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November/December 1993
Volume 78, Number 6

Federal Reserve
Bank of Atlanta

In This Issue:
inflation: How Long Has This
Been Going On?
.Business Cycles and Analysts' Forecasts:
Further Evidence of Rationality

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FRB^RËSEARCH LIBRA

International Comparisons of
Inflation and Employment Valid?

F Y I — A r e










Pcpripmic
R e v i e w
November/December 1993, Volume 78, Number 6




Federal Reserve
Bank of Atlanta

President
R o b e r t P. Forrestal

Senior Vice President and
Director of Research
Sheila L. T s c h i n k e l

Vice President and
Associate Director of Research
B. F r a n k K i n g

Research Department
William Curt Hunter, Vice President, Basic Research
Mary Susan Rosenbaum, Vice President, Macropolicy
Thomas J. Cunningham, Research Officer, Regional
William Roberds, Research Officer, Macropolicy
Larry D. Wall, Research Officer, Financial

Public Affairs
Bobbie H. McCrackin, Vice President
Joycelyn Trigg Woolfolk, Editor
Lynn H. Foley, Managing Editor
Carole L. Starkey, Graphics
Ellen Arth, Circulation

The Economic Review of the Federal Reserve Bank of Atlanta presents analysis of economic
and financial topics relevant to Federal Reserve policy. In a format accessible to the nonspecialist, the publication reflects the work of the Research Department. It is edited, designed, produced, and distributed through the Public Affairs Department.
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eral Reserve System.
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(Contents
Federal Reserve Bank of Atlanta Economic Review
November/December 1993, Volume 78, Number 6

inflation: How Long Has
This Been Going On?
Ellis W. T a l l m a n

-Business Cycles and
Analysts' Forecasts:
Further Evidence
of Rationality
W i l l i a m C. H u n t e r a n d
Lucy F. A c k e r t




A significant body of economic research analyzes recent inflations
and episodes of hyperinflation. The author of this article observes that
by concentrating on the short term, such analysis loses sight of the recurrent factors that generate inflation. To add perspective to the policy debate on inflation, this study examines numerous episodes
throughout history, beginning with ancient times.
The discussion briefly surveys the political, fiscal, and monetary
circumstances of the countries in which inflationary episodes occurred. Among these inflations, the most notable common feature is
the exploitation of money creation in times of extreme fiscal demands
and insufficient tax revenue sources. The lesson in these historical
treatments for the modern readers lies in the fact that long-lived solutions invariably involved reforming both fiscal and monetary policies.

For individuals, businesses, and policymakers alike, expectations
about the future play an important role in economic behavior. Explaining how expectations are formed has become a central point in
the study of economics and economies.
One important focus of study has been stock analysts' expectations about firms' earnings. Recently, research has cast doubt about
the economic rationality of these forecasts. To investigate this question, the authors conducted statistical tests with procedures similar to
those reported in the previous literature. The study shows that once
the effects of biases introduced by aggregate economic shocks are accounted for, the rational expectations hypothesis cannot be rejected.
By providing evidence suggesting that stock analysts' forecasts
are rational, these results confirm that these forecasts are the best
available, given current knowledge. Because they are rational, the
forecasts can be considered trustworthy sources of information for
economic decisionmaking and policy formation.

FYI—Are International
Comparisons of Inflation
and Employment Valid?
Michael J. Chriszt

i n d e x for 1993




Greater interdependence of national economies and the globalization of financial markets have profoundly changed the world
economy. In such an environment, comparisons of various countries' economic reports are inevitable. How valid are these comparisons, though? Focusing on the consumer price indexes and labor
market reports of the G-7 countries, this article points out the ways
in which seemingly comparable reports can differ.




nflation: How Long Has
This Been Going On?

Ellis W. Tallman

/

The author is an economist on
the macropolicy team of the
Atlanta Fed's research
department. He thanks Eric Leeper
and Mary Rosenhaum
for
helpful
suggestions.

Federal Reserve Bank of Atlanta




nflation is a central issue in monetary policy debates—in the press,
in congressional hearings, and among monetary policy decisionmakers. Two widely held perceptions of the nature of inflation ensure its
prominent place in discussions of government policies. First, inflation is considered costly. Second, government policies influence the
inflation rate. To the general public at least, the high inflation the United
States experienced during the mid-1970s and early 1980s demonstrated that
inflation is costly; the nature and size of its costs are still under study. Likewise, policymakers in particular are continuing to refine their understanding
of the latter point. In what ways do government policies affect inflation?
Behind that question is the larger one of what forces drive inflation, and a
working understanding of these forces should be a key element of policy
discussion and design. There is a significant body of economic research analyzing recent inflations and episodes of hyperinflation, and these analyses
offer useful insights regarding the underlying causes of inflation. Delving
further into history, this article expands the set of inflations typically examined to include numerous episodes beginning with ancient times. The discussion explores the relationship between inflation and government policies
in these various inflationary periods, in search of common features across
these experiences. It becomes clear that inflations have arisen historically in
various degrees and in countries worldwide amid a variety of institutional
structures and monetary standards.
The analysis covers an extensive time period and examines a variety of
inflationary episodes, briefly surveying the political, fiscal, and monetary
circumstances of the countries in which inflationary episodes occurred.
Among these inflations, the most notable common feature is the exploitation

Economic Review 9

of money creation in times of extreme fiscal demands
and insufficient tax revenue sources.1 These circumstances made money creation an attractive and in some
cases the only viable revenue source. The discussion
then focuses on similarities and differences apparent
among the various historical inflations and suggests
how their characteristics may inform decisionmakers
about the efficacy of government policies in modern
times.

/historical Precedents:
Inflation through the Ages

background
In the United States most policy debates on inflation center on relationships among inflation, monetary
and fiscal policies, and other relevant variables observed in or implied by recent data. By concentrating
on the short term, such analysis ignores the general
patterns that occur over many inflations, losing sight
of the long-run factors that generate inflation.
The purpose of this study is to add perspective to
the policy debate on inflation, providing background
broader than that painted by, for example, examining
only the post-World War II U.S. domestic experience
or the past twenty years of U.S. inflation. The vast
amount of previously unexploited information available in the numerous inflations that have occurred
throughout economic history should help improve the
understanding of how and why inflations start and persist. If common sources underlie a large number of inflations, identifying them could provide useful insights
for current policy debates.
In his influential studies of modern inflations and
hyperinflations, Thomas J. Sargent (1986) argued that
reducing inflation effectively has required major reforms in both fiscal and monetary policies. To be credible and to sustain inflation reduction, the reform
policies had to break the perceived pattern of recurrent
fiscal profligacy and debt monetization (that is, the
monetary authority creating new money to purchase
the increasing amounts of new debt issued by the fiscal authority) by establishing long-term policy reform.
The predilection toward inflation is often associated
with the choice of monetary standards. The economies
that Sargent studied operated with fiat money standards; the prevalence of inflation worldwide in industrialized nations during the past twenty years has been
associated with the predominant use of fiat money in
modern economies (see the box on page 4). Some analysts have suggested that restraining inflation in the
long run may require developed nations to alter the insti-

2




Economic

tutional structure that determines government policies.
Early "supply-side" arguments suggest that a return to a
commodity money standard—for example, a gold
standard for the dollar—would restrain the growth of
the money supply and, thus, hold down the inflation
rate.2 This analysis investigates inflation in economies
with various monetary standards for whether the same
factors determine inflation.

Review

Economies have progressed from commodity monies (often using coinage of precious metals) to modern
fiat paper currency, an inconvertible claim issued by
the government. Any type of monetary system can experience persistent and undesirable rates of inflation;
however, the technological differences between earlier
forms of money (transactions media) and modern currency affect how fast the monetary authority can increase the money supply. It has often been suggested
that a fiat currency standard is necessary for the production of extremely high rates of inflation.3 The extreme inflation rates that can result from the faster
money creation in a fiat money system distinguish
losses of purchasing power in historical instances from
modern inflation. Despite the differences, there also
seem to be similarities among earlier inflations in their
underlying causes as well as between those historical
instances and more recent inflations.
The historical evidence challenges certain conventional wisdoms. For example, can inflation—that is,
sustained price level increases—occur in a commodity money system? Did ancient empires and medieval
nation-states suffer dramatic price level increases as
well as long-lived inflation? General observations
drawn from examining diverse historical inflationary
periods may reinforce findings from studies of modern
inflations.

IIard Currency (Commodity Money)
Inflations: Ancient to Medieval Times
The discussion of historical inflations concentrates
on the price level increases and the political circumstances under which the inflations occurred. Unrestrained fiscal policies preceded these historical inflations and remain key determinants in modern instances.

November/December 1993

There are, however, distinguishing features of these earlier economies that are noteworthy. For example, among
kingdoms and empires there was no market for promissory notes as there is between countries today.4
The Roman Empire. In the third century, the Roman Empire experienced significant inflation, the proximate cause of which was that fiscal expenditures
(mostly for wars during the Germanic incursions to the
north) continually exceeded revenues from tax collections. Without a debt market—that is, a market for
debt of the Roman Empire—fiscal deficit spending
had to be funded some other way. The only other
method available at that time was seigniorage, the difference between the value of the precious metal bullion used for coinage and the face value of the minted
coins. The Roman emperor had the power to mint
coins and thus could choose the purity and weight of
the precious metal content of coinage. If the value of
the coinage exceeded the raw bullion value, he could
increase revenues by reducing either the quality or
weight of its precious metal content so that the same
denomination coin would have lower intrinsic value, a
process called debasing. 5
In Rome, gold coins, notably, were not debased;
however, these coins were so high in value that they
were not generally used in market transactions (Paul
Einzig 1966, 229). Silver coinage debasement and the
overissuance of fiat coins made of base metals led to a
substantial and persistent inflation. The price level increased fiftyfold from 200 A.D. to 300 A.D., implying
an average rate of inflation between 3 percent and 4
percent per year (Forrest H. Capie 1991, 5). However,
it seems that some subperiods may have experienced
dramatic price increases. In the latter part of the inflation, the Roman emperor Diocletian (285-305 A.D.)
felt it necessary to impose wage and price controls to
alleviate inflation (Rondo Cameron 1989, 41). To spur
compliance, violations of the restrictions were punishable by death. Even so, the regulation of prices and
wages was unenforceable, and the restrictions were
eventually revoked. A more long-lived solution was
achieved when Diocletian imposed fiscal reforms by
reorganizing the Roman bureaucracy and making the
collection of taxes more efficient, thus reducing the
need for financing by coinage debasement.
Medieval Europe. The "Great Debasements" of
coinage during the fourteenth and fifteenth centuries
in Medieval Europe were, like the Roman inflation,
generally a byproduct of wars (Peter Spufford 1989,
289). War expenditures during the Middle Ages were
the most expensive endeavors undertaken by sovereign
states. As in Rome, the instances of debasement oc Bank of Atlanta
Federal Reserve


curred when the sovereign ruler also had control of the
minting of coinage.
Not all medieval European economies experienced
inflation resulting from debasement. The Florentine
florin, for example, retained nearly the same weight and
fineness of gold, fluctuating within 6 percent of its initial weight in gold units throughout the fourteenth and
fifteenth centuries (Spufford 1989, 300). The florin can
therefore serve as a benchmark for assessing inflation
in other currencies. Extant records of Italian traders'
foreign exchange transactions show the number of foreign coins exchanged per unit of florins. The depreciation of a coinage relative to the florin reflects the loss
of purchasing power in that currency. In lieu of price
data (which are unavailable), the exchange rate data
help estimate the inflation rate in these medieval
economies. The data do not, however, provide direct
measures of prices for various goods during an episode.
The experiences of the Kingdom of Castile provide
one notable example of a persistent medieval inflation.
From 1300 to 1500, the kingdom engaged in a series
of foreign and civil wars financed largely by coinage
debasement. Over these two hundred years the maravedi, the Castilian unit of account, fell to only 1/65 of
its initial value versus the Florentine florin, implying
an annual average rate of inflation of slightly more
than 2 percent, a relatively small amount by modern
standards (Spufford 1989, 295). However, in various
subperiods during those centuries, the inflation rate
rose more substantially. For example, between 1462
and 1473, when Castile was at war with Navarre, the
Castilian price level more than doubled, and the annual average rate of inflation was between 6 percent and
7 percent—an unpleasant level in modern, developed
economies and likely disruptive in these earlier economies (Spufford 1989, 299).
Inflation in Castile displays persistence because the
large-scale coinage debasement was not followed by
effective reestablishment of the initial coinage value.
Such attempts at coinage reform were often met with
revolt by debtors, renters, peasants, and other groups
who stood to lose the most by a return to a strong
coinage (Spufford 1989, 315). Because the debasement continued, the Castilian maravedí over time depreciated further. The downward drift of its value is
the most continuous inflation in that era.
At about the same time, a series of inflationary
episodes took place in France. The exchange rate of the
French tournois in 1300 in comparison with its value
in 1500 seems to indicate much greater stability than
the maravedi. The tournois in 1500 was only onefourth its value relative to the florin in 1300, implying

Economic

Review

3

Monetary Standards
A c o u n t r y ' s c h o i c e o f m o n e t a r y s t a n d a r d is o f t e n

r e n c y , d e v e l o p e d a l o n g the lines of the f o l l o w i n g story

t h o u g h t to a f f e c t the likelihood of inflation. A c c o r d i n g to

about the goldsmith. A s c o m m o d i t y m o n e y — i n this case,

m o s t theories of inflation, the q u a n t i t y of m o n e y in cir-

g o l d — b e c a m e m o r e widely used, p e o p l e a c c u m u l a t e d it

c u l a t i o n l a r g e l y d e t e r m i n e s t h e l e v e l of p r i c e s in t h e

in sizable e n o u g h a m o u n t s that they felt m o r e c o m f o r t a b l e

e c o n o m y ; thus the g r o w t h in this m o n e y supply directly

depositing the gold with a goldsmith for safekeeping. In

i n f l u e n c e s the inflation rate. T h e r e are institutional dif-

e x c h a n g e , the depositor received f r o m the goldsmith a pa-

ferences in the m o n e y s t a n d a r d s a n d the w a y s in which

per receipt that served as a claim f o r the deposited gold.

they can b e m a n i p u l a t e d to g e n e r a t e inflation.

A s the practice spread throughout the e c o n o m y , receipts

V a r i o u s m o n e t a r y s t a n d a r d s e x i s t e d d u r i n g the infla-

f o r gold deposited with goldsmiths traded as m o n e y . Be-

t i o n a r y e p i s o d e s e x a m i n e d in this article, w h i c h r a n g e

c a u s e t h e c o m m o d i t y - b a c k e d p a p e r c u r r e n c y c o u l d be

o v e r t h o u s a n d s of years. T h e f o r m of m o n e y in use g e n -

converted into the c o m m o d i t y or coined value backing it,

erally e v o l v e d o n the basis of its desirability as a transac-

the value of the representative m o n e y w a s tied to the value

tions m e d i u m . 1 A n u m b e r of v a l u e d c o m m o d i t i e s w e r e

of the c o m m o d i t y . 3 T o maintain the credibility of p a p e r

used as the m e d i u m o f e x c h a n g e , b u t early e c o n o m i e s

m o n e y convertibility, g o v e r n m e n t s held c o m m o d i t y re-

generally e v o l v e d t o w a r d f a v o r i n g silver and gold. O v e r

serves sufficient to meet the possible conversion d e m a n d s .

time, m o n e t a r y s t a n d a r d s m o v e d t o w a r d the fiat standard

U n d e r the c o m m o d i t y - b a c k e d m o n e y s c h e m e , it is be-

prevalent in m o d e r n d e v e l o p e d e c o n o m i e s .

lieved that the threat of c o n v e r s i o n to s p e c i e ( c o i n a g e )

C o m m o d i t y m o n e y w a s the earliest and simplest

h i n d e r e d the use of seigniorage for revenue production be-

transactions m e d i u m . T h e c o m m o d i t y itself had value in

cause the value of paper claims could not greatly exceed

o t h e r uses, so the p o p u l a t i o n h a d a d e m a n d f o r it. T h e

the value of the backing. A relevant point for the purposes

c o m m o d i t i e s u s e d as m o n e y r a n g e d f r o m Y a p stones to

of this discussion, h o w e v e r , is that there is always an in-

rice (in C h i n a ) to nails (in the c o l o n i a l U n i t e d States).

c e n t i v e f o r the g o v e r n m e n t to g l e a n s o m e s e i g n i o r a g e

C o i n a g e of precious metals b e c a m e the d o m i n a n t f o r m of

f r o m m o n e y creation, and the q u e s t i o n is w h e t h e r they

m o n e y in the early e c o n o m i e s e x a m i n e d in this review.

will break the rules set by the monetary standard to accu-

Gold and silver h a d innate value d e s i r e d by the popula-

m u l a t e the desired revenue.

tion, and the process of h a v i n g coins m i n t e d by the gov-

C o m m o d i t y - b a c k e d m o n e y n e e d n o t be c o n v e r t i b l e ;

e r n m e n t ensured a level of w e i g h t and purity of the metal

f o r e x a m p l e , a f t e r 1933 the United States n o l o n g e r ex-

at g i v e n pressings. C o i n a g e eliminated the n e e d to w e i g h

changed gold for gold certificate dollars for domestic

bullion in e v e r y e x c h a n g e transaction to d e t e r m i n e their

U . S . citizens; h o w e v e r , the c o u n t r y r e m a i n e d o n an inter-

value. A n o t h e r a d v a n t a g e w a s that if the v a l u e of the r a w

n a t i o n a l g o l d e x c h a n g e s t a n d a r d and p r o v i d e d g o l d in

metal w a s less than the value of the coinage, the govern-

f o r e i g n transactions. W h i l e the gold dollar standard hin-

ment c o u l d profit by the d i f f e r e n c e . T h e resulting s o u r c e

d e r e d a t t e m p t s t o raise r e v e n u e f r o m seigniorage, the po-

of r e v e n u e is referred to as seigniorage. 2

tential to a c h i c v e p r o f i t s and the temptation to exploit it
remained.

Commodity Money
C o m m o d i t y m o n e y s y s t e m s are n o t i m m u n e to inflation. F o r e x a m p l e , if the supply of the c o m m o d i t y m o n e y g r o w s at a rate b e y o n d the increased d e m a n d for it,
the price level increases. S u c h external supply c h a n g e s
are n o t t h e t y p e of i n f l a t i o n e x a m i n e d h e r e , h o w e v e r .
R a t h e r , in the e p i s o d e s e x a m i n e d in this discussion, inflation a r o s e f r o m a c t i v e d e b a s e m e n t of the c o i n a g e b y
the g o v e r n m e n t f o r the p u r p o s e of e x t r a c t i n g s e i g n i o r age revenue. Debasements reduced the precious metal
w e i g h t , f i n e n e s s (purity), o r both of the c o i n a g e a s the
m e t a l s w e r e m i n t e d into n e w c o i n s . D e b a s e m e n t s o c c u r r e d t h r o u g h o u t history and resulted in an increase in
t h e transactions m e d i u m , m u c h as a n increase in printed
currency e x p a n d s the m o n e y supply today.

Fiat Money

A c c o r d i n g to economists and numismatists, the use of
representative m o n e y , o r c o m m o d i t y - b a c k e d p a p e r cur-

T h e fiat m o n e y era that b e g a n in the m i d - 1 9 7 0 s w a s
d i f f e r e n t in a n u m b e r of w a y s f r o m the p r e c e d i n g era, e s -

12 Economic



Review

M o s t d e v e l o p e d nations h a v e severed the institutional
link b e t w e e n their c u r r e n c i e s and gold a n d instead issue
their m o n e y as legal tender f o r all d e b t s b y g o v e r n m e n t
o r d e r (fiat). S u c h a m o n e t a r y standard is referred to as a
fiat standard. B e c a u s e the m o n e y is u n b a c k e d p a p e r currency, there is n o u n d e r l y i n g constraint o n its issuance.
T h e i n c i d e n c e s of h y p e r i n f l a t i o n in the twentieth c e n t u r y — f o r e x a m p l e , G e r m a n y , 1921-24; H u n g a r y , 1 9 2 0 - 2 4
and 1945-46; a n d C h i n a , 1 9 4 7 - 4 9 — g i v e glaring t e s t i m o n y to the potential e x c e s s e s that can o c c u r in a fiat m o n ey s y s t e m that fails to practice p r o p e r m o n e t a r y res t r a i n t . 4 H o w e v e r , fiat m o n e y is n o t t h e r o o t of t h e s e
p r o b l e m s ; rather, it is only a facilitator.

November/December 1993

institutional r e f o r m that called for a return to the gold
standard. 5 T h e current low inflation environment worldwide has quelled many of the d e m a n d s for a return to the
gold standard and o f f e r s at least slight evidence that low
inflation can be sustained under fiat m o n e y systems.

pecially on t h e international markets. First, the m a j o r nations began a system of flexible exchange rates that allowed rates of exchange between currencies to c h a n g e in
response to the relative market d e m a n d s and supplies of
the currencies. In the Bretton W o o d s e x c h a n g e rate system, rates between currencies had been fixed at a given
ratio, w h i c h w a s altered only infrequently. Presumably
as a result of m a j o r oil supply shocks, a n u m b e r of d e v e l o p e d nations e x p e r i e n c e d persistent inflations after
the break-up of the Bretton W o o d s system. In the United
States, inflation attracted widespread attention especially
during the late 1970s and early 1980s. There were a variety of proposals to reduce the inflation rate, including an

The examination of inflations in this article suggests
that the choice of monetary system may h a v e s o m e influence on t h e inflation rate that an e c o n o m y may experience. H o w e v e r , the m o r e fundamental issues concern
whether significant inflation can arise under any m o n e y
standard and whether inflation observed today shares a
c o m m o n source with inflation in medieval and ancient
times.

Notes
1. The desirable attributes are durability, divisibility, portability, homogeneity, difficulty of counterfeiting, and a
stable demand for and supply of the money.
2. The marginal costs of making coins from bullion were
minimal.
3. In many instances the paper currency coexisted with
coinage in the economy. In the United States at the tum
of the century, many paper bills were convertible into
gold, and gold coinage remained in use as well.
4. See Sargent (1986) for an interesting discussion of a selection of hyperinflations. See also Capie (1991).

an average inflation rate of slightly more than one-half
of 1 percent per year. Within these arbitrary endpoints,
however, there were shorter periods of inflation in
which the exchange value of the tournois fluctuated
significantly.
The French episodes of inflation were typically
more severe and sharper than those in Castile. French
inflation over the 200-year period appears less virulent
because of the moderate average annual inflation rate.
However, French rulers typically would enforce a
coinage reform following periods of rapid coinage debasement. Unlike in Castile, French authorities restored
coinage to the weight and fineness of precious metal
content that existed before the debasement, thus essentially resetting the coinage to its initial exchange rate.
The explosive price increases and precipitous declines in the foreign exchange value of the tournois
generated the most notorious inflations in the medieval
era. At its most severe, the average inflation rate in
France exceeded 50 percent per year. These extreme
increases in the price level produced substantial redistributions of wealth from creditors to debtors. The re
Federal Reserve Bank of Atlanta


5. Aside from the price level issues discussed in this review,
the gold standard was associated with a variety of problems that may make it unattractive as a modern monetary
standard (see Tallman and Moen 1993). Governments
may break the rules implicit in any monetary standard to
exploit seigniorage. Thus, an ingredient that is key to the
success of a monetary standard is the likelihood that a
government will abide by the implicit restrictions.

form measures often taken to return the coinage to near
its initial value imposed redistributions from debtors to
creditors over very short periods of time. Such disruptions of course led to political strife in the country.
In France as elsewhere, the main driving force behind coinage debasement was the need to generate
seigniorage revenues for funding wars. But in France
the debasement of coinage was taken to extremes not
frequently observed. An example of the basic accounting of coin production—that is, the number of coins
minted from an amount of bullion—conveys the extent
of debasement that took place over a short time. In
1336 the French minted sixty coins at 96 percent silver
content. From the same amount of silver bullion, in
1355 they minted 480 coins of 20 percent silver content (Spufford 1989, 305). Containing less of the valued metals, the later coins were thus less valuable. The
foreign exchange markets recognized the fall in value
almost immediately. Spufford notes that exchange
rates would reflect large debasements—or substantial
reforms that raised value significantly—in weeks or
even days (1989, 293).

Economic

Review

5

The rapid inflations in France during this period
were especially notable given the amount of time, labor, and capital input necessary for debasing the
coinage, which required melting down bullion or circulated coinage and then reminting coins. 6 In the fiveyear period ending in 1342, the foreign exchange
value of the tournois fell to only one-fifth its initial
level in 1338, implying an annual average rate of inflation approaching 40 percent (Spufford 1989, 297). In
1343, monetary reform returned the coinage to its initial precious metal content and fineness; however, the
extensive financial demands of the ongoing Hundred
Years War and the lack of any existing mechanism for
direct taxation in France inevitably forced the ruler to
resort again to debasement as a means of finance. By
1360, the foreign exchange value of the tournois had
fallen to less than 1/25 its 1343 value, an average annual inflation rate of nearly 60 percent per year (Spufford
1989, 297).
The exploitation of coinage debasement for revenue
by French rulers led certain interest groups, mainly
those hurt most by inflation, to complain and to question the right of the sovereign to mint and debase coins
at will. Spufford notes that the De Moneta of Nicholas
Oresme written in the middle of the fourteenth century
verbally attacked the exploitation of debasement: "In
such a kingdom internal trade is disturbed and hindered in many ways by such changes, and while they
last, money-rents, yearly pensions, leases, cesses [censurej and the like, cannot be well and justly assessed,
or valued, as is well-known. Neither can money be
safely lent or credit given" (Spufford 1989, 306). His
statement suggests that contemporaries recognized the
difficulties that inflation imposed on an economy. 7
Oresme's writing also gives some insight into his
understanding of fiscal and monetary factors in generating inflation. He argued that the right to coin money
should not be in sole possession of the royal authority.
In essence, he was proposing that some restriction
should prevent the royal authority from being able to
exploit the revenue creation potential of seigniorage.
Oresme's treatise foreshadows the modern viewpoint
that the fiscal authority and the monetary authority
should not be under the same control. Modern inquiries in this area by Alberto Alesina and Lawrence
H. Summers (1993) show a positive correlation between the average inflation rate in a country and the
degree of fiscal influence on monetary policy.8
Political agreements between French rulers and the
nobility prevented further coinage debasements for
several centuries. The aristocratic class—the wealthy—
had been the group most adversely affected by infla
Economic
6


Review

tions and thus had a strong incentive to restrict royalty
from exploiting seigniorage. As an alternative source
of revenue, the nobility offered the royal authority a
method of reliable taxation. 9 French reform measures
in 1360 not only returned the coinage to its strong
base but also included provisions for direct taxation by
the ruler as a mechanism to avert large fiscal deficits.
The Roles of Monetary and Fiscal Policy. Two
simple features of these previous inflations are particularly noteworthy in comparison with modern inflationary episodes. First, the inflations discussed were generated by the decisions of a ruler acting as both the
coining authority—comparable to the monetary authority in the U.S. economy—and the fiscal authority.
In the countries that experienced notable inflations, the
government relied on seigniorage as a major source of
revenues. Countries that avoided inflation caused by
coinage debasement established agreements that replaced renewal of coinage, with the opportunities it
provided for debasement, with reliable taxation as an
alternative form of revenue as early as the twelfth century (Spufford 1989, 316). Clearly, effective fiscal reform
was a necessary ingredient for reducing the inclination
toward financing by seigniorage.
A second important element of these inflations is that
they occurred without the existence of a primary fiat
currency—that is, a nonconvertible (often paper) claim
issued by the government, unbacked by any commodity,
to serve as a medium of exchange.10 Commodity-based
money could be exploited via coin debasement to generate seigniorage for a government revenue. The resulting inflation was a by-product of the method of fiscal
finance, chosen in large degree by default. In most cases, the existing fiscal demands far outpaced the fiscal
revenues and, given the absence of a debt market,
seigniorage was the only revenue source available.
Regardless of the form of money and the rules implicit in any particular monetary standard against inflation financing, governments have an incentive to raise
revenue by seigniorage financing. Throughout history,
there have been situations in which rulers exploited
such financing, and the resulting inflations generally
unsettled their economies. Descriptions of historical inflation episodes suggest, however, that fiscal and monetary policies combined to generate inflation, as seems
to be the case in modern economies (see Sargent
1986). The instances of inflation occur when fiscal
spending exceeds the tax revenue base, requiring money creation as a solution; the fiscal deficits become
monetized when seigniorage revenue finances the
shortfall. As noted earlier, in the historical episodes cited, the ruler generally retains the power to coin or print

November/December 1993

money, and, as contemporary observers of medieval inflation like Oresme understood, this control of the production of the transactions medium by the fiscal
authority seems to be an important ingredient in generating inflations.

71ie First Paper Currency Inflation:
Twelfth-Century China
The first true paper currency was introduced in China during the Sung dynasty in the tenth century. The
paper money was a substitute for iron coinage that had
been the medium of exchange." The population deposited coins with bank-like institutions and held in
exchange more easily handled paper receipts for these
deposits. 12 The receipts played the role of a currency, a
representative money.13
As in the episodes of inflation discussed previously,
the Chinese inflation occurred in the midst of wartime
expenditures by the government. When the invasion of
the Tartars sometime after 1127 forced the Sung dynasty to move south, the initial paper monetary system collapsed. In 1161, a new paper currency, hui-tzu ("check
medium"), was introduced as a replacement (Lui 1983,
1069). The government carefully regulated the amount
of the currency outstanding and apparently ensured that
adequate coinage reserves backed the currency.14 For
twenty years, the exchange rate between the paper currency and copper coins, a market-determined rate, was
stable. For its responsible monetary policy—that is,
maintaining the value of the currency—the government
gained credibility, and the use of the paper currency
spread throughout the nation.
The Chinese paper currency thus was a commoditybacked money that the government controlled. Under a
commodity-backed money system, to avoid inflation
the amount of backing should fluctuate with output so
that if there were more economic output, there would
be more backing. As long as the Chinese currency was
properly backed, governmental control of the amount
outstanding did not impose an inflation. The currency
supply could increase without generating inflation because it increased with the amount or value of economic transactions, essentially rising because of demand
rather than excess currency supply generated by the
monetary authority. The stable value of the paper currency did not continue, however. Wars against the Tartars and later against the Mongols increased the fiscal
demands, and the government turned to paper money
creation as a means to raise revenue. As the paper

DigitizedFederal Reserve Bank of Atlanta
for FRASER


money supply increased, the backing of the money actually diminished, further depreciating the currency's
value. In essence, the government broke the rules implicit in its commodity-money standard and in doing so
lost the credibility built up over those twenty years of
relative stability.
As in ancient Rome and the economies of the Middle Ages, the extreme fiscal demands of war expenditures pressured government revenue sources. Given the
government control of money issue and the absence of
a viable market for sovereign debt, inflationary finance
was an obvious alternative. Price level measures in China increased approximately fortyfold from 1160 to
1240, implying an average annual inflation rate between 4 percent and 5 percent.16 Lasting over an eightyyear span, the Chinese experience is an example of
a persistent inflation preceding modern fiat currency
inflations by centuries. This inflationary instance
demonstrates that a commodity-backed currency can
still be exploited for seigniorage if the rules of the standard are not maintained. In such a case, a commoditybacked money approaches the concept of fiat money.

Fiat Money Inflation: The Assignat
The assignat, a paper currency issued in postrevolutionary France (1790-97), was issued as a backed paper
money, although the public perception of the currency
approached that of a fiat money over time.17 In the initial issue, the assignats were an interest-bearing transactions medium with interest payments that would be
supported by the sale of land confiscated from royalty
or the church. For this first issue of 400 million livres,
the money was not legal tender; rather, it was to be redeemed systematically over five years. Assignats, then,
were viewed as mortgages on the church or royal land.
Within four months of the first issue, however, a second issue (also 400 million livres) offered the money as
noninterest bearing and as legal tender.18 The assignats
would be retired when citizens purchased confiscated
lands with accumulated currency.
The French government in those years had no reliable mechanism for collecting taxes; the government
failed to enforce the most lucrative taxes from the prerevolutionary era. Especially following the outbreak
of war in 1793 with Spain, Holland, and England, substantial war expenditures led to the creation of assignats as a major source of revenue. From 1790 to
1795, only 20 percent of government revenues were
from taxation. 19

Economic

Review

7

period the inflation rate averaged nearly 25 percent per
month. By November the assignat had lost a tremendous amount of its value—down to less than one percent of the initial value. The suspension of land sales for
assignats enacted on November 20, 1795, removed
from the money the last vestige of a backed currency so
that assignats became fiat. Their value fell still further. In December the inflation process and the seigniorage reached unprecedented extremes. The government
printing presses essentially doubled the supply outstanding in that month, and the price level more than
doubled from November to December. The demise of
the assignat as a transactions medium was imminent.

Table 1 presents data on the number of assignats in
circulation and also provides a measure that indicates
the value of assignats in circulation as a percent of
their value when they were first introduced. 20 Assignat
value depreciated to 70 percent of its initial value after
two years of circulation, a fairly stable level relative to
what followed. From 1792 to 1793, the inflation became noticeable enough to spark public protests. During the Reign of Terror (from September 1793 to June
1794), the government imposed maximum price limits
and other restrictions to maintain the value of assignats. In the latter half of 1794, after the Reign of Terror had ended, the strained and weakening economic
system experienced additional depreciation of the
assignats. The key period of depreciation occurs in the
data for 1795, however, after the repeal of maximum
price restrictions.

The price level data in Table 2 show how the index
of prices rose most rapidly at the end of the assignat
era. In terms of the inflation rate, several months in
revolutionary France appear to qualify as times of hyperinflation; the key element in the assignat inflation
was the tremendous increase in notes outstanding.
The reliance of the fiscal authority on revenues
from seigniorage links the instance of assignat inflation with historical inflationary episodes cited above.
What differentiates the assignat inflations, though, is
that the extreme degree of inflation was created by the
combination of the printing press and a fiat money.
The high inflation rates in this case fed fears that issues of fiat currency inevitably lead to rapid inflation,
risking hyperinflation (see Andrew Dickson White

As assignat depreciation accelerated in 1795, the
government was forced to issue more of them to generate the necessary revenue. The revenue extracted depended on how much the new assignats would buy in
the marketplace—that is, on their market value. As inflation accelerated, the population was less willing to
hold assignats. The demand for them diminished, and
new issues were causing more rapid depreciation. As
Table 1 shows, the amount in circulation more than
doubled from February to November 1795. The price
level data shown in Table 2 suggest that over the same

Table 1
Assignat Depreciation
Issuance

Period

In Circulation

Percent of Initial Value 3

1790-1791

1,860 M

1,490 M

88

lanuary-May 1792

2,200 M

1,660 M

72

January-August 1793

4,950 M

4,050 M

39

September 1793-Iuly 1794

8,450 M

7,200 M

46

7.6 B

39

August 1794 b
November 1794

8.0 B

32

February 1795

8.8 B

22.5

11.4 B

a

The figures for percent

b

Figures for each issuance

c

By January

3.5

19.7 B

November 1795 c

11

16.4 B

M a y 1 795
August 1795

.8

of initial value use the local data (see note 20).
after 1794 are not

1796, the amount

available.

of assignats in circulation

exceeded

39 billion

livres.

S o u r c e : C a l c u l a t e d from data in Harris (1930, 163-86).


Economic
8


Review

November/December 1993

1980). The assignat inflation experience in fact foreshadows numerous hyperinflationary episodes in recent history.21

U.S. Inflation in Wartime
Several rigorous treatments provide in-depth analysis of war-related inflations in the United States. 22
This brief summary of the fiscal expenditures, revenue sources, and political environment that relate to
these inflationary episodes emphasizes that the United
States has in its history experienced inflations driven
by the same forces as those discussed above. Fiscal
and monetary policies remain the key linkages among
inflationary episodes throughout time and across
countries.
The inflation from the American Revolutionary
War period presents a clear example of fiscal deficits
during wartime sparking the use of seigniorage financing. 23 The Continental Congress had no power to tax,
and the war with England began as a revolt over taxes.
Thus, the colonial government was unlikely to exploit
direct taxation as a major source of revenue for the
war effort (Capie 1991, 10). In fact, the colonies raised
only 6 percent of their revenues via taxation. Sovereign
loans and gifts from France and Spain covered less
than 20 percent of the revenue needed for the war.24
The Continental Congress financed the remaining
deficit by money creation—that is, by printing paper
fiat currency known as continentals.
The inflation produced by the seigniorage financing
raised the price level (measured by an index of wholesale prices in Philadelphia) from 100 in 1776 to higher
than 6,500 in 1780 (Stanley Lebergott 1984, 42). The
depreciation of the continental was mild at first but accelerated rapidly; Capie (1991) noted that prices increased by more than 1,000 percent during the twoyear period from 1779 to 1780, implying an annual average inflation rate of greater than 300 percent. The
phrase "not worth a continental" refers to the perceived worthlessness of this paper currency.
During the Civil War the Confederacy faced similar fiscal difficulties. In the early Confederacy no existing machinery could impose and collect direct
taxes. With the revenues from taxes greatly limited,
the Confederacy instead raised 23 percent of its funds
from bond issues. The most striking statistic, though,
is that from February 1861 to October 1864, 58 percent of the Confederate revenues were generated by
money creation. From October 1861 to March 1864,

Federal Reserve Bank of Atlanta




the monthly rate of inflation averaged about 10 percent. 23 The supply of Confederate bills increased
elevenfold over their first three years. As the end of
the war approached and Union victory seemed assured, the price level in the Confederacy skyrocketed. 26
Inflations experienced in the Civil War by the
Union, in World War I, and in World War II (analyzed
in detail by Milton Friedman 1991) differ notably
from those of the colonies and the Confederacy. For
the purposes of this discussion, a specific element of
war-related inflation is of interest: the way in which
the inflation rate varied in relation to the proportion of
revenue generated through taxation as opposed to
through seigniorage.
The Union experienced inflation averaging 25 percent per year, as measured by wholesale prices. Tax
revenues covered about 21 percent of the war expenditures. The government relied on money creation to finance 23 percent of the accumulated deficits for the war
effort. During World War I, the United States collected
tax revenue to cover 43 percent of the expenditures for
the war effort, whereas money creation financed only
11 percent of the accumulated deficits. Given the lower degree of money creation, it is not surprising that
wholesale price inflation was lower during World War
I than for the Union during the Civil War: the inflation
rate averaged 16 percent per year from August 1914 to
May 1920. Even more impressive is the success of
U.S. efforts to hold down inflation during World War

Table 2
Price Level Data: General Index
(1790=

Date

100)

Price Level

Percent Change
Per Month
NA

January 1795

580

March 1 795
April 1795

720

34.5

900

22.3

February 1795

M a y 1795

510

NA

-12.8

NA

June 1795

1,310

NA

July 1795
August 1795

2,180
2,710

50.9

October 1795

3,100
NA

13.4
NA

September 1795
November 1795

December 1795

21.8

5,340

NA

12,990

143.3

Source: Harris (1930, 108).

Economic

Review

9

II. Fiscal responsibility was a key ingredient; tax revenues covered nearly 60 percent of the wartime expenditures. Wholesale inflation increased an average
annual rate of 9 percent per year over the period from
September 1939 to August 1948.27 The fraction of the
accumulated deficit financed by money creation was
11 percent.

Sovereign Debt
Most of the inflations described in this article occurred in conjunction with wartime fiscal deficits because the extreme demands for wartime expenditures
placed strains on existing financing mechanisms. Although it may appear that governments turned to financing via money creation because it offered a
simple solution, more often, especially in the most
egregious misuses, there was no viable financing alternative immediately available. As noted above, the early inflations took place in economies that could not
finance their government expenditures (in excess of
revenues) through the issue of sovereign debt. The fiscal deficits, then, had to be monetized essentially as
they arose.
In modern instances of U.S. inflation, the use of
sovereign debt issue has given governments an option
not available under the strict government budget constraints that impinged on the earlier economies. By issuing debt, governments are able to finance wartime
expenditures while maintaining relatively stable tax revenues over time and avoiding increasing taxes. Robert J.
Barro (1981) has called this process "tax smoothing."
Barro's study shows that the most significant increases
in the public debt are associated with wartime fiscal
expenditures. The government "smooths" taxation
over time so that the tax demands on the economy during the war are not so extreme. After wartime, the
government must raise more revenue to shrink the accrued debt. Modern economies have benefited from
the ability to finance wars by spreading out the welfare
costs of distortionary taxation across more time periods and especially over periods without war through
the issuance of debt. 28
The existence of government debt as an alternative
does not eliminate the temptation to exploit seigniorage as a revenue source. Rather, the accumulation of
debt and related interest expenses represents liabilities
of the government that will ultimately require repayment—through tax revenue or seigniorage revenue.
Responsible policies on the part of both fiscal and

Economic
10



Review

monetary authorities are necessary to resist the temptation to inflate away government debt.

Conclusion
This article focuses on the combination of fiscal
and monetary policies that generated inflation in certain historical instances. The discussion centers on the
role of fiscal deficits, a recurring factor in periods of
inflation since the time of the Roman Empire and the
Middle Ages as well as through American history. Fiscal deficit-induced inflations took place in economies
with various forms of monetary standard: commodity,
metal-backed paper, and fiat currency; however, as
suggested by Capie (1991), fiat paper currency allows
the inflation rate to reach tremendously high annual
rates when governments pursue inflationary financing.
In examinations of modern high or hyperinflationary instances, it is clear that unchecked fiscal spending
and untenable fiscal deficits preceded the cases of
hyperinflation. 29 These circumstances seem to have
precedents in earlier economies. In the historical inflations, some perceptive observers recognized not only
the redistributive aspects of inflation but also the ultimate fiscal (and monetary) causes. Critical writings
from the medieval era, specifically Oresme, foreshadow analysis by modern economists suggesting that the
basic principles that generated inflations in medieval
times still operate today. The lesson in these historical
treatments for the modern reader lies in the fact that
long-lived solutions invariably involved reforming
both fiscal and monetary policies.
The problems that fiscal deficits create arise in
many modern episodes of high inflation. Latin America during the early 1980s and the current circumstances in the Eastern Bloc nations present dramatic
examples of the disruption that this extreme inflationary circumstance imposes on an economy. Some
economists (for example, Eric Leeper 1993) suggest
that the movement toward European Monetary Union
is a reaction to high average inflation among these industrialized countries. In general, domestic fiscal
deficits in Europe forced some degree of domestic
monetary accommodation and thus inflation. European Monetary Union will remove the discretion of a
domestic monetary authority to engage member countries in seigniorage financing.
Despite the dramatic differences in the economic
structure over thousands of years, the underlying causes of inflation seem to remain basically the same. In

November/December 1993

methods of raising revenue from taxation may help
prevent a reliance on potentially harmful seigniorage
financing. 30

historical episodes, the ultimate source of inflation was
the combination of recurrent fiscal deficits and their
monetization. This finding suggests that adequate

Notes
1. Most inflation incidents used as examples here occurred during the fiscal pressures of wartime; however, neither fiscal
pressures nor inflations connected with them are exclusively
related to war. Any major fiscal initiative that results in large
deficits could result in inflation.
2. Analysts that support a commodity money standard argue
that it maintains the price level better than the prevailing fiat money standard by involving rules that limit a central
b a n k ' s discretion for generating excessive money creation.
3. Capie, for example, suggests that high inflation or hyperinflations occur in fiat monetary systems because the printing
press—all that is necessary to generate fiat paper currency makes it possible to produce a rapid enough increase in
the stock of currency to support inflation (1991, 28-29).
4. Hamilton (1947) provides a brief history of the early issuance of sovereign debt.
5. The process of debasing coinage is analogous to the depreciation of paper currency when it is overproduced. If the
monetary authority prints money at too fast a pace and increases the currency supply, the price or value of the paper
money declines and the prices of other goods measured by
the price level increases.
6. In comparison, fiat money seigniorage requires only printing presses to create new currency.
7. Certain interest groups profited from the decline in the purchasing power of the coinage; the writings of contemporary
observers recognized this redistributional aspect of inflation.
For example, the nobility preferred strong and stable currency that preserved their wealth and maintained the real value
of their rents that were normally in fixed nominal amounts.
Debtors obviously profited f r o m inflations because fixed
rents are repayed in less valuable money. During a coinage
reform, the debtors, most often the least powerful subjects,
sparked outbreaks of violence. In Castile, reforms in both
1391 and 1473 sparked riots in urban areas (Spufford 1989,
315). Modern economies have developed institutional features that help alleviate some of the redistributional aspects
of inflation, yet that aspect of inflation remains. Garfinkel
(1989) presents a useful discussion of inflation costs in the
modern context.
8. See Pollard (1993) for a critical review of this literature.
9. Because seigniorage as the main source of revenue imposed
high costs on the most powerful subjects, it was unlikely to
be long-lasting without producing political tension.
10. S o m e e c o n o m i e s — f o r e x a m p l e , R o m e — c i r c u l a t e d fiat
coinage composed of base metals.
11. The discussion in this section follows closely the text in Lui
(1983).
12. Initially, the government offered a group of wealthy families the privilege of organizing and issuing the paper claims,


Federal Reserve Bank of Atlanta


called chiao-tzu, or "exchange m e d i u m " (Lui 1983, 1069).
After some time, though, the provincial government took
over the role of issuing the money.
13. See the box on page 4. The representative money scheme
p l a y e d out m u c h like the e v o l u t i o n of p a p e r c u r r e n c y
backed by gold in medieval Europe.
14. There was convertibility between the paper currency and
coinage, but it was not at a 100 percent conversion rate.
15. Lui notes that the use of the hui-tzu did not extend to the
province of Szechuan, which had its own paper currency
(1983,1069).
16. Notably, the money supply measures increased nearly fiftyfold over the same period. Descriptions of the measures of
money and prices are described in Lui (1983, 1073-74).
17. In 1715, the Duke of Orleans had allowed John Law to establish a bank and issue a paper currency supposedly backed
by the land of the Mississippi territories. T h e associated
"Mississippi Bubble" burst in 1720, leaving a worthless paper currency and the French with bad m e m o r i e s of such
money. The public opposed subsequent attempts to issue paper currency; for example, an issue of interest-bearing paper
currency in 1788 was revoked before it was issued (see Harris 1930, 8). Under these circumstances, how the assignats
were packaged for public acceptance is an interesting story
in itself.
18. At this point, the assignats were considered backed by the
value of real estate confiscated from the church. As a matter
of public perception, they were differentiated f r o m the paper money issued on the security of property in the Mississippi territory because the lands b a c k i n g assignats were
local. See Harris (1930, 9).
19. Hamilton notes that the French accumulated a huge debt
f r o m the extreme expenditures f o r the Seven Years W a r
(1756-63). That debt and the continuing fiscal deficits of
the Revolutionary Era were the main motivations for issuing assignats (1947, 124).
20. Harris explains the source of the assignat value data (1930,
112). The Treasury collected from local sources the prices
of gold, silver, f o o d , m e r c h a n d i s e , and land; these f i v e
prices were combined to indicate the local value of the currency. During the Reign of Terror, s o m e of the prices in the
index were subject to controls.
21. See Capie's (1991) discussion of more recent instances of
hyperinflation. See also Sargent (1986).
22. See Capie (1991), Lerner (1991a and 1991b), and Friedman
(1991).
23. Smith (1984, 1985) discusses the experience of inflation in
the colonial era.
24. The colonies also gained revenue from confiscating property of the crown.

Economic

Review

11

25. Lerner (1991b, 393) notes that these statistics refer to the
eastern section of the Confederacy.
26. Burdekin and Langdana (1993) suggest that the rapid deterioration of the Confederate currency at the end of the war
reflected the likelihood that the South would lose the war.
The decline may reflect the option value of the bills because
they were supposedly payable in gold two years following
the end of the war. A loss by the Confederacy, however,
would make the currency worthless, and holders took this
fact into account.
27. Price controls were enforced during wartime.

28. Ohanian (1993) compared the welfare cost of the Korean
War (financed by taxation) with World War II (financed
largely by debt issuance). His results suggest that there are
large welfare gains f r o m tax smoothing.
29. See Sargent (1986) and Rogers and W a n g (1993).
30. Burgess and Stern (1993) have suggested that seigniorage
in developed economies represents a small percent relative
to real G D P ( a p p r o x i m a t e l y .5 p e r c e n t ) . H o w e v e r , the
seigniorage revenues of Argentina from 1980 to 1985 were
only 4 percent of real GDP, yet they had disastrous results
on the inflation rate.

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H a m i l t o n , Earl J. " O r i g i n and G r o w t h of National Debt in
Western Europe." American Economic Review Papers and
Proceedings (May 1947): 118-30.
Harris, S.E. The Assignats. N e w York: A M S Press, 1930.
Lebergott, Stanley. The Americans: An Economic Record.
York: W . W . Norton, 1984.

12
Economic



Review

New

. " T h e W e l f a r e C o s t s of W a r F i n a n c e in the U n i t e d
States." University of Rochester, W o r k i n g Paper, October
1991.
Pollard, Patricia S. "Central Bank Independence and Economic
Performance." Federal Reserve Bank of St. Louis Economic
Review 75 (July/August 1993): 21-36.
Rogers, John H., and Ping Wang. "High Inflation: Causes and
Consequences." Federal Reserve Bank of Dallas Economic
Review (Fourth Quarter 1993): 19-33.
Sargent, Thomas J. Rational Expectations
and Inflation. New
York: Harper and Row Publishers, 1986.
S m i t h , B r u c e D . " M o n e y a n d I n f l a t i o n in C o l o n i a l M a s sachusetts." Federal Reserve Bank of Minneapolis Quarterly Review (Winter 1984): 1-14.
. " S o m e Colonial Evidence on T w o Theories of Money:
Maryland and the Carolinas." Journal of Political
Economy
93 (December 1985): 1178-1211.
Spufford, Peter. Money and Its Use in Medieval Europe. C a m bridge: Cambridge University Press, 1989.
Tallman, Ellis W., and Jon R. Moen. "Liquidity Shocks and Financial Crises during the National Banking Era." Federal
R e s e r v e B a n k of Atlanta W o r k i n g Paper 9 3 - 1 0 , A u g u s t
1993.
White, Andrew Dickson. Fiat Money Inflation
well, Idaho: Caxton Printers, 1980.

in France.

Cald-

November/December 1993

iSusiness Cycles and
Analysts' Forecasts:
Further Evidence
of Rationality

William C. Hunter and Lucy F. Ackert

Hunter is vice president in
charge of basic research at the
Atlanta Fed. Ackert is an
assistant professor of finance at
Wilfrid Laurier
University,
Waterloo, Ontario,
Canada.
The authors thank Matthew
Cashing and Mary
Rosenbaum
for helpful
discussions;
John Curran, Mark Rogers,
Yuxing Yan, and Art Young for
technical assistance; and Frank
King for editorial
comments.


Federal Reserve Bank of Atlanta


xpectations about the future play an important role in economic behavior. Borrowing and investment decisions by consumers and
businesses, purchase and labor contracts, and job choices require at
least a crude forecast of economic variables. Thus, it should not be
too surprising that explaining how expectations are formed has become a central point in the study of economics and economies. The issue is
not of simply academic interest. Given that there are several alternative explanations or theories of how individuals form their expectations, the choice
among these theories can influence both conclusions about how economies
work and recommendations for macroeconomic policies designed to influence prices, output, and employment.
One major school of thought in this area—called rational expectationscan be seen as an attempt to provide a general theory of expectations formation. This theory, developed and refined over the past thirty years since its
first statement by John Muth (1961), asserts that decisionmakers in the
economy form their expectations or forecasts in the best way they know on
the basis of all economically relevant information available to them at the
time. Thus, the hypothesis asserts the rather reasonable position that decisionmakers make efficient use of all of the information that they currently
have in predicting the future. This idea is consistent with the assumption
that individuals do not act arbitrarily or without thought in their economic
life, in forming expectations as in other economic decisions. Stated differently, people do not make systematic mistakes: in the long run they behave
as if they understand the process generating the values of the variables that

Economic

Review

13

they are trying to predict. If people efficiently use
available information and doing so in fact leads to systematic over- or underestimates of some important
economic variable, then that information can be used
to correct their future estimates. 1
A large body of empirical literature has developed
since Muth's first statement of his hypothesis, and
there has been a long-running debate, exemplified in
work by Edward Prescott (1977) and Michael C.
Lovell (1986), on whether testing the rationality of
economic agents' expectations is useful, or even possible.2 While much of this research has applied rationality tests to surveys of economists about future values
of economic variables such as inflation and gross domestic product, an important part of this literature
deals with the expectations of stock analysts about
firms' earnings. Because stock analysts' reputations
and livelihoods depend at least in part on their accuracy, their forecasts are particularly appropriate subjects
for rationality tests. One would assume that their forecasts are seriously considered and accurately reported.
Such forecasts should more closely represent those of
economic agents made in connection with real decisions than do more casual "opinion" forecasts often
reported by economic surveys. Stock analysts' forecasts are also attractive for research because two sets
of forecasts are systematically collected and reported, one in the Institutional Brokers Estimate System
(I/B/E/S) data base produced by Lynch, Jones, and
Ryan, and Standard and Poor's Earnings Forecaster.
With greater interest in expectations formation and
attention to serious forecasters, the volume of research
on the rationality of financial analysts' forecasts of corporate earnings has increased significantly over the
past two decades. 3 Until recently much of this research
has simply evaluated the accuracy of analysts' forecasts relative to naive extrapolations of past earnings.
For example, analysts' forecasts of future earnings were
evaluated against or compared with forecasts that assumed that current or past earnings were the best predictors of future earnings. More recently, however, research on earnings forecasts has addressed the much
more fundamental issue of the economic rationality of
these forecasts.
The growth in the number of studies examining
analysts' forecasts has not clarified the issue of rationality, though. Results reported in the literature continue to be conflicting. Lack of a consensus may be
partially explained by differences in the samples, data
sets, and time periods examined by various researchers. Researchers' choices of statistical tests have no
doubt been a contributing factor as well.

Economic
14


Review

An oversight common to these studies results from
their treatment of the relationship between the individual analysts' forecasts. Because the analysts arrive at
their forecasts individually, one might argue that their
forecasts should be thought of as independent. Researchers doing statistical tests of rationality have taken this forecaster independence as support for the
statistically convenient assumption that individual analysts' forecast errors are not related to errors in any
other analysts' forecasts.
However, if forecast errors are in fact correlated, statistical tests based on this assumption may not measure
accurately. Because analysts' forecast errors are likely
to be influenced by the effects of macroeconomic activity on particular companies' performance, there is good
reason to believe that they are related. For example, a
sharp, unexpected disruption in the supply of a critical
productive input—such as might be caused by a weatherrelated natural disaster—can adversely affect the cost
structure of firms across industries. Such adverse supply shocks can result in analysts' systematically overpredicting earnings (as they fail to account for higher
production costs) and, hence, errors would be correlated across their forecasts. Under such conditions, standard statistical hypothesis tests that assume independence of forecast errors may reject rationality when it
should be accepted. Research by Michael P. Keane and
David E. Runkle (1990) points out that the effects induced by macroeconomic shocks or business cycles
cause the standard errors in typical rational expectations
or forecast models to be biased downward when forecast
errors are assumed to be independent. However, when
this bias is accounted for, valid tests of rational expectations formation in security analysts' forecasts can be
conducted.
This article investigates whether earnings forecasts
made by security analysts are economically rational—
that is, whether they satisfy the rational expectations hypothesis. As noted above, this hypothesis makes the
most sense from an economic perspective. However, recent studies have cast doubt on its applicability to security analysts' forecasts. For this study, statistical tests of
the rationality of security analysts' forecasts were conducted with procedures similar to those reported in the
previous literature. Using this approach demonstrates
that erroneous conclusions can be reached and incorrect
inferences made if the analysis does not properly account for biases introduced into analysts' forecasts by
aggregate economic shocks. The study shows that once
the effects of these biases are accounted for, it is not possible to conclude that security analysts' forecasts are inconsistent with rational expectations.

November/December 1993

Nationality Testing
It is obvious that the process of forecasting any
variable will be improved by incorporating as much
information as possible about how the variable is determined. Because a forecaster who does not use all
available relevant information is acting inefficiently,
his or her forecast error—the difference between the
actual realized value of the variable and the forecasted
value—will be unnecessarily large and may exhibit
systematic biases. Thus, it should come as no surprise
that forecast error plays a central role in characterizing
rational forecasts.
Two key properties, each involving forecast error,
have been identified for testing the rationality of forecasts. First, if the forecasts are rational, a time series
of forecast errors should have a mean of zero—that is,
the forecasts should equally overshoot and undershoot
the actual data. This property is called unbiasedness in
this article. Secondly, the forecast errors should not be
correlated with any relevant economic information
readily available at the time the forecast was made, including the values of past forecast errors—referred to
here as efficiency. Tests of the efficiency involving only current and past values of forecast errors are called
serial correlation tests.4

Previous Studies of Analyst
Forecast Rationality
The body of literature examining the properties of
analysts' earnings forecasts is large, and many studies
have directly addressed the issue of forecast rationality.5 Most of these studies conduct tests of rationality
using unbiasedness or lack of serial correlation tests—
for example, studies by Timothy Crichfield, Thomas
Dyckman, and Josef Lakonishok (1978), Lawrence D.
Brown and Michael S. Rozeff (1979), Dov Fried and
Dan Givoly (1982), Givoly (1985), Werner F.M. De
Bondt and Richard H. Thaler (1990), and Ashiq Ali,
April Klein, and James Rosenfeld (1992). However,
none of the existing studies adjust for the possibility
that individual analysts' forecast errors are correlated on the basis of such factors as macroeconomic
shocks.
The study by Crichfield, Dyckman, and Lakonishok
(1978) provides a good example of an unbiasedness
test. These authors use the mean forecasts of earnings
growth taken from Standard and Poor's Earnings

Federal Reserve Bank of Atlanta


Forecaster. They estimate the following simple regression model:
At = a + b* Et+er

(1)

where A{ represents realized earnings (or earnings
growth), Et is the predicted earnings (or earnings
growth), and et is a random error expected to equal zero. Under rationality, expected earnings should neither
consistently overstate nor understate actual earnings.
Thus, the unbiasedness test examines the hypothesis
that the parameters a and b are simultaneously equal
to zero and one, respectively.
Analyzing forecasts made for forty-six companies
for each year from 1967 to 1976, these authors concluded that analysts' forecasts were indeed rational in the
sense that the estimated a and b values were not significantly different from their hypothesized values. Using a
different approach, Burton G. Malkiel and John G.
Cragg (1970) examined five-year earnings growth predictions made by several investment firms in the years
1961 through 1969 and reported similar results.
In a test of the efficiency property of the rationality
hypothesis—that people use all relevant information
available at the time of the forecast—Fried and Givoly
(1982) examined whether financial analysts' earnings
forecasts exploit what is known about actual earnings.
That is, they tested whether publicly available information is incorporated in earnings forecasts. The specific public information examined was stock market
earnings. Using a statistical methodology similar in
spirit to that used by Crichfield, Dyckman, and Lakonishok and data from the Earnings Forecaster for the
1969-79 period, Fried and Givoly concluded that the
financial analysts in their study not only fully exploited the time series properties of actual earnings but also
fully incorporated the information available in stock
market earnings (as represented by Standard and
Poor's Composite 500) into their forecasts. In a related
study Givoly (1985) tested forecast rationality using
annual forecasts from the Earnings Forecaster and
found that analysts made full use of information contained in the past forecasts and actual earnings.
More recently, however, De Bondt and Thaler (1990)
applied unbiasedness tests for rationality to consensus
I/B/E/S data and reached a different conclusion. They
concluded that the forecasts are overly o p t i m i s t i c forecasted earnings systematically exceeded actual
earnings—and thus are inconsistent with rationality.
Similarly, Ali, Klein, and Rosenfeld (1992) reject rationality in their study of behavior of analysts' earnings forecasts over time using consensus I/B/E/S

Economic

Review

15

Table 1
Unbiasedness Test
At = a + b • Et+

et
O L S with

Coefficient

W h i t e Correction

a

-0.0110
(-0.709)
0.9928**

b

(64.278)
[-0.466]
.686

R2M

1.414

F
** Significant at the 1 percent level
* Significant at the 5 percent level

N o t e : O L S estimates are corrected for n o n h o m o g e n e o u s variances w i t h the

forecasts. These authors also document what seems to
be a significant overprediction bias. Studies by Jeffrey
Abarbanell and Victor L. Bernard (1991) and Robert
Mendenhall (1991) also report evidence that does not
support the rationality of analysts' forecasts.
Two features of the tests reviewed above call for further research. First, applying similar tests to different
data sets, the researchers do not agree on rationality.
Second, the existing tests fail to account for possible
correlation introduced into analysts' forecast errors by
macroeconomic shocks or business cycle factors that
affect all forecasters. It is possible that correction for
the latter flaw would introduce greater uniformity into
the results of rationality tests.
To facilitate comparisons with other studies, the research reported on in this article ran a series of tests
using the unbiasedness and serial correlation tests
common in research on rational expectations. The unbiasedness tests uses equation (1) above. The serial
correlation uses the equation

W h i t e (1980) correction. T h e estimated coefficients are reported a l o n g
w i t h f-statistics corresponding to the null hypotheses that the coefficient is 0(.) or 1 [.]. A n F-test is used to test the joint hypothesis that a =

A-Et

= a + b(Al_l-Et_l)

+ el,

(2)

0 and b = 1, that is, the hypothesis of rational expectations. At is actual
quarterly earnings per share, £ ( is forecasted quarterly earnings per
share, a n d e ( is the error term.

Table 2
Serial Correlation Test
At-

Et = a + biA^

- £,_,) + e (

O L S with
Coefficient
a

WLS

Bootstrap

W h i t e Correction

Weight=SD

Method

-0.0022

0.0970

(-1.441)

0.0417**

(1.572)

(3.663)

0.0974**
(6.279)

.0037

.0112
F

-0.0158

(-0.722)

-.0146
(-1.325)

b

6.987**

2.0200

** Significant at the 1 percent level
* Significant at the 5 percent level
N o t e : T h e first c o l u m n reports O L S estimates with the W h i t e correction for
nonhomogeneous variances, the second c o l u m n reports the weighted
least squares ( W L S ) estimates using the standard deviation as the deflator, a n d the third c o l u m n reports the bootstrapped coefficients a n d
standard errors. The F-test statistic applies to the joint test for rational
expectations—that is, a = 0 a n d b = 0. At is actual quarterly earnings
per share for quarter t, Et is the earnings per share forecasted for quarter
f, and e ( is the error term.


16
Economic


where the variables are as previously defined and the
subscripts refer to time periods, to test the relationship
of current to past errors. The possible bias introduced
by macroeconomic shocks or business cycles was then
accounted for.

Review

.Empirical Analysis
The tests applied equations (1) and (2) above to analysts' quarterly earnings forecasts from the I/B/E/S
data base for the years 1984 through 1990. Both the
mean and the median forecast were used as the measure of the consensus forecast. The results were strikingly similar, so only those obtained using the median
are reported. Each firm was required to have at least
three earnings forecasts in any given quarter for that
quarter to be included in the sample. Further, in order
to maximize the number of firms in the sample, the
analysts' forecasts of quarterly earnings were sampled
one month before the end of each quarter for which
earnings are forecast. Earnings estimates for a sample
of 220 companies, chosen randomly, were included for
analysis. A total of 3,640 observations were included
in the final sample.
Unbiasedness and Serial Correlation Tests. The
results of the statistical tests are displayed in Tables 1
and 2. Following Crichfield, Dyckman, and Lakon-

November/December 1993

ishok (1978) and Givoly (1985), Table 1 presents the
results of a simple unbiasedness test using the model
presented in equation (1) above. The coefficients in
Table 1 were estimated using ordinary least squares
(OLS) regression, where the standard errors were corrected for nonconstant variance, using the procedure
developed by Halbert White (1980). 6 Under rational
expectations, a regression such as that outlined in
equation (1) should yield coefficient estimates of a = 0
and b = 1. In Table 1, both the estimated constant and
slope appear very close to their hypothesized values.
The F-test of the joint hypothesis that a = 0 and b = 1,
reported in the fourth row of Table 1, does not reject
rationality.
Table 2 reports tests of the hypothesis that analysts
use the information contained in their past forecast errors in their current forecasts as outlined in equation (2).
Three different statistical procedures were used to conduct these tests. The parameter estimates in the first
column in Table 2 were obtained using OLS, where
the standard errors were corrected for unequal variances using White's procedure. The estimates in the
second column were obtained using weighted least
squares (WLS) regression, where the standard deviation was used as the weighting variable. The third column in Table 2 presents the results obtained using a
statistical method known as bootstrapping. This procedure is used to control for possible quarterly crosssectional correlations across the firms included in the
sample. 7 If analysts forecast rationally, new forecasts
should reflect all information contained in past prediction errors—that is, a = b = 0. The coefficient
estimates again appear to be fairly close to their hypothesized values. However, for two of the three alternative methods used (weighted least squares and
bootstrap), the slope coefficient (b) does differ significantly from zero. The joint test of the rational expectations hypothesis is not rejected using OLS with the
White correction (F-test with degrees of freedom two
and infinity) but is rejected using the weighted least
squares procedure.
The results presented in Tables 1 and 2 are inconclusive and similar to those reported in the literature.8
Although it is not possible to give a definitive reason
for the discrepancies, as will be explained below, the
failure to account for possible time effects of macroeconomic shocks or business cycles could be a contributing factor, particularly in cases in which rationality is
rejected.
Tests for Macroeconomic Shock or Business
Cycle-Induced Time Effects. In order to determine
whether the rational expectations hypothesis was re-

Federal Reserve Bank of Atlanta



jected because of a failure to account for the possibility that forecast errors are not independent across the
cross-sections of firms included in the sample, a careful examination was conducted of the residuals from
the regressions summarized in Tables 1 and 2. This
analysis indicates the presence of significant time series dependence. 9 Without correction, the presence of
this type serial correlation can easily invalidate hypothesis tests. As stated in the introduction, because
aggregate shocks affect the economic variables underlying the earnings being forecasted, they can induce
bias into observed forecast errors. Furthermore, these
aggregate shocks not only cause cross-sectional correlations but because of the cyclical nature of these variables, they may also lead to autocorrelated residuals. 10
As a result, it is possible to reject rational expectations
when the hypothesis is actually valid. Given the somewhat inconclusive results in the initial tests, it is appropriate to account for these effects in the analysis.
This research involves two approaches to examining business cycle effects. The first runs regressions
across analysts' forecasts for each quarter of the period
covered.11 Table 3, in which the results are reported,
shows that the slope coefficient (b) is quite variable,
suggesting that it is not stable over time. In addition,
the model is rejected in a subset of the quarters. 12
These results suggest the presence of time or business
cycle effects.
To test for the presence of the suggested business
cycle effects, a fixed time effects model was used (see
George G. Judge and others 1987, section 13.4). This
model is basically a quarterly dummy variables model,
which allows each time period a different intercept
(the constant [a] in equations [1] and [2]) and allows
testing for the rationality while the model is shifting
over time. 13 Table 4 reports the results of an F-test for
homogeneity of quarters along with the unbiasedness
and serial correlation tests for rationality.
If the analysts' forecasts are rational, the slope coefficients (b) in the unbiasedness and serial correlation
tests with the inclusion of fixed time effects should not
differ significantly from 1 and 0, respectively. The test
results in Panels A and B in Table 4 show that the hypothesis of no time effects is strongly rejected at the 1
percent level by the F-test of homogeneity of quarters.
On the other hand, the unbiasedness and serial correlation tests with the inclusion of fixed time effects do
not reject rationality. As can be seen in Panel A of
Table 4, the null hypothesis that the slope coefficient
(b) is equal to 0 is rejected, but the rational expectations hypothesis that it is equal to the value of 1 cannot
be rejected. Similarly, in Panel B, the null hypothesis

Economic

Review

17

Table 3
Quarterly Examinations of Past Forecast Errors
WLS

OLS
Quarter

Constant (a)

Slope (b)

85:3

-0.1262*

-0.1276*

(-1.965)

85:2

(-2.465)

-0.1114
(-1.839)

85:4

-0.0349
(-1.160)

86:1
86:2

-0.1008**
(-3.275)
0.0095
(0.539)

86:3
86:4

-0.0107
(-0.522)
-0.0544
(-1.498)

87:1
87:2

0.0518**
(2.807)
- 0.0780
(-1.276)

87:3
87:4
88:1

0.0728
(1.321)
-0.0097*
(-2.282)
0.1482**
(3.028)

88:2

0.0536
(1.343)

88:3
88:4

-0.0324
(-0.677)
-0.0280
(- 0.695)

89:1

0.0946*
(2.390)

0.8102
(0.995)
0.02740
(0.993)
-0.1695
(-0.925)
0.1608**
(3.367)
0.2111
(1.754)
0.2022
(1.707)
0.0552
(0.914)
0.6409**
(3.363)
0.0214
(0.494)
0.1181
(0.999)
0.0291
(0.900)
0,3480**
(5.285)
0.2816*
(2.342)
0.0136
(0.050)
-0.1292
(-1.653)

89:2

- 0.0484

89:3

-0.1126*
(-2.330)

(1.237)

89:4

- 0.0680*
(-2.202)

(1.887)

(-1.495)

0.7760
(1.928)
0.0689
0.2367

Constant (a)

Number of
Slope (b)

-0.0025

-0.0862

-0.161)

Observations

(-1.032)

0.0393
(1.149)
-0.0129
(-1.276)
-0.0064
(-0.805)
-0.0014

121

0.6371**

133

(3.138)
0.0053

169

(0.445)
0.3383

163

(0.370)
149

0.0677

(-0.255)

(0.968)

-0.0031

0.2040**
(3.872)

(-0.692)
-0.0027
(-0.385)
0.0118
(1.758)
-0.0014
(-0.104)
-0.0025
(-0.160)
-0.0256
(-1.201)
0.0019
(0.183)
0.0008
(0.070)
-0.0292
(-1.710)
-0.0120
(-0.827)
0.0065
(0.684)
-0.0168
(-1.878)
0.0011
(0.182)
0.0058
(0.607)

154
213

0.1779
(1.869)
0.0081

195

(0.265)
0.0459

179

(0.754)
0.0078

200

"(0.087)
0.0721

223

(0.894)
217

-0.0230
(-0.778)
0.2253**

201

(4.365)
0.2434

160

(0.120)
0.6003**

205

(7.499)
-0.2540**

163

(-3.908)
0.2638**
(2.956)

199

0.1257**

150

(2.618)
-0.0231

219

(-0.339)

** Significant at the 1 percent level
* Significant at the 5 percent level
Note: Each column reports estimates of the coefficients and corresponding f-statistics using t w o estimation techniques. The first column reports
O L S estimates with the W h i t e correction for nonhomogeneous variances w h i l e the second c o l u m n reports the weighted least squares
( W L S ) estimates using the standard deviation as the deflator. The f-test statistic applies to the joint test for rational expectations—that is,
constant = 0 and 6 = 0 from the model At-

Et = constant + &At_, - F M ) + e ( , w h e r e At is actual quarterly earnings per share for quarter t, Et

is the earnings per share forecasted for quarter t, and e ( is the error term.

Economic
18



Review

November/December 1993

The delicate nature of rational expectations tests
may raise questions about their results. Nonetheless, to
explain rejection of analysts' rationality by saying that
analysts repeatedly and systematically make costly
mistakes and do not learn from them does not seem realistic. Such seemingly nonrational behavior is within
the realm of possibility, but, in the absence of an acceptable theoretical foundation, it seems unlikely for
professionals whose livelihood depends on rational
forecasts. 15 These points are buttressed by the fact that
the rational expectations hypothesis is most applicable
in situations in which the phenomena being forecasted are well understood by economic agents, as would
appear to be the case with security analysts regularly
providing earnings forecasts. As Robert E. Lucas
(1977) has observed, "In so far as business cycles can
be viewed as repeated instances of essentially similar
events, it will be reasonable . . . to assume [that economic agents'] expectations are rational, that [economic agents] have fairly stable arrangements for collection and processing information, and that they utilize information in forecasting the future in a stable
way, free of systematic and easily correctable biases"
(1977).

Table 4
Test for Fixed Time Effects
Panel A
Unbiasedness Test
A=

FTE + b •

Et+e,

b

0.9884
¡0.0171
(58.485)**
[-0.6861
.690

F

3.545**

Panel B
Serial Correlation Test
FTE + b(At i - £ f 1 ) + e (

At-Et=
b

0.0967
{0.061}
(1.585)
[14.808]**
.023

F

3.509**

** Significant at the 1 percent level
* Significant at the 5 percent level
Note:

In each panel,
coefficient,

the associated

and t-statistics corresponding
the coefficient
reports

Conclusion

the first row reports the estimated
standard

error in braces

II,

to the null hypotheses

that

equals zero (.) or one [.]. The second

row

the adjusted

coefficient

of determination

The third row reports the F-statistic,
mogeneity

slope

of quarters—that

which

(R2).

tests for ho-

is, no time effects.

that the slope coefficient is equal to zero as implied by
the rational expectations hypothesis cannot be rejected, but the hypothesis that it is equal to the value 1 can
be. These results are consistent with those reported for
price expectations by P.C. O'Brien (1990) and Keane
and Runkle (1990) and provide evidence in support of
the rationality of analysts' forecasts. In addition, and
perhaps more importantly, the analysis and discussion
also raise questions concerning the robustness of recent studies that reject rationality but do not test or account for the presence of time or business cycle effects
of the type induced by macroeconomic shocks. Because these effects can easily invalidate or reverse the
conclusions reached in these studies, caution must be
used in interpreting the results reported. 14


Federal Reserve Bank of Atlanta


This article evaluates the rationality of earnings
forecasts by security analysts participating in the
I/B/E/S data base. Following previous studies, the
analysis considers unbiasedness and serial correlation
tests. The results of the initial tests are generally negative and inconclusive, similar to several past studies.
Like the results generally reported in the literature, the
findings are ambiguous because of the possible presence of time or business cycle effects induced by, for
example, macroeconomic shocks. Such effects could
cause the standard errors in forecast models to be biased, invalidating standard hypothesis tests. The study
documents the presence of significant quarterly time
effects in the sample and, as a result, conducts unbiasedness and serial correlation tests that explicitly account for these time effects. Using this more general
statistical model, the hypothesis of analyst forecast rationality cannot be rejected.
The results presented in the article provide support
for the notion that security analysts engage in their
forecasting activities in a rational fashion. That is,
these analysts appear to learn from their past forecasting mistakes, make use of all economically relevant

Economic

Review

19

information in forming their forecasts, and process information efficiently. Thus, the results call into question the conclusion reached in studies that found that
security analysts do not forecast in a rational manner.
Taken literally such a conclusion makes it difficult to
explain, from an economic survival perspective, the
continued employment of analysts to forecast corporate earnings. The results reported in this article
demonstrate the effects that business cycles can have
on analysts' forecasts and how important it is that statistical tests examining the rationality of these forecasts properly account for these effects. As shown

above, failure to do so can lead to erroneous conclusions and inferences concerning the usefulness of analysts' forecasts.
By providing evidence suggesting that stock analysts' forecasts are rational, these results confirm that
these forecasts are the best available, given current
knowledge. Because they are rational, the forecasts
can be considered trustworthy as inputs into formulating policies. They can provide valuable information
for use in both economic decisionmaking and the formation of economic policy.

Notes
1 . M o s t a l t e r n a t i v e e x p l a n a t i o n s of h o w e x p e c t a t i o n s are
formed necessarily rely on a belief in systematic mistakes—
that is, the belief that people do not learn f r o m their past
forecasting mistakes. The rational expectations hypothesis
is attractive to economists because it assumes that individuals learn f r o m their past mistakes and take steps to avoid repeating these mistakes; it seems consistent with how people
really behave.
2. The econometric analysis of direct expectations and forecasts has a long history in economics. Earlier studies by Anderson (1952) and Theil (1952, 1955, and 1966) and the
more recent studies by Pesando (1975), Mullineaux (1978,
1980), B. Brown and Maital (1981), Figlewski and Wachtel
(1981), K e a n e and R u n k l e (1990), and others have contributed immensely to the authors' understanding of how
agents form their expectations as well as the statistical properties of these expectations.
3. Studies by Crichfield, Dyckman, and Lakonishok (1978), L.
Brown and Rozeff (1979), Givoly and Lakonishok (1979,
1980, 1982, 1984), Elton, G r u b e r , and Gultekin (1981),
Givoly (1985), O f e r and Siegel (1987), and De Bondt and
Thaler (1990) are just a few of the papers examining various aspects of financial analysts' forecasts. For a comprehensive review of this v o l u m i n o u s literature, see Givoly
(1985) or various editions of the Institutional Brokers Estimate System bibliography produced by the brokerage firm
Lynch, Jones, and Ryan.
4. It should be noted that these properties need not hold, in the
s e n s e of M u t h ( 1 9 6 1 ) , if e x p e c t a t i o n s o r f o r e c a s t s are
formed on the basis of a misspecified model or a correct
model structure that has incorrect parameter values. In addition, the efficiency property is also used to define an efficient m a r k e t . T h u s , there is no f u n d a m e n t a l distinction
between the hypothesis that expectations are rational and
the hypothesis that markets are efficient.
5. See G i v o l y (1985) f o r a c o m p r e h e n s i v e bibliography of
studies addressing the rationality of analysts' earnings forecasts.


20
Economic


Review

6. Previous studies have employed various deflators in attempts
to correct f o r n o n h o m o g e n e o u s — t h a t is, u n e q u a l — v a r i ances. Givoly (1985) and Ali, Klein, and Rosenfeld (1992)
conclude that the choice of deflator does not materially affect the statistical inferences. The present study also estimated the c o e f f i c i e n t s using weighted least squares ( W L S ) ,
where the standard deviation w a s the weighting variable.
The results obtained^using this alternative procedure were
not significantly different from those reported in Table 1.
7. T h e bootstrap procedure described in Noreen (1989) w a s
u s e d . T h i s p r o c e d u r e w a s also used by Ali, K l e i n , and
Rosenfeld (1992).
8. For example, De Bondt and Thaler (1990) used standard
W L S t e c h n i q u e s and r e j e c t e d the r a t i o n a l i t y of a n n u a l
I/B/E/S forecasts for the period f r o m 1976 to 1984. (De
Bondt and Thaler normalized using the standard deviation
of earnings per share.) Crichfield, D y c k m a n , and L a k o n ishok used standard techniques, and the rationality of annual
Earnings Forecaster forecasts for the 1 9 6 1 - l b period is not
rejected. As is often the case in this literature, they do not
weight their variables.
The results of other studies are also conflicting (for instance, see Ali, Klein, and Rosenfeld 1992 in comparison
with Givoly 1985). Similarly, rationality is not rejected for
certain samples of forecasts (annual Earnings
Forecaster
1967-76 [Crichfield, Dyckman, and Lakonishok 1978], annual Earnings Forecaster 1969-79 [Givoly 1985], quarterly
I/B/E/S 1984-90) and rejected for other samples (annual
I/B/E/S 1976-84 [ D e Bondt and T h a l e r 1990J, quarterly
Value Line 1976-86 [Abarbanell and Bernard 1991], annual
I/B/E/S 1976-90 [Ali, Klein, and Rosenfeld 1992]).
9. The usual battery of diagnostics for serial dependency in the
residuals were conducted.
10. Ali, Klein, and R o s e n f e l d ( 1 9 9 2 ) a t t e m p t to control for
cross-sectional correlations caused by aggregate shocks using a bootstrap procedure. This method does not, however,
c o r r e c t f o r the serial d e p e n d e n c e r e s u l t i n g f r o m t h e s e
shocks.

November/December 1993

11. A s in other tests, OLS with the White correction and WLS
were used.
12. P. Brown, Foster, and Noreen (1985) also document large
yearly variations in mean and median forecast errors.

(1990)—examine time periods characterized by significant
macroeconomic shocks or business cycles. Thus, the bias
discussed above would seem to be m o r e p r o n o u n c c d for
these studies.

13. O ' B r i e n (1990) uses a similar methodology to test for analyst, firm, and year effects. Using individual I/B/E/S forecasts for nine industries, she finds significant firm and year
effects for most of the industries examined.

15. In a forthcoming paper, the authors offer and test a dynamic
model of analysts' earnings forecasts (Ackert and Hunter
1994). The paper demonstrates that what is often taken to be
irrational behavior on the part of security analysts can be
shown to be consistent with a dynamic, more complicated
form of rationality.

14. This point is amplified if one considers the fact that recent
studies rejecting analyst forecast rationality—for example,
Ali, Klein, and Rosenfeld (1992) and D e Bondt and Thaler

Ali, Ashiq, April Klein, and J a m e s Rosenfeld. " D o Analysts
Properly Use Information about Permanent and Transitory
Earnings Components in Setting Their Forecasts of Annual
E P S ? " The Accounting Review 67 (1992): 182-98.

Givoly, Dan. " T h e Formation of Earnings Expectations." The
Accounting Review 3 (1985): 372-86.
Givoly, Dan, and Josef Lakonishok. " T h e Information Content
of Financial Analysts' Forecast of Earnings." Journal of Accounting and Economics 1 (December 1979): 1-21.
. "Financial Analysts' Forecasts of Earnings: Their Value
to Investors." Journal of Banking and Finance 4 (December
1980): 221-33.
. "Accounting for Construction Companies, Inflation, and
Market Efficiency: Analysis of an Israeli Case." International Journal of Accounting
and Economic Research
17
(Spring 1982): 121-49.

Anderson, O. " T h e Business of the IFO-Institute for Economic
Research, M u n i c h , and Its Theoretical Model." Revue de
I'Institute International de Statistique 20 (1952): 1-17.

. "Properties of Analysts' Forecasts of Earnings: A Review and Analysis of the Research." Journal of Accounting
Literature 3 (1984): 117-52.

Brown, Bryan W., and S. Maital. " W h a t Do Economists Know?
An Empirical Study of Experts' Expectations." Econometrica 49 (1981): 491-504.

J u d g e , G e o r g e G., W i l l i a m E. G r i f f i t h s , R. C a r t e r Hill, H.
L u t k e p o h l , a n d T . C . L e e . The Theory and Practice
of
Econometrics. New York: John Wiley and Sons, 1987.

Brown, Lawrence D., and Michael S. Rozeff. "Adaptive Expectations, Time-Series Models, and Analyst Forecast Revision." Journal of Accounting Research (1979): 341-51.

Keane, Michael P., and David E. Runkle. "Testing the Rationality of Price Forecasts: New Evidence from Panel Data."
American Economic Review 80 (September 1990): 714-35.
Lovell, Michael C. "Tests of the Rational Expectations Hypothesis." American Economic Review 76 (1986): 110-24.

Abarbanell, Jeffrey, and Victor L. Bernard. "Analysts Overreaction/Underreaction to Earnings Information as an Explanation for Anomalous Stock Price Behavior." University of
Michigan, Working Paper 91-36, 1991.
Ackert, Lucy F., and William C. Hunter. "Rational Expectations and the D y n a m i c A d j u s t m e n t of Security Analysts'
Earnings Forecasts to New Information." Journal of Financial Research (forthcoming 1994).

Brown, P., George Foster, and Eric Noreen. Security
Analysts'
Multi-Year
Earnings Forecasts and the Capital
Market.
A m e r i c a n Accounting Association Studies in Accounting
Research #21, 1985.
Crichfield, Timothy, T h o m a s Dyckman, and Josef Lakonishok.
" A n Evaluation of Security Analysts' Forecasts." The Ac-counting Review 53 (July 1978): 651-68.
De Bondt, Werner F.M., and Richard H. Thaler. " D o Security
A n a l y s t s O v e r r e a c t ? " American
Economic
Review
80
(1990): 52-57.
Elton, Edwin J., Martin J. Gruber, and Mustafa Gultekin. "Expectations and Share Prices." Management Sciences (1981):
975-87.
Figlewski, Stephen, and Paul Wachtel. " T h e Formation of Inflationary Expectations." Review of Economics and Statistics 63 (February 1981): 1-10.
Fried, Dov, and Dan Givoly. "Financial Analysts' Forecasts of
E a r n i n g s — A Better Surrogate for Market Expectations."
Journal of Accounting
and Economics 4 (October 1982):
85-107.

Federal Reserve Bank of Atlanta




Lucas, Robert E. "Understanding Business Cycles." In Stabilization of the Domestic and International Economy, edited
by K . B r u n n e r a n d A . H . M e i t z e r . A m s t e r d a m : N o r t h Holland Publishing Company, 1977.
Malkiel, Burton G., and John G. Cragg. "Expectations and the
Structure of Share Prices." American Economic Review 60
(1970): 601-17.
Mendenhall, Robert. " E v i d e n c e of Possible U n d e r w e i g h t i n g
Earnings-Related Information." Journal of Accounting
Research 2 9 ( 1 9 9 1 ) : 170-79.
Mullineaux, Donald J. " O n Testing for Rationality: Another
Look at the Livingston Price Expectations Data." Journal of
Political Economy 86 (April 1978): 329-36.
. "Inflation Expectations and Money Growth in the United States." American Economic Review 70 (1980): 149-61.
M u t h , John. "Rational Expectations and the T h e o r y of Price
Movements." Econometrica 29 (July 1961): 315-35.

Economic

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21

N o r e e n , Eric. Computer-Intensive
Methods for Testing
Hypotheses:
An Introduction.
N e w Y o r k : J o h n W i l e y and
Sons, 1989.
O ' B r i e n , P.C. "Forecast Accuracy of Individual Analysts in
N i n e I n d u s t r i e s . " Journal
of Accounting
Research
28
(1990): 286-304.
Ofer, Aaron R., and Daniel R. Siegel. "Corporate Financial Policy, Information, and Market Expectations: An Empirical
I n v e s t i g a t i o n of D i v i d e n d s . " Journal
of Finance
42
(September 1987): 889-958.
Pesando, James E. " A Note on the Rationality of the Livingston
P r i c e E x p e c t a t i o n s . " Journal
of Political
Economy
83
(1975): 849-58.
Prescott, Edward. "Should Control Theory Be Used for Economic Stabilization?" In Optimal Policies, Control
Theory,


Economic
22


Review

and Technological
Exports, edited by Karl Brunner and
Alan Meltzer. Vol. 7, Carnegie-Rochester Conferences on
P u b l i c P o l i c y . Journal of Monetary
Economics
(Suppl.
1977): 13-38.
Theil, Henri. " O n the Shape of E c o n o m e t r i c Microvariables
and the Munich Business Test." Revue de /'Institute
International de Statistique 20 (1952): 105-20.
. "Recent Experiences with the Munich Business Test."
Revue de 1'Institute International de Statistique 23 (1955):
184-92.
. Applied Economic Forecasting.
A m s t e r d a m : NorthHolland, 1966.
White, Halbert. "A Heteroskedasticity-Consistent Covariance
Matrix Estimator and Direct Test for Heteroskedasticity."
Econometrica 48 (May 1980): 817-38.

November/December 1993

Are International
Comparisons of Inflation
and Employment Valid?

Michael J. Chriszt

nderstanding the performance of foreign economies is essential
for investors, academics, and policymakers, especially in light of
the international economic developments of the 1980s. Greater interdependence of national economies and the globalization of financial markets have profoundly changed the world economy.
With attention focused on the economies of the world at large, comparisons of various countries' economic reports are inevitable. Most countries
have several broad economic indicators that are widely reported, and comparing reports among countries can serve as a useful yardstick for judging
how well one economy is doing with respect to others. How valid are these
comparisons, though? Are the reports similar enough to be compared, or are
there subtle differences that preclude useful comparisons?

The author is a senior
economic analyst on the
macropolicy team of the
Atlanta Fed's
research
department.


Federal Reserve Bank of Atlanta


Two of the most important economic data reports frequently observed are
the monthly inflation and labor market (employment and unemployment)
reports. Although it may be tempting to draw specific assumptions about the
meaning of particular reports from scanning the headlines for the latest inflation or unemployment rate, it is important to keep in mind that the construction and methodology of these reports differ from country to country.
The purpose of this article is to demonstrate the ways in which seemingly
comparable reports can differ (no attempt is made to define or compare national economic performance). Specifically, the discussion focuses on the
consumer price indexes and labor market reports of the G-7 countries—the
United States, Japan, Germany, France, Italy, the United Kingdom, and
Canada.

Economic

Review

23

Consumer Inflation
The consumer price index (CPI) is considered one of
the most useful measures of inflation in the United
States and abroad (see Chart 1). Based on monthly surveys, the CPI measures prices at the middle-income, urban consumer level for a fixed basket of goods and
services. Because the CPI is an index, it is used to compare the current level of prices with some base period.
For example, in the United States, the base for the CPI
is the average level of prices from 1982 to 1984. This
base is then set to 100. By comparing the current level of
the CPI with, say, its level of a year ago, the rate at which
consumer prices have risen during the past twelve
months can be determined. Other countries use different
base years, and subtle but important differences exist in
how countries' CPI indexes are compiled. (See Box 1
on page 30 for a summary of consumer price indexes
in the G-7 countries and Appendix 1 for a description of
the mathematical formula, the Laspeyres formula, used
to compile the consumer price index.)

Important Components. For the United States, the
largest component of the consumer price index is housing, accounting for more than 40 percent of the total.
In comparison, the housing component of most other
industrialized nations' CPIs is significantly lower.
However, the U.S. housing component encompasses
many items that other countries measure separately.
For example, the German CPI housing—or "rent"—
component is 17 percent, but Germany has fuel and
light expenses and furniture and household items as
separate components; the U.S. CPI housing component includes all these items.
Food and clothing outlays also receive heavy weights
in consumer price indexes. In the U.S. CPI measure,
food and beverages account for 17.6 percent of the total index. In other industrial countries, this component
carries a larger weight. In Japan, for example, food accounts for almost one-third of the overall CPI measure.
Importantly, though, the United States does not include
tobacco in its food and beverage component while
Japan and Germany do, adding to the weight of their
overall food components. Like the United States, the

Chart 1
Consumer Price Indexes

Year-over-Year
Percent C h a n g e
25

1981
U n i t e d States

1983

1987

1985
Canada

1989
France

1991

1993

West(ern) G e r m a n y

United Kingdom
S o u r c e : C a l c u l a t e d by the Federal Reserve B a n k of Atlanta using data from International M o n e t a r y Fund, International F i n a n c i a l Statistics.


24
Economic


Review

November/December 1993

United Kingdom, Canada, and France track tobacco in
submeasures other than food.
After the housing and food components, transportation and communication goods and services constitute the largest group in national CPI measures—17
percent of the overall CPI in the United States. Only
Canada weights this area more heavily. In most other
industrialized economies, the transportation component accounts for 10 percent to 15 percent of the overall price measure.
Among the other significant components is the
clothing and footwear subset. In Italy, this component constitutes more than 10 percent of the total
measure. In the United States, it accounts for slightly
more than 6 percent. On average, this component constitutes about 8 percent of industrial countries' overall
CPI.
Weighting. Every country weights its CPI components differently, both in construction and aggregation,
because the CPI measure is designed to account for national preferences in consumer purchases. For example,
in the United States the CPI weights are derived from
the Consumer Expenditure Survey conducted from
1982 through 1984. The expenditure weight for each
item is an estimate of the population's total expenditure
for that item, averaged over the three-year period.
Weights are revised slightly each December based on
price fluctuation (see Appendix 1).
Most industrial nations construct their CPI weights
in this manner. France and Britain, however, update
the weights in their CPI measures annually on the basis of ongoing consumer expenditure survey results.
Weights for Japan's CPI are derived from the household expenditure survey of 1990; for Canada's, from
a 1986 survey; and for western Germany's, from a survey compiled in 1983 (updated in 1985). Japan, Canada, and Germany do not update weights annually.
Although nations differ in their methods for gathering and computing their consumer price indexes,
the variations are not significant enough to warrant
discarding or ignoring comparisons. Because each
country establishes its respective CPI on the basis of
national spending patterns, transnational dissimilarities in index construction are to be expected. The value
inherent in perceptions that the current CPI measures
are accurate clearly seems to outweigh relatively small
differences in index composition. Therefore, even with
their different weighting schemes, national consumer
price indexes continue to be valid tools for comparing
inflationary trends among countries. Table 1 illustrates
the components and weights of the leading industrialized economies' CPIs.


Federal Reserve Bank of Atlanta


£/nempioyment
Apart from gross domestic product (GDP), which
measures an economy's total output, reports focusing
on employment are probably the next most keenly
watched economic indicators. Because of their scope
and frequency, employment data are a particularly rich
source of information on the level and range of economic activity. Like GDP, employment measures reflect activity in almost all sectors of the economy (no
other economic report does). In addition, countries
usually release employment and unemployment figures monthly, providing more current information than
the quarterly GDP (see Chart 2).
Labor market data generally consist of two kinds
of reports: employment and unemployment. Employment reports, which simply tally the total number of
employed people in a given month, provide facts and
figures covering most sectors of the economy, from
which several assumptions (or forecasts) can be made.
For example, counting the number of production employees engaged in manufacturing in a given month
allows estimates of that month's level of industrial
production.
Unemployment reports, although perhaps not as
useful to analysts as employment reports, seem to get
the most attention. An increase in a country's unemployment rate is perceived as a sign of economic weakness, and a decline is seen as a sign of strength. In
truth, however, unemployment data are a lagging indicator because firms do not typically react to declines
in demand for their goods or services by cutting the
payroll immediately. Hours may be reduced, for instance, before layoffs are considered. And, clearly,
management does not rush into a hiring frenzy immediately following one month's pickup in sales.
Changes in the labor force react to changes in demand for goods and services and also to underlying
conditions. When activity shows signs of improvement, many people appear to reenter the labor force in
search of work. At the same time, the lack of labor demand usually continues for a while, and the unemployment rate may actually increase as the economy is
beginning to improve. Despite such limitations, unemployment rates are an economic indicator to which
populations are sensitive, and these statistics therefore
have significance for policymaking.
The unemployment rate of a given country is computed by dividing the total number of unemployed by
the labor force, stating the number as a percentage.
While countries share this basic approach, methods of

Economic

Review

25

Table 1
Weighting Schemes of
National Consumer Price Indexes
(Through

1992)

Italy

Canada
Source

of weights. The weights and items were obtained

from the 1986 family expenditure and family food expenditure surveys.
Item

W e i g h t (100)

Housing

31.4

Transport
Food
Recreation, Reading, and Education
Clothing and Footwear

18.3
18.1
8.8
8.7

T o b a c c o and Alcohol
Furnishings and Equipment
Health and Personal Care

5.6
4.9
4.2

Source of weights. T h e weights w e r e gleaned from consumption patterns and national accounts data for the first
two quarters of 1989 and the last two quarters of 1990.
Item

W e i g h t (100)

Food and Tobacco
Other Goods and Services
Transport and Communication
Clothing and Footwear
Furniture and Household Utensils
Education and Recreation
Housing
Medical Care

22.8
18.0
13.5
10.8
10.6
10.0
7.6
6.7

France
Source of weights. The weights are revised at the beginning
of each calendar year using the results of continuing family
expenditure surveys conducted among 10,000 households
and data from the system of national accounts.
W e i g h t (100)

Item

25.6

Furniture and Items, Tobacco

22.7
12.5
9.7
8.4
8.2

Food
Other Services
Housing
Clothing and Footwear
Fuel and Light
Transport and Communication
Personal and Medical Care

•

6.8
6.1

Germany (Western)
Source of weights. The weights were derived from a 1983
expenditure survey of roughly 55,000 private households
and were updated in 1985 on the basis of a budget survey
of about 1,000 selected private households.
Item

Source of weights. The weights were calculated from an
expenditure survey of approximately 8,000 households
c o n d u c t e d in 1990. T h e monthly weights of fresh food
items w e r e gathered from average expenditure data for
1989 and 1990.
W e i g h t (100)

Item

31.4
14.8

Food
Housing
Transport and Communication
Reading and Recreation
Clothing and Footwear

11.9
11.2

Fuel, Light, and W a t e r
Education

8.6
5.5
4.7

Miscellaneous
Furniture and Household Utensils
M e d i c a l Care

3.1

4.5
4.4

W e i g h t (100)

Food and Tobacco
Rent
Transport and Communication
Other Goods and Services
Education and Entertainment
Fuel and Light
Furniture and Household Items
Clothing and Footwear
Personal and Medical Care

Economic
26



Japan

Review

23.0
17.8
14.4
10.9
8.4
7.3
7.2
6.9
4.1

November/December 1993

United Kingdom

United States

Source of weights. T h e weights are revised in February
each year using the latest results of the household expenditure survey. About 7,000 private households participate in
the survey.
Item

Weight (100)

Housing
Transport and Vehicles

17.2
16.3

Food
Durable Household Goods and Services
Alcohol
Other G o o d s
Clothing and Footwear

15.2
12.5
8.0
7.5
5.9

Meals outside home
Fuel and Light
Other Services
Tobacco

Item

W e i g h t (100)

Housing

41.5

Food and Beverages
Transport
Medical Care
Other Goods and Services
Clothing and Footwear
Entertainment

17.6
17.0
6.7
6.7
6.1
4.4

4.7
4.7
4.4
3.6

data collection and definitions of what it means to be
"unemployed" and of what constitutes the labor force
can differ and distinctly affect international comparisons of unemployment rates (see Box 2).
Data Collection. Collecting data through surveys
provides a broad look at unemployment because participants answer a variety of questions. In the United States,
the unemployment report is based on a survey of roughly 60,000 households (0.05 percent of the labor force).
The "household survey" is conducted over a week in the
middle of each month. Japan's survey covers about
40,000 households (0.06 percent of the labor force) and
is carried out during the last week of the month. Canada
surveys roughly 55,000 households (0.4 percent of the
labor force) over a week, usually in the middle of the
month. The Italian survey contacts 70,000 households
(0.3 percent of the labor force) but is only a quarterly endeavor: Italy's unemployment report is taken during the
first week of the first month of every quarter.
The British, French, and German unemployment reports are not gathered through surveys; rather, the data
are obtained by analyzing what is called "registration
data." Registration data are gathered from government
offices at which people apply for work and collect unemployment benefits. On the last day of the month,
officials in France and Germany look at how many
people are registered and who also fit the national definition of "unemployed." This number becomes the total number unemployed for the month. The United
Kingdom examines data on the Thursday in the second week of the month.
Definition of Unemployed. The criteria for being
counted as unemployed vary considerably among

Federal Reserve Bank of Atlanta



Source of weights. Weights are derived from the consumer
expenditure survey of about 5,000 consumer units carried
out during the 1982-84 period.

countries. U.S. officials define a person as unemployed
if he or she did not work during the survey week but
was available for work and has actively sought employment within the preceding four weeks. Canada applies a similar definition. In other countries, however,
there is greater variation on who is considered unemployed. In Japan and Italy, the requirement is only that
individuals were actively seeking employment at the
time of the survey. In Britain, an individual simply has
to be registered at the Unemployment Benefit Office
on the survey date. In France and Germany, unemployed status refers to those registered for three months.
In addition, in Germany an individual must be seeking
a job of more than twenty hours per week, and in
France, a job of more than thirty hours per week.
There are other, more subtle differences in identifying the unemployed. For example, the United States
considers only individuals sixteen years of age or older economically active members of the labor force.
Canada, Germany, Japan, and Britain have set fifteen
as the lower age limit. In Italy the age is set at fourteen, and in France there is no mention of an age limit.
Most countries include layoffs in their definition of
unemployed; Japan and Britain do not, however. In addition, recent graduates looking for their first jobs are
included in most nations' tally of the unemployed as
long as they meet the other criteria. Britain is the exception, not counting its "school-leavers" among the
ranks of the unemployed.
The Labor Force. In addition to identifying the
unemployed differently, countries calculate unemployment rates differently as well, on the basis of somewhat different definitions of the labor force. In the

Economic

Review

27

Percent of Labor Force

Chart 2
Nationally Reported Unemployment Rates

United States

Canada
Japan

France

United Kingdom

West(ern) Germany
Italy

Source: National authorities of e a c h country; see B o x 2.

Percent ot Labor Force

Chart 3
O E C D Standardized Unemployment Rates

United States

Canada
Japan

United Kingdom

France

West(ern) G e r m a n y
Italy

S o u r c e : Organisation for E c o n o m i c Cooperation and D e v e l o p m e n t , M a i n E c o n o m i c Indicators.

28
Economic



Review

November/December 1993

United States, Canada, and Italy the labor force includes both employed and unemployed, excluding
overseas members of the armed services. Japan, the
United Kingdom, and France include members of the
armed services in their measure of the labor force.
Germany's measure excludes armed service members
as well as the self-employed.
The result is considerable variation among national
unemployment rates. For instance, Germany's rate appears high compared with other nations' measures but
in fact is overstated by comparison. In addition to excluding the armed forces and the self-employed from
its labor force measure, Germany relies on registration
data, which tends to undercount the actual number of
unemployed, and the unemployment rate is higher
than if it were calculated differently.
Because the national unemployment rates are based
on such varying data, comparing them may be misleading. The data are, however, valuable for analyzing
employment developments within individual countries. For international comparisons, a measure developed by the Organisation for Economic Cooperation
and Development (OECD) may be more suitable.
The O E C D ' s S t a n d a r d i z e d U n e m p l o y m e n t
Rates. The Organisation for Economic Cooperation
and Development computes and publishes standardized
unemployment rates for many industrialized countries
(see Chart 3). The standardized rates give the number
of unemployed persons as a percentage of the total labor force. The OECD definitions for unemployment
and labor force conform with those adopted by the thirteenth Conference of Labor Statisticians, which are
generally referred to as the "ILO Guidelines" (see Appendix 2).
According to these guidelines, the labor force consists of civilian employees, the self-employed, unpaid
family workers, professional and conscripted members
of the armed forces, and the unemployed. Unemployment status refers to those who, in a specific period,
are without work and are seeking employment.
As seen above, countries often look to registration data as their main source of unemployment statistics. According to the ILO Guidelines, however, registering at
employment offices is only one way that the "seeking
employment" criterion can be satisfied. Direct applications to employers, answering newspaper ads, and checking at work sites are other actions the ILO considers as
seeking employment. Relying solely on registration data
therefore results in underestimating both the total number
of unemployed persons and the total labor force.
Labor force surveys, on the other hand, are more
comprehensive and are therefore seen as more reliable.
Digitized Federal Reserve Bank of Atlanta
for FRASER


Not all countries conduct monthly labor force surveys,
however. The United States, Canada, and Japan conduct monthly surveys; Italian authorities manage quarterly polls; and Germany, France, and the United
Kingdom have annual surveys. To calculate a standardized monthly unemployment rate for the latter
countries, the OECD uses monthly registration data
for estimating monthly changes in unemployment between their annual surveys.

Establishment Surveys
National authorities also measure the total number
of jobs in the economy. This figure differs from the
number of persons employed because people can
hold more than one job at a time. Periodic (usually
monthly) surveys of employers—"establishment"
surveys—provide these data (see Box 3). The size
and scope of these surveys across national borders
limits comparability. For example, the U.S. survey
includes most types of firms while Great Britain includes only those engaged in manufacturing activity.
In addition, countries handle part-time and seasonal
workers and striking or laid-off employees differently. While these differences make international comparisons of data from establishment surveys likely to
be misleading, within each country establishment
surveys are often more useful than household surveys
because of the greater scope and detail of information provided.

Conclusion
Gauging and comparing countries' economic performance demands both a broad perspective and
attention to detail. A country's current inflation or unemployment rate alone offers little perspective, and
definitive inferences should be avoided unless details
have been thoroughly analyzed.
A review of methods and measurements shows that
comparing national CPI measures is not wholly accurate, but slight differences are accounted for by national preference and are relatively insignificant in the
long run. Comparison of nationally reported unemployment rates and particular data from establishment
surveys across countries is not advisable, however.
The OECD calculates standardized unemployment
rates that may be used comparatively.

Economic

Review

29

Box 1
Summary of Consumer Price Indexes
Canada
Official Title
Organization
Frequency
Scope and Method

Base Year, Formula

Consumer Price Index
Statistics Canada
Monthly. Official release is usually during the second week of the month following the measured month.
Prices for food, gasoline, and most other commodities are collected once a month. Prices for automobiles are gathered quarterly; prices for furniture and household appliances are recorded six
times per year. All private households in urban areas with populations greater than 30,000 are
covered.
1986 = 100, Laspeyres formula
France

Official Title
Organization
Frequency

Scope and Method

Base Year, Formula

Official Title
Organization
Frequency

Scope and Method
Base Year, Formula

Consumer Price Index for Urban Households
INSEE (Institut Nationale de la statistique et des études économiques)
Monthly. Preliminary estimates released the first week of the month following the measured
month. Official, or "definitive," release is during the third week of the month following the
measured month.
Prices are collected monthly for most goods and services and twice monthly for fresh products.
Furnishings and clothing prices are collected quarterly. Agents record prices at 30,000 retail outlets and service establishments in 108 urban centers with more than 2,000 residents.
1990 = 100, Laspeyres formula
Germany (Western)
Consumer Price Index for All Private Households
Federal Statistical Office
Monthly. Preliminary estimates based on four Lander CPI results are released during the last
week of the measured month. Official release is usually during the second week of the following
month.
Prices are collected in the middle of the month in 118 municipalities at 15,000 retail outlets and
service centers.
1985 = 100, Laspeyres formula
Italy

Official Title
Organization
Frequency
Scope and Method

Base Year, Formula

National Consumer Price Index
ISTAT (Instituto Nazionale di Statistica)
Monthly, released during the first week of the month following the measured month.
Prices are collected in the ninety-three provincial capitals from roughly 26,300 retail stores and
from 6,000 service establishments. Data are collected on the fifteenth of each month; for fresh
goods, prices are gathered three times per month. Household durable goods and some services
prices are collected quarterly.
1990 = 100, Laspeyres formula
Japan

Official Title
Organization
Frequency


30
Economic


Consumer Price Index
Management and Coordination Agency, Statistics Bureau
Monthly. A national CPI is released toward the end of the month following the measured
month. A CPI for the Tokyo area is released toward the end of the measured month.

Review

November/December 1993

Scope and Method

Base Year, Formula

(National Index) Prices are gathered on the week that includes the twelfth of each month in
167 municipalities. Some prices for fish and fresh vegetables are recorded three times each
month.
1990 = 100, Laspeyres formula
United Kingdom

Official Title
Organization
Frequency
Scope and Method
Base Year, Formula

Official Title
Organization
Frequency
Scope and Method

Base Year, Formula

Retail Prices Index
Central Statistical Office
Monthly. Data are released toward the middle of the month following the measured month.
Prices are collected in 180 localities. The index relates to a single day of the month, usually
the second Tuesday of the month.
1987 = 100, Laspeyres Formula
United States
Consumer Price Index for All Urban Consumers (CPI-U)
U.S. Department of Labor, Bureau of Labor Statistics
Monthly. Data are released the second Friday of the month following the measured month.
Prices are gathered in eighty-five sample urban areas. Food and fuel prices are collected each
month in all eighty-five survey areas. Prices on most other goods and services are gathered
monthly in only the five largest cities and every other month in the remaining eighty urban
centers.
1982-84 = 100, Laspeyres formula

Box 2
Unemployment Report Comparisons
Canada
Statistics Canada
Monthly. Official release is usually the second Friday of the month following the measured
month.
Sample survey of about 55,000 households.
Scope and Method
Definition of Unemployed Persons without work who are currently available for work and who also sought employment within the previous four weeks.

Organization
Frequency

France
Organization
Frequency
Scope and Method
Definition of Unemployed

Minister des Affaires Sociales et de l'Emploi

Organization
Frequency
Scope and Method
Definition of Unemployed

Federal Labor Office
Monthly, released during the first week of the month following the measured month.

Monthly, released toward the end of the month following the measured month.
Based on registration data.
Persons without work who are currently available for work and who have sought a full-time
position (thirty hours or more) for more than three months.
Germany (Western)

' Based on registration data.
Persons without work who are currently available for work and have been registered for a
minimum of three months as seeking a job of twenty or more hours per week.

Federal Reserve Bank of Atlanta



Continued

on page 10

Economic Review 39

Box 2 (Continued)
Italy
ISTAT (Instituto Nazionale di Statistica)
Organization
Quarterly, released during the fifth week of the measured quarter.
Frequency
Sample surveys of about 70,000 households.
Scope and Method
Definition of Unemployed
Persons without work who are currently available for and seeking employment.
Japan
Management and Coordination Agency, Statistics Bureau
Monthly. The report is released toward the end of the month following the measured
month.
Sample survey of about 40,000 households.
Scope and Method
Definition of Unemployed Persons without work who are currently available for employment and who also actively
sought a job or are preparing to begin work.
Organization
Frequency

United Kingdom
Department of Employment
Organization
Monthly. Data are released toward the middle of the month following the measured month.
Frequency
Scope and Method
Based on registration data.
Definition of Unemployed Persons claiming benefits at Unemployment Benefit Offices.
United States
Organization
Frequency
Scope and Method
Definition of Unemployed

U.S. Department of Labor, Bureau of Labor Statistics
Monthly. Data are released the first Friday of the month following the measured month.
Sample survey of about 60,000 households.
Persons who did not work during the survey week but were available for work and had actively sought employment within the preceding four weeks.

Box 3
Establishment Surveys
Canada
Organization
Businesses Covered

Not included
Geographical Coverage
Persons Covered

Frequency
Concepts and Definitions
Establishment

Statistics Canada
Industrial: forestry, mining, oil wells, manufacturing; construction; transportation, communication, and other utilities; trade; finance, insurance, real estate; commercial, business, and
personal services; public administration.
Agriculture, fishing and trapping, private household services, religious organizations, and
the military.
Entire country.
All persons drawing pay for services rendered or for paid absences, and workers for whom
the employer is required to complete a Revenue Canada T-4 form. Military services are excluded.
Monthly, since 1966.

Employment

Economic

32


Review

The smallest separate operating entity capable of reporting all elements of basic industrial
and payroll data. All types and sizes of establishments are covered.
Full-time, part-time, and temporary employees are covered. Working owners, directors,
partners, and other officers of incorporated businesses are included as well.

November/December 1993

Not covered
Data Collection
Reference Period

Organization
Businesses Covered

Not covered
Geographical Coverage
Persons Covered
Not covered
Frequency
Concepts and Definitions
Establishment
Employment

Data Collection
Reference Period

Self-employed, unpaid family workers, homeworkers, and those not receiving any pay during the reference period (strikers, lockouts, layoffs, and workers on unpaid leave).
Survey conducted by mailed questionnaires, reporting statements, and telephone calls.
The last pay period or the last seven days of the month.
France
Service des études et de la statistique, Ministere du Travail, de l'Emploi et de la Formation
Professionnelle
Industrial—mining and manufacturing; electricity, gas, and water; wholesale and retail
trade and restaurants and hotels; transport, storage, and communication; finance, insurance,
real estate, and business services; community, social, and personal services.
Agriculture, public administration, domestic services.
Entire country.
Wage earners and salaried employees.
Working proprietors and directors, unpaid family workers, and homeworkers.
Quarterly, since 1946.
A group of employees (ten or more) working under the control of a single legal entity at a
single location.
Employees who have an employment contract, whether it is in force or not, whatever their
age. This includes full- and part-time wage earners and salaried employees, as well as seasonal workers. Excluded are temporary employees and homeworkers.
Survey conducted by mailed questionnaires.
The last day of every quarter.
Germany (Western)

Organization
Businesses Covered
Geographical Coverage
Persons Covered
Not covered

Frequency
Concepts and Definitions
Establishment
Employment

Data Collection
Reference Period

Federal Statistical Office
Industrial—-mining and manufacturing; electricity, gas, and water; building and civil engineering work; wholesale and retail trade; finance and insurance.
States of the former West Germany.
Wage earners and salaried employees.
Working proprietors and directors, unpaid family workers, homeworkers, apprentices, parttime, temporary, and seasonal workers. Also excluded are workers absent because of unpaid vacation, temporary layoff, and temporary military service.
Quarterly, since 1950. (Monthly series available for manufacturing employment beginning
in 1981.)
Local unit of an enterprise.
Employees are those whose regular monthly gross earnings are below DM9,000 ($5,300).
They include wage earners and salaried employees and those temporarily absent because of
paid leave, strike, lockout, or sickness.
Survey conducted by mailed questionnaires.
The first month of every quarter.
Italy

Organization
Businesses Covered
Geographical Coverage
Persons Covered
Frequency

Ministerio del Lavoro e délia Previdenza Sociale
Industrial—mining, manufacturing; electricity, gas, and water; construction.
•Entire country.
Wage earners and salaried employees.
Quarterly, since 1965. Monthly from 1947 to 1964.

Digitized Federal Reserve Bank of Atlanta
for FRASER


Continued on page 12

Economic

Review 41

Box 3 (Continued)
Concepts and Definitions
Establishment
Employment
Data Collection
Reference Period

Local unit or the place where the central administrative office of the enterprise is located
and where production is ensured. Covers firms of fifty or more employees.
Wage earners and salaried employees.
Survey conducted by mailed questionnaires.
First month of every quarter.
Japan

Organization
Businesses Covered

Policy Planning and Research Department, Ministry of Labor
Industrial—mining and manufacturing; electricity, gas, and water; construction; wholesale
and retail trade, restaurants and hotels; transport, storage, and communication; finance, insurance, real estate, and business services; community, social, and personal services.

Not included
Geographical Coverage
Persons Covered
Not covered
Frequency
Concepts and Definitions
Establishment

Agriculture, hunting, forestry, fishing, and household services.
Entire country.
Wage earners and salaried employees.
Working directors and proprietors, unpaid family workers, and homeworkers.
Monthly, since 1950.

Employment

Data Collection
Reference Period

An economic unit that produces goods and services at a single location. All establishments
with thirty or more regular employees are covered.
Regular employees, including wage earners, salaried employees, apprentices, part-time,
temporary, seasonal workers. Also included are those on paid and unpaid leave. Workers
who are temporarily off the payroll, such as strikers, lockouts, layoffs, and other authorized
or unauthorized employees are also included.
Survey conducted by mailed questionnaires.
One month.
United Kingdom

Organization
Businesses Covered
Geographical Coverage
Persons Covered
Not covered
Frequency
Concepts and Definitions
Establishment
Employment

Data Collection
Reference Period

Department of Employment
Industrial—manufacturing.
Great Britain (Northern Ireland is not included).
Working directors, wage earners, and salaried employees.
Working proprietors, unpaid family workers, and homeworkers.
Monthly, since 1971.
Workplaces that participate in the survey (those with ten or more employees).
Employees on establishment payrolls. Apprentices, part-time, temporary, seasonal workers,
and those on paid and unpaid leave are included. Workers who are temporarily off the payroll, such as strikers, lockouts, layoffs, and other authorized or unauthorized employees are
also included.
Survey conducted by mailed questionnaires.
One day in each month.
United States

Organization
Businesses Covered

 34


Economic

Bureau of Labor Statistics of the Department of Labor in cooperation with State Employment Security Agencies
Industrial—mining, manufacturing; electricity, gas and water; construction; wholesale and
retail trade; transport, storage, and communication; finance, insurance, real estate, and business services; community, social, and personal services; local, state, and federal government.

Review

November/December 1993

Not included
Geographical Coverage
Persons Covered
Not covered
Frequency
Concepts and Definitions
Establishment
Employment

Data Collection
Reference Period

Agriculture, hunting, forestry, fishing, private households, and the military.
Entire country.
Working directors, wage earners, and salaried employees.
Working proprietors, unpaid family workers, and homeworkers.
Monthly, since 1915.
An economic unit that produces goods and services at a single location and is engaged in
one type of economic activity. All types and sizes of establishments are covered.
Employees on establishment payrolls who receive pay for any part of the pay period that includes the twelfth of the month. Part-time, temporary, seasonal workers, and those on paid
leave are included; workers on unpaid leave are excluded. Strikers and locked-out employees are also excluded.
Survey conducted by mailed questionnaires.
The pay period which includes the twelfth day of the month.

Appendix 1
The Laspeyres Index Formula
The mathematical formula used to calculate CPI in
the United States and the other G-7 countries is the
Laspeyres index formula:
h

where
I

I*Pt<la •X 100,
ILPtfla

index;
price;
P
quantity;
<
7
I
the summation of the products of price and
quantity for all the items in the index;
t
= the time period to which the index refers;
the base period to which the quantity weights
refer; and
o
= the base period to which the prices refer.
If the measured period is the same as the base period
(0 and weights (a), the formula is precisely equivalent to

Federal Reserve
 Bank of Atlanta


the Laspeyres index. In this case, movement in the index
reflects changes only in the prices paid by consumers for
that fixed basket of goods. Therefore, the formula is altered to permit the index to be calculated without having
to determine specific weights. That reformulation is:
W/-1

Is(P,-\qa)(P,/P,-l)
l.Pt-^a

The first term in the numerator—the same as the first
term in the denominator—represents the portion of consumer spending on each item in the fixed basket if the
consumer purchased the base quantities. It is called a relative importance
and may change from period to period
if the price of the item changes relative to all other
prices. The relative importance can be employed to compute indexes for specific periods from the component
price series composing the CPI.

Economic Review 43

Appendix 2
International Labor Office Definition of Unemployment
T h e f o l l o w i n g is extracted f r o m the R e s o l u t i o n C o n -

s u b p a r a g r a p h (2) a b o v e , a p p r o p r i a t e tests s h o u l d

c e r n i n g S t a t i s t i c s of t h e E c o n o m i c a l l y A c t i v e P o p u l a -

b e d e v e l o p e d to suit national c i r c u m s t a n c e s . S u c h

tion, E m p l o y m e n t , U n e m p l o y m e n t , a n d U n d e r e m p l o y -

tests m a y b e b a s e d o n notions such as present d e -

m e n t ( R e s o l u t i o n 1, T h i r t e e n t h International C o n f e r e n c e

sire for w o r k and p r e v i o u s w o r k e x p e r i e n c e , will-

of L a b o r Statisticians, G e n e v a , 1982).

ingness to take up work for w a g e or salary on

(1) T h e " u n e m p l o y e d " c o m p r i s e all p e r s o n s a b o v e a

locally prevailing terms, o r r e a d i n e s s to u n d e r t a k e

specified a g e w h o d u r i n g the r e f e r e n c e p e r i o d were:

s e l f - e m p l o y m e n t activity g i v e n the n e c e s s a r y resources and facilities.

(a) " w i t h o u t w o r k , " i.e., w e r e n o t in paid e m p l o y -

(4) N o t w i t h s t a n d i n g the criterion of s e e k i n g work e m -

m e n t or s e l f - e m p l o y m e n t ;
(b) " c u r r e n t l y available for w o r k , " i.e. w e r e avail-

b o d i e d in the s t a n d a r d d e f i n i t i o n of e m p l o y m e n t ,

able for paid e m p l o y m e n t or self-employment

persons without work and currently available for

d u r i n g the r e f e r e n c e period; a n d

w o r k w h o h a d m a d e a r r a n g e m e n t s t o take u p paid

(c) " s e e k i n g w o r k , " i.e., had taken specific steps in a

e m p l o y m e n t o r u n d e r t a k e s e l f - e m p l o y m e n t activity

specified recent period to seek paid e m p l o y m e n t

at a date s u b s e q u e n t to the r e f e r e n c e p e r i o d should
b e c o n s i d e r e d as u n e m p l o y e d .

or s e l f - e m p l o y m e n t . T h e specific steps m a y inc l u d e registration at a p u b l i c o r p r i v a t e e m p l o y -

(5) P e r s o n s t e m p o r a r i l y absent f r o m their j o b s with n o

m e n t e x c h a n g e ; application to e m p l o y e r s ; check-

formal j o b attachment w h o were currently avail-

ing at worksites, f a r m s , factory gates, m a r k e t or

able f o r w o r k a n d s e e k i n g w o r k s h o u l d b e r e g a r d e d

other assembly places; placing or answering

a s u n e m p l o y e d in a c c o r d a n c e w i t h t h e s t a n d a r d

n e w s p a p e r advertisements; seeking assistance of

definition of u n e m p l o y m e n t . C o u n t r i e s m a y , h o w -

f r i e n d s o r relatives; l o o k i n g f o r land, b u i l d i n g ,

ever, depending on national circumstances and

m a c h i n e r y o r e q u i p m e n t to establish o w n enter-

policies, p r e f e r to relax the s e e k i n g w o r k criterion

prise; applying f o r permits and licenses, etc.

in t h e c a s e of p e r s o n s t e m p o r a r i l y laid o f f . In such

(2) In situations w h e r e the c o n v e n t i o n a l m e a n s of seek-

c a s e s , p e r s o n s t e m p o r a r i l y laid o f f w h o w e r e n o t

ing w o r k are of limited r e l e v a n c e , w h e r e the labor

s e e k i n g w o r k b u t classified a s u n e m p l o y e d should
be identified as a s e p a r a t e s u b c a t e g o r y .

m a r k e t is largely u n o r g a n i z e d o r of limited scope,
w h e r e labor a b s o r p t i o n is, at the t i m e , inadequate,

(6) Students, h o m e m a k e r s , and o t h e r s m a i n l y e n g a g e d

o r w h e r e the labor f o r c e is largely s e l f - e m p l o y e d ,

in n o n - e c o n o m i c activities during the r e f e r e n c e peri-

the s t a n d a r d d e f i n i t i o n of u n e m p l o y m e n t g i v e n in

od w h o s a t i s f y t h e criteria laid d o w n in s u b p a r a -

s u b p a r a g r a p h (1) a b o v e m a y be applied b y relaxing

graphs (1) and (2) above should b e regarded as

the criterion of s e e k i n g w o r k .

u n e m p l o y e d o n the s a m e basis as o t h e r c a t e g o r i e s
of e m p l o y e d p e r s o n s and be identified separately,

(3) In the application of t h e criterion of current avail-

w h e r e possible.

ability f o r w o r k , especially in situations c o v e r e d b y

References
Bank of Japan. Research and Statistics Department. Comparative Economic and Financial Statistics, Japan and Other
Major Countries. Tokyo: Bank of Japan, 1991.

. Employment,
Wages, and Hours of Work
(Establishment Surveys). Vol. 2 of Statistical Sources and
Methods.
Geneva: International Labor Organization, 1989.

International Labor O f f i c e . Economically
Active
Population,
Employment,
Unemployment,
and Hours of Work (Household Surveys). Vol. 3 of Statistical Sources and
Methods.
Geneva: International Labor Organization, 1986.
. Employment,
Unemployment,
Wages and Hours of

. Consumer Price Indices. Vol. 1 of Sources and Methods: Lahor Statistics, 3d ed. Geneva: International Labor
Organization, 1992.

Work (Administrative
Records and Related Sources). Vol. 4
of Statistical Sources and Methods. Geneva: International
Labor Organization, 1989.

36
Economic


Review

O r g a n i s a t i o n for E c o n o m i c C o o p e r a t i o n and D e v e l o p m e n t ,
Statistics D i r e c t o r a t e . Quarterly Labor Force
Statistics,
Number 2, 1993. Paris: Organisation for Economic Cooperation and Development, 1993.

November/December 1993

i/ridex for 1993
jRnancial Institutions
Holder, Christopher L., "Competitive Considerations in Bank
Mergers and Acquisitions:
Economic Theory, Legal Foundations, and the Fed," January/
February, 23
Holder, Christopher L., "The Use
of Mitigating Factors in Bank
Mergers and Acquisitions:
A Decade of Antitrust at the
Fed," March/April, 32
King, B. Frank, "Commercial Bank
Profits in 1992," September/
October, 39
Wall, Larry D., "Too-Big-to-Fail
after FDICIA," January/
February, 1
Wall, Larry D., Alan K. Reichert,
and Sunil Mohanty, "Deregulation and the Opportunities for
Commercial Bank Diversification," September/October, 1

Analysts' Forecasts: Further
Evidence of Rationality,"
November/December, 13
Smith, Stephen D., and Richard B.
Harper, "Private Insurance of
Public Debt: Another Look at
the Costs and Benefits of Municipal Insurance," September/
October, 27
Smith, Stephen D., and Sheila L.
Tschinkel, "Policy Essay—New
Tools for Regulators in a HighTech World," March/April, 45

Macroeconomic Policy
inflation
Abken, Peter A., "Inflation and the
Yield Curve," May/June, 13
Rogers, R. Mark, Steven W. Henderson, and Daniel H. Ginsburg,
"Consumer Prices: Examining
Housing Rental Components,"
May/June, 32
Tallman, Ellis W., "Inflation: How
Long Has This Been Going
On?" November/December, 1

Financial Markets
Abken, Peter A., "Inflation and the
Yield Curve," May/June, 13
Cohen, Hugh, "Beyond Duration:
Measuring Interest Rate Exposure," March/April, 23
Cohen, Hugh, "Review Essay—
Junk Bonds:
Securities

How High

Yield

Restructured

America, by Glenn Yago,"
July/August, 28
Cunningham, Thomas J., "Review
E s s a y — C a p i t a l Ideas:
probable

Origins

of

The

Im-

Modern

by Peter L. Bernstein," May/June, 47
Hunter, William C., and Lucy F.
Ackert, "Business Cycles and
Wall Street,

Federal Reserve Bank of Atlanta



Espinosa, Marco, and Chong K.
Yip, "International Policy
Coordination: Can We Have
Our Cake and Eat It Too?"
May/June, 1
Hunter, William C., "Banking
Reform and the Transition to a
Market Economy in Bulgaria:
Problems and Prospects,"
January/February, 15

international Economics
and Finance
Chriszt, Michael J., "Are International Comparisons of Inflation and Employment
Valid?" November/
December, 23
Donovan, Jerry J., "Review Essay—Business Information
Sources for Eastern Europe
and the Newly Independent
States: A Guide to Periodical
Literature," January/
February, 37

Espinosa, Marco, and Chong K.
Yip, "International Policy
Coordination: Can We Have
Our Cake and Eat It Too?"
May/June, 1
Leeper, Eric M., "The Policy
Tango: Toward a Holistic
View of Monetary and Fiscal
Effects," July/August, 1
Roberds, William, "The Rise of
Electronic Payments Networks and the Future Role of
the Fed with Regard to Payment Finality," March/April, 1
Tallman, Ellis W„ "Inflation:
How Long Has This Been
Going On?" November/
December, 1

Payments System
Roberds, William, "The Rise of
Electronic Payments Networks and the Future Role of
the Fed with Regard to Payment Finality," March/April, 1

Economic

Review

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