’s international trade is Michael T. Owyang transported, 40 states experienced a declining Michael R. Pakko distance of trade, while 11 states (including Anthony N.M. Pennington-Cross Washington, D.C.) experienced an increasing Jeremy M. Piger distance of trade. Evidence, albeit far from Patricia S. Pollard definitive, suggests that declining transportation Daniel L. Thornton costs over land, the implementation of the Howard J. Wall Christopher H. Wheeler North American Free Trade Agreement, and David C. Wheelock faster income growth by nearby trading partners relative to distant partners have contributed Managing Editor to the changing geography of state exports. George E. Fortier Assistant Editor 19 Monetary Policy and Asset Prices: A Look Lydia H. Johnson Back at Past U.S. Stock Market Booms Graphic Designer Donna M. Stiller Michael D. Bordo and David C. Wheelock Review is published six times per year by the Research Division of the This article examines the economic environ- Federal Reserve Bank of St. Louis and may be accessed at our web address: research.stlouisfed.org/publications/review. ments in which past U.S. stock market booms Single-copy subscriptions are also available free of charge. Send requests occurred as a first step toward understanding to: Federal Reserve Bank of St. Louis, Public Affairs Department, P.O. Box 442, St. Louis, MO 63166-0442, or call (314) 444-8808 or 8809. how asset price booms come about and The views expressed are those of the individual authors and do not whether monetary policy should be used to necessarily reflect official positions of the Federal Reserve Bank of St. Louis, the Federal Reserve System, or the Board of Governors. defuse booms. The authors identify several © 2004, The Federal Reserve Bank of St. Louis. episodes of sustained rapid rises in equity Articles may be reprinted, reproduced, published, distributed, displayed, prices in the 19th and 20th centuries, and then and transmitted in their entirety if this copyright notice is included. assess the growth of real output, productivity, Please send a copy of any reprinted, published, or displayed materials to George Fortier, Research Division, Federal Reserve Bank of St. Louis, the price level, and money and credit stocks P.O. Box 442, St. Louis, MO 63166-0442; [email protected]. during each episode. Two booms stand out in Please note: Abstracts, synopses, and other derivative works may be made only with prior written permission of the Federal Reserve Bank terms of their length and rate of increase in of St. Louis. Please contact the Research Division at the above address market prices—the booms of 1923-29 and to request permission. 1994-2000. In general, the authors find that ISSN 0014-9187 booms occurred in periods of rapid real growth NOVEMBER/DECEMBER 2004 i R EVIEW and productivity advancement, suggesting that 61 Discrete Policy Changes and Empirical booms are driven at least partly by funda- Models of the Federal Funds Rate mentals. They find no consistent relationship between inflation and stock market booms, Michael J. Dueker and Robert H. Rasche though booms have typically occurred when money and credit growth were above average. Empirical models of the federal funds rate almost uniformly use the quarterly or monthly 45 What Does the Federal Reserve’s Economic average of the daily rates. One empirical ques- Value Model Tell Us About Interest Rate tion about the federal funds rate concerns the Risk at U.S. Community Banks? extent to which monetary policymakers smooth this interest rate. Under the hypothesis of rate Gregory E. Sierra and Timothy J. Yeager smoothing, policymakers set the interest rate this period equal to a weighted average of the The savings and loan crisis of the 1980s rate inherited from the previous quarter and the revealed the vulnerability of some depository rate implied by current economic conditions, institutions to changes in interest rates. Since such as the Taylor rule rate. Perhaps surpris- that episode, U.S. bank supervisors have placed ingly, however, little attention has been given more emphasis on monitoring the interest rate to measuring the interest rate inherited from risk of commercial banks. Economists at the the previous quarter. Previous tests for interest Board of Governors of the Federal Reserve rate smoothing have assumed that the quarterly System developed a duration-based economic or monthly average from the previous period value model (EVM) designed to estimate the is the inherited rate. The authors of this study, interest rate sensitivity of banks. The authors in contrast, suggest that the end-of-quarter level test whether measures derived from the Fed’s of the target federal funds rate is the inherited EVM are correlated with the interest rate sensi- rate, and empirical tests support this proposi- tivity of U.S. community banks. The answer to tion. The authors show that this alternative this question is important because bank super- view of the rate inherited from the past affects visors rely on EVM measures for monitoring empirical results concerning interest rate and risk-scoping bank-level interest rate sensi- smoothing, even in relatively rich models that tivity. The authors find that the Federal Reserve’s include regime switching. EVM is indeed correlated with banks’ interest rate sensitivity and conclude that supervisors 73 Review Index 2004 can rely on this tool to help assess a bank’s interest rate risk. These results are consistent with prior research that finds the average inter- est rate risk at banks to be modest, though the potential interaction between interest rate risk and other risk factors is not considered here. ii NOVEMBER/DECEMBER 2004 The Increasing Importance of Proximity for Exports from U.S. States Cletus C. Coughlin ncome, trade policies, transportation costs, over time, then its trade is becoming more (less) technology, and many other variables combine intense with nearer countries relative to countries to determine the levels of international trade farther away. In other words, a declining (increasing) I distance of trade means that the shares of a country’s flows. Not only do changes in these determinants (state’s) trade with nearby trading partners is rising affect the levels of trade flows, they can also have (falling) relative to trade with its more distant trading important consequences for the geographic pattern partners. of a country’s trade. Some changes are generally The analysis begins by summarizing the facts thought to increase the proportion of a country’s and the explanations concerning the geographic trade with nearby countries relative to its other distribution of exports throughout the world. An trading partners, while other changes tend to important feature of the economic geography of decrease this proportion. For example, if a country trade flows is the distance that separates a state from enters into a trade agreement with nearby countries, its trading partners. Distance is generally thought it is likely that the country’s share of trade with to play a key role in the geographic distribution of nearby countries will increase relative to its trade trade for two reasons. First, transportation costs are with other trading partners. On the other hand, higher for longer distances. Second, the costs of declining transportation costs can reduce the cost accessing information about foreign markets and disadvantage of trading with distant countries and establishing a trade relationship in those markets could thereby increase trade with more distant are higher for longer distances.2 Thus, a country’s countries relative to those nearby. trade with more distant countries is deterred. This paper focuses on the changing geography Despite the “death of distance” associated with of merchandise exports from individual U.S. states the communications revolution, proximity appears to foreign countries. Due to data limitations, exports to be increasingly important for trade flows.3 Using of services are not examined. Two basic questions are the bilateral trade flows of 150 countries, Carrere addressed. First, how has the geographic distribu- and Schiff (2004) find that during 1962-2000 the tion of exports from individual U.S. states changed? distance of (non-fuel merchandise) trade declines Second, which changes in the economic environ- for the average country and that countries with a ment appear to account for the observed changes declining distance of trade were twice as numer- in the geographic distribution of state exports? ous as those with an increasing distance of trade.
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