Full text of Research Update : April 1998

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April 1998

Research
U P D AT E
f r o m t h e F e d e r a l R e s e r v e B a n k o f N e w Yo r k
RESEARCH AND MARKET ANALYSIS GROUP

Fed Conference Examines U.S. Education Reform
Economists and educators attending the
Federal Reserve Bank of New York’s conference
“Excellence in Education: Views on Improving
American Education” on November 14, 1997,
explored a variety of strategies for strengthening the performance of the
Participants called for further nation’s primary and secondary schools. Conference
participants agreed that one
experimentation with education
strategy—offering students
a greater choice of schools—
reforms and urged that new studies has led to demonstrably better educational outcomes
be carefully designed to permit a for low-income urban
minorities. Nevertheless,
full evaluation of results. participants cautioned that
the existing evidence is
insufficient to justify expanding choice programs to the student population as a whole.
The proceedings of the conference, published in a special issue of the Bank’s Economic
Policy Review (vol. 4, no. 1), cover four broad

topics: the effectiveness of current school
spending, the impact of school choice on student achievement, the relative performance of
public and private schools, and the importance
of educational standards. Speakers at the conference included many of the key figures in the
current debate on education reform.
A starting point for much of the discussion
was the perceived mismatch between the training provided by elementary and secondary
schools and the increasingly sophisticated skills
required by employers in today’s labor market.
As a number of conference participants noted,
many students graduating from high school
today cannot qualify for jobs that would enable
them to secure a traditional middle-class living.
Although studies to date are not adequate to
support large-scale reforms, the conference
speakers presented evidence that more limited
strategies can be effective. For poor urban students, the option to attend private schools can
result in improved test scores and graduation

New Research: Januar y–March 1998

rates. Some research findings suggest that
schools would benefit from adopting more rigorous performance standards, such as detailed
curriculum standards, regular assessments of
student progress in mastering the curriculum,
and stricter grading and grade-promotion
policies. Conference participants also offered
evidence that reducing class size results in
improved performance on standardized tests,
particularly for low-income students.
Another topic of discussion was the
methodology of evaluation—how policymakers should assess the cost-effectiveness
of specific reforms. Researchers have taken
different approaches to putting a dollar

value on educational improvements. Some
examine the effect of such improvements on
the wages earned by students later in life. An
alternative method, developed in detail in
one conference paper, involves calculating
what people are willing to pay to reside in a
community with superior schools.
Although the speakers at the conference
expressed different views on the extent of the
problems affecting American schools, they
agreed that more studies are needed before policymakers proceed with ambitious reforms of
the current system. For the immediate future,
they recommended continued experimentation with different reform initiatives.

Publications and Papers
The Research and Market Analysis Group produces a wide range of publications
and discussion papers:
• The Economic Policy Review—a policy-oriented research journal focusing on macroeconomic, banking, and financial market topics. www.ny.frb.org/rmaghome/econ_pol
• Current Issues in Economics and Finance—a newsletter-style publication offering
concise analyses of economic and financial topics. www.ny.frb.org/rmaghome/curr_iss
• Second District Highlights—a regional supplement to Current Issues covering
financial and economic developments in the Federal Reserve System’s Second District.
www.ny.frb.org/rmaghome/curr_iss/sec_dis
• Staff Reports—technical papers presenting research findings, designed to stimulate
discussion and elicit comments. These papers are intended for publication in leading
economic and finance journals. www.ny.frb.org/rmaghome/staff_rp
• Research Papers—discussion papers reporting preliminary research findings.
www.ny.frb.org/rmaghome/rsch_pap
• Publications & Other Research—a brochure spotlighting the Group’s research output for
the year. www.ny.frb.org/rmaghome/otherres

New York–New Jersey Job Recovery Expected
to Continue in 1998
The pattern of employment recovery in the
New York–New Jersey region is expected to
remain unbroken in 1998—despite a slight
slowing in job growth—according to the
Federal Reserve Bank of New York’s regional
jobs forecast (Current Issues in Economics
and Finance, vol. 4, no. 3).
The forecast projects 1.3 percent job
growth for the region, down slightly from the
1997 nine-year high of 1.7 percent. New jobs
are also projected to slip, from 195,000 to

149,000. The deceleration is attributed
almost wholly to the effects of an anticipated
slowing of growth in the U.S. economy.
Within the region, job growth in New
Jersey should reach 1.8 percent, down from
2.4 percent in 1997. Growth of 1.0 percent is
forecast for New York State, slowing from
1.4 percent last year. New York City jobs are
expected to expand by 1.2 percent, somewhat below the 1.6 percent growth rate
achieved in the previous year.

Price Competitiveness of U.S. Exports Is Assessed
U.S. dollar movements had a profound effect
on the price competitiveness of U.S. exports
in the 1980s, but their impact has been much
less dramatic during most of the 1990s,
according to Thomas Klitgaard and James
Orr in “Evaluating the Price Competitiveness
of U.S. Exports” (Current
If sustained, the dollar’s recent Issues in Economics and
Finance, vol. 4, no. 2).

rise will make it more difficult

The authors arrive at
these findings first by using
for U.S. firms to keep pace a trade-weighted U.S. dollar index to track the dollar’s performance against
with their competitors.
that of key foreign currencies. The index, developed
by the authors, measures how exchange rate
movements or inflation conditions can affect
U.S. price competitiveness. The authors then
demonstrate the index’s link to exports by
comparing the growth rate of U.S. exports to
specific foreign markets with the corres-

ponding rates for Germany and Japan—the
nation’s main export competitors.
From this analysis, Klitgaard and Orr conclude that “the dollar’s sharp run-up during
the first half of the 1980s had a significant
negative impact on U.S. foreign sales relative
to those of Germany and Japan, while the
dollar’s fall in the latter half helped U.S. firms
regain market share.” They note that in the
first half of the 1980s, the dollar’s appreciation hit U.S. exports hard, while German and
Japanese exporters enjoyed robust growth in
virtually all markets examined. The dollar’s
sharp drop beginning in 1985 led to a boom
in U.S. exports that was mostly unmatched
by German and Japanese exports.
The authors observe that exchange rates
and relative inflation rates have been much
more stable in the 1990s. Despite this stability,
overall U.S. export sales were still stronger
than German or Japanese sales. The authors

Federal Reser ve Bank of New York

attribute the difference largely to the removal
of North American trade barriers rather than
a weak dollar.
Dollar movements could influence trade
in the future, however. Klitgaard and Orr
acknowledge that the dollar appreciation
that began in 1997 has hurt U.S. price competitiveness and, if sustained, will continue
to do so. To keep pace with foreign firms, the
authors say, U.S. exporters would have to

adopt cost-cutting methods and possibly
accept lower profit margins. Nevertheless,
the authors explain, although the dollar’s
current level is relatively high, the dollar
index is not significantly out of the bounds in
which it fluctuated earlier in the 1990s.
“Further sharp increases in the dollar’s
strength would be necessary to push our
index of price competitiveness to the high
levels of the mid-1980s.”

Many Workers Forgo Opportunity to Save
for Retirement through 401(k) Plans
An increasing number of employers are sponsoring pension plans that enable workers to
make their own investment decisions. These
decisions include whether to participate, how
much to contribute, how to invest the plan
assets, and what to do with the plan assets upon
switching jobs. Of such employee-directed
plans, the 401(k) is the most common.

In “How Workers Use 401(k) Plans: The
Participation, Contribution, and Withdrawal
Decisions” (Staff Reports, no. 38), William F.
Bassett, Michael J. Fleming, and Anthony P.
Rodrigues review the choices made by workers
offered 401(k) plans. While retirement planning
choices are increasingly becoming the responsibility of the individual, many workers—

Recently Published
Beverly Hirtle.“Derivatives, Portfolio Composition and Bank Holding Company Interest Rate
Risk Exposure.” Journal of Financial Services Research 12, no. 2-3: 243-66.
Sangkyun Park.“Effects of Price Competition in the Credit Card Industry.” Economics Letters 57,
no. 1: 79-85.
Asani Sarkar and Michelle Tozzi.“Electronic Trading on Futures Exchanges.” Derivatives
Quarterly 4, no. 3: 7-14. Adapted from Federal Reserve Bank of New York Current Issues in
Economics and Finance 4, no. 1.

particularly low-income workers—are not participating in 401(k) plans or are participating in
a limited way, the authors report.
The study, which draws on data from the
1993 Current Population Survey, finds that
more than one-third of the
workers who are offered
Many workers—particularly low- 401(k) plans opt not to
participate. Factors such
income workers—are not as income, age, job tenure,
education, and home
participating in 401(k) plans ownership affect the decision to join. For example,
or are participating in a limited way. while 81 percent of workers
with family incomes of at
least $75,000 choose to
participate, only 36 percent of workers with
family incomes of less than $15,000 choose
to participate.
Employer matching can also influence a
worker’s decision to join a 401(k). Workers
whose employers offer matching contributions are more likely to participate in 401(k)
plans than workers whose employers do not
offer such matches. Surprisingly, participation does not appear to rise as the rate of
employer matching increases.
After reviewing 401(k) participation decisions, Bassett, Fleming, and Rodrigues look
at preretirement lump-sum distributions
and rollover decisions. They find that nearly
one-half of workers who had a pension plan
in a previous job report taking a lump-sum
distribution from the plan before retirement
age. In recent years, only 28 percent of these
distribution recipients have rolled over their

investments into tax-qualified plans.
Workers with high incomes, advanced education, and their own homes are more likely
to roll over lump-sum distributions. The size
of the distribution is also an important predictor—larger distributions are more frequently rolled over into tax-qualified plans.
Although 401(k) plans have grown rapidly
in the past ten years, with annual contributions more than doubling during that period,
Bassett, Fleming, and Rodrigues observe that
low participation rates and the low rollover
rate of preretirement distributions are troubling: “As our main data source does not
measure household assets or saving, we cannot draw definitive conclusions about the
overall adequacy of workers’ retirement
income. Nevertheless, our findings raise concern that many workers may not be adequately saving for their retirement years.”

1997 Publications
Brochure Available
Our 1997 Publications & Other Research
brochure was released earlier this year.
The twenty-four-page brochure highlights much of the work published by
the Research Group over the past year—
both in our four research series and in
leading academic journals.
Copies are available by returning the
enclosed order form or by visiting
www.ny.frb.org/rmaghome/otherres.

Federal Reser ve Bank of New York

New Officer Appointed in Charge of Statistics Area
The Research and Market Analysis Group
welcomes the appointment of Leon W Taub
as vice president of the Group’s statistics
area. Mr. Taub was formerly Chief of the
National Income and Wealth Division of the
U.S. Commerce Department’s Bureau of
Economic Analysis, where he oversaw the
production of the U.S. GDP estimates and
research on GDP data sources and compo-

nents. He holds a Ph.D. in economics from
New York University.
The statistics area collects financial and
bank structure data for use in bank supervision
and compliance monitoring. The data are also
used in the implementation of monetary and
foreign exchange policy, the construction of
monetary aggregates, and the tracking of
domestic and international capital markets.

From the Federal Reserve Bank of New York: A Revised and
Expanded Guide to the Conduct of U.S. Monetary Policy
The 1998 edition of U.S. Monetary Policy and
Financial Markets offers an updated account
of the Federal Reserve’s procedures for formulating and carrying out monetary policy.
Author Ann-Marie Meulendyke explains the
role of the Federal Open Market Committee
in setting policy and details the steps taken
by the Federal Reserve Bank of New York’s
Trading Desk to implement the Committee’s
decisions through open market operations.
The book also explains how policy is transmitted to the nation’s economy through the
banking system and financial markets.
Included in the volume is a short history
of monetary policymaking and the Federal
Reserve System. A chapter on the international dimensions of monetary policy, substantially revised for this edition, explores

how changes in domestic policy affect the
economies of other countries and how
developments abroad can influence the
actions of U.S. policymakers.
Designed to supplement monetary economics textbooks, U.S. Monetary Policy and
Financial Markets will be of particular interest to students and teachers of money and
banking. In addition, the book should prove
useful to all members of the academic, business, and financial communities who would
like to know more about monetary policy
and its effects on today’s marketplace.
To obtain a copy of U.S. Monetary Policy
and Financial Markets, use the enclosed
order form. The book is also available at
www.ny.frb.org/pihome/addpub.

Capital Regulation Conference Held at New York Fed
In February, the Federal Reserve Bank of New
York hosted “Financial Services at the
Crossroads: Capital Regulation in the TwentyFirst Century”—a conference cosponsored
with the Bank of England, the Bank of Japan,
and the Federal Reserve System’s Board of
Governors. Speakers included Federal Reserve
Chairman Alan Greenspan; Tom de Swaan,
Chairman of the Basle Committee on Banking
Supervision and Executive Director of
de Nederlandsche Bank; Thomas Labrecque,
President of Chase Manhattan Corporation;
and Edgar Meister, a member of the Board of
Directors of the Deutsche Bundesbank.
One of the main concerns voiced during
the sessions was that financial innovation
and developments in risk management
practices within financial institutions have
put pressure on the current system of
risk-based capital regulations. Several conference papers suggested that the effectiveness of supervisory rules and guidelines—
especially regulatory capital requirements—
will vary as the circumstances facing financial institutions change and as these institutions develop new and increasingly complex
risk management methods.
Another key issue involved the limitations
of the “one-size-fits-all” approach to capital
regulation. Participants suggested that crafting effective one-size-fits-all regulatory capital requirements is extremely difficult because
each financial institution’s circumstances and
characteristics influence how it responds to
any rules. Participants concluded that the
basic approach to supervisory capital requirements will continue to evolve over time,
reflecting innovations in risk management
and measurement at financial institutions as

well as changes in the views and experience of
supervisors concerning the prevailing capital
regime.
A special issue of the Bank’s Economic
Policy Review devoted to the conference proceedings will be issued later this year. In the
meantime, longer versions of many of the
papers presented are available at our web site:
www.ny.frb.org/rmaghome/conference.

Web Site News
• Members of the Federal Reserve Bank of
New York’s Research and Market
Analysis Group can be reached via email at firstname.lastname@ny.frb.org.
• Back issues of many of our publications
and papers are available conveniently
at our web site. There, you can also find
links to other Federal Reserve System
research offerings and to Federal
Reserve Bank of New York information
and announcements.
• Our Electronic Alert Service can automatically notify you by e-mail when
new publications are available at our
web site. You can then go directly to the
site and download a publication or
order the hard-copy version electronically. To subscribe to this free service,
visit our site.
• You can now download papers presented at Federal Reserve Bank of
New York conferences. For example,
many papers from the recent conference “Financial Services at the Crossroads: Capital Regulation in the
Twenty-First Century” are at our site.
www.ny.frb.org/rmaghome

Federal Reser ve Bank of New York

RESEARCH AND MARKET ANALYSIS GROUP
PUBLICATIONS AND PAPERS:
JANUARY–MARCH 1998
Economic Policy Review
Volume 4, Number 1 (March)
To Our Readers, by William J. McDonough
Creating a Performance-Driven System,
by Rudy Crew
Conclusions and Controversies about the
Effectiveness of School Resources, by Eric A.
Hanushek
Reassessing the View That American Schools
Are Broken, by Alan B. Krueger
What Do America’s “Traditional” Forms of
School Choice Teach Us about School Choice
Reforms? by Caroline M. Hoxby
Schools and Student Achievement: More
Evidence from the Milwaukee Parental Choice
Program, by Cecilia Elena Rouse
What Have We Learned about the Benefits of
Private Schooling? by Derek Neal
Measuring the Value of Better Schools,
by Sandra E. Black

New York–New Jersey Job Recovery Expected
to Continue in 1998, by James Orr, Rae D.
Rosen, and Mike De Mott
Volume 4, Number 3 (March)
Second District Highlights

Staff Reports
Estimation of Cross-Country Differences in
Industry Production Functions,
by James Harrigan
Number 36 (January)
How Big Are Potential Welfare Gains from
International Risksharing? by Eric van Wincoop
Number 37 (February)
How Workers Use 401(k) Plans: The
Participation, Contribution, and Withdrawal
Decisions, by William F. Bassett, Michael J.
Fleming, and Anthony P. Rodrigues
Number 38 (March)

Research Papers

The Two-Legged Stool: The Neglected Role of
Educational Standards in Improving America’s
Public Schools, by Julian R. Betts

Asset Market Hangovers and Economic
Growth: U.S. Housing Markets, by Matthew
Higgins and Carol Osler
No. 9801 (January)

Standards, Information, and the Demand for
Student Achievement, by Richard J. Murnane
and Frank Levy

Methods for Evaluating
Estimates, by Jose Lopez
No. 9802 (March)

Current Issues in Economics
and Finance

Value-at-Risk

Interbank Interest Rates as Term Structure
Indicators, by Allan M. Malz
No. 9803 (March)

Electronic Trading on Futures Exchanges,
by Asani Sarkar and Michelle Tozzi
Volume 4, Number 1 (January)

Modelling the Instability of Mortgage-Backed
Prepayments, by Stavros Peristiani
No. 9804 (March)

Evaluating the Price Competitiveness of U.S.
Exports, by Thomas Klitgaard and James Orr
Volume 4, Number 2 (February)

Judging the Risk of Banks: What Makes Banks
Opaque? by Donald P. Morgan
No. 9805 (March)

The views expressed in Research Update are those of the authors and do not necessarily reflect the
position of the Federal Reserve Bank of New York or the Federal Reserve System.