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MR. A.T,tARDICE
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November 1981
1
The Large Monetary Aggregates as Intermediate Policy Targets
14
"Fed Quotes"
15
Another Look at the Incidence and Duration of Unemployment
20
Regulatory Briefs and Announcements
24
Now Available from the Federal Reserve
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
The Large Monetary Aggregates
as Intermediate Policy Targets
By Patrick ]. Lawler
The Federal Reserve Board publishes two broad
monetary aggregates, M2 and M3, and an even
broader measure of liquid assets, L. Four-quarter
growth rates of M2 and M3 are targeted semiannually by the Fed and reported to the Congress.
Two- to four-month growth rates of M2 are also
used as short-term targets in the Fed's directives
to its Trading Desk after each meeting of the Federal Open Market Committee.
These aggregates generally>get little attention
compared with the narrower definitions of money,
Mi-A and Mi-B. The Mi's have usually outperformed the larger aggregates in statistical tests
and are easier for the Fed to control. But the extension of NOW (negotiable order of withdrawal) accounts nationwide this year has made the Mi
aggregates much harder to interpret and has led
many to suggest placing greater emphasis on the
broader measures, especially M2. This article considers some of the problems with doing so, looks
at some evidence concerning the past behavior
of the aggregates, and discusses a recently developed set of alternatives.
The article concludes that the large aggregates
are, of necessity. arbitrarily constructed and would
be difficult for the Fed to control as intermediate
targets. Furthermore, reduced-form estimates indiNovember t98t/Voice
cate these money measures have had weak relationships with GNP (gross national product)
growth. Divisia indexes of the large aggregates
represent a substantial theoretical improvement.
but empirical results using these new measures
are disappointing. The large aggregates do not appear to be well qualified as intermediate targets.
The M-IB aggregate has been distorted
by nationwide spread of NOW accounts •••
The stock of money and its rate of change play a
major part in virtually all theories of how the economy works. Two aspects of money are usually
considered critical to its effects on prices, interest
rates, and production. It is the medium of exchange
in most business transactions, and it is a store of
liquid wealth. Unfortunately, no one financial asset has exclusive possession of these characteristics. They are shared by many assets in varying
degrees. Thus, it is difficult to determine precisely
which assets should be included in measures of
money that correspond to the concepts of money
in economic theories.
Two measures currently used focus separately
on these principal aspects of money. Mi-B is a
measure of assets that can be used as media of
1
exchange. L is a measure of all liquid financial
assets. There are conceptual problems with both.
Before the late 1970's the distinction between
assets that were media of exchange and other
liquid assets was relatively sharp. The former
could be used directly as a means of payment, but
they earned no interest and so were held only to
meet transaction needs. The latter earned interest
but could not be used to buy things before being
converted to something else first.
In the last half dozen years, however, high interest rates, along with changes in law and regulation,
have resulted in the development of several assets
that can be used as exchange media but also pay
interest and, therefore, are closely related to some
of the "other" liquid assets. M1-B attempts to
strike a balance. Money market mutual fund
shares, on which checks may be drawn, are excluded because data indicate that few checks are
actually drawn on them. Interest-earning checkable deposits allowed before 1981 at commercial
banks and thrift institutions are included.
However, the legal change permitting the nationwide spread of NOW accounts since December 31,
1980, is not so easily handled. Interest-earning
checkable deposits jumped $39 billion in the first
four months of this year. Most of the deposits
shifted into these accounts have come from checking accounts and are apparently held for transaction purposes. But a large portion has also come
from savings accounts, either to meet high minimum-balance requirements, to consolidate accounts, or to take advantage of the extra flexibility
of NOW accounts, which pay about the same interest as savings accounts but also allow checking.
Accordingly, an attempt has been made by the
Federal Reserve Board to estimate, mainly on the
basis of survey information, the portion of the increase in NOW deposits that is used primarily for
transaction purposes. Only this amount is included
in "shift-adjusted" M1-B, the measure currently
used for the narrow money growth targets.
The amount excluded is small, less than a
fortieth of M1-B, but critical for policymaking.
Through the first nine months of 1981, M1-B, which
includes all NOW accounts, grew at an annual rate
of 5.2 percent, while the shift-adjusted measure
grew at a rate of only 1.7 percent. The estimated
size of the shift is subject to error. Some analysts
believe the error is probably sufficiently large to
greatly reduce the usefulness of any transactionsbased monetary aggregate this year.
2
... but the large aggregates have other problems
The difficulty of knowing what to include is also
a problem for the broadest aggregate, L. It incl~des
currency plus all deposits and RPs at depOSItory
institutions, money market mutual fund shares,
and other liquid assets. 1 Some quite liquid assets
are excluded, such as high-rated corporate and
municipal bonds due to mature in the near future.
And some fairly illiquid assets are included, such
as fixed-rate time deposits at commercial banks
with remaining maturities of more than four years.
Both M1-B and L also suffer from another compositional problem. All funds included are treated
equally, regardless of the type of asset or the
holder. For M-1B, a dollar of currency held by a
consumer is given the same weight as a dollar
held in a checking account by a corporation. Their
relationships to economic activity are unlikely to
be the same, however. The problem is particularly
severe for L, which is a veritable hodgepodge.
The other two large aggregates are neither fish
nor fowl. They include all transaction accounts
but only some of the other liquid financial assets.
M3 excludes all money market assets except
money market mutual fund shares; M2 adds to
those exclusions time deposits larger than $100,000
and RPs with maturities longer than one day.
Ideally, aggregates should include assets that
are close substitutes for one another and exclude
other assets. Different types of transaction balances may be thought of as close substitutes. More
broadly, all liquid assets may be considered substitutes. But aggregates that contain transaction
deposits plus some, although not all, other liquid
assets are arbitrary. M2 primarly includes assets
that are media of exchange or easily convertible
into exchange media. Yet it also includes smalldenomination time deposits, since they have
proved to be substitutes for savings deposits in
the past. However, because time deposits carry
substantial penalties for early withdrawal, they
are much less liquid than the other components.
M3 includes large certificates of deposit (CDs) but
excludes their close substitute, commercial paper.
1. RPs are short-term loans to banks from customers
and are collateralized by U.S. Treasury securities.
"Other liquid assets" includes the nonbank public's
holdings of U.S. savings bonds, short-term Treasury
securities, commercial paper, and bankers acceptances
plus Eurodollar deposits issued by Caribbean branches of
U.S. banks to U.S. nonbank customers. Holdings of these
assets by money market mutual funds are netted out.
Federal Reserve Bank of Dallas
While the large aggregates have serious conceptual problems, they currently have one advantage
over Ml-B in that they should be virtually unaffected by shifts in deposits due to the nationwide
establishment of NOW accounts. However, they
may be affected by other institutional changes. In
recent years the development of money market
mutual funds and the inauguration of six-month
money market CDs and 21/2-year variable rate CDs
at depository institutions have undoubtedly drawn
some funds out of the money market and into
assets counted in M2. This year, M2 has been
affected by the uncapping of the maximum yield
on the 21/2-year CDs, the sharp rise in retail RPs
in August and September and their subsequent
decline, and the introduction of the tax-free "allsavers" certificates, which may draw funds from
municipal bonds and money market assets.
The large aggregates rate poorly
as portents of the future economy ...
Current Federal Reserve policy attempts to achieve
long-run economic goals, such as price stability
and steady economic growth, by adjusting weekly
reserve operating targets so as to meet intermediate
monetary targets. An indirect procedure is necessary because the Fed cannot control production
and purchasing decisions directly. Rather, the Fed
influences such decisions by buying or selling U.S.
Government securities, using data on reserves and
the money stock as guides.
To be a good guide, a monetary aggregate used
as an intermediate target should bear a close relationship with current and future economic goals.
Results from some very straightforward tests will
be presented here. GNP growth rates were regressed on current growth rates and five lagged
rates of the different aggregates. The closeness of
fit of these regressions indicates to what extent
variation in GNP growth has been related to the
behavior of one or another of the aggregates. The
equations differ from many reduced-form estimates
in the literature in that the lag structures are freely
estimated, all nonmonetary variables are excluded,
and no adjustments for autocorrelation are made.
The number of lags was chosen arbitrarily without
investigating alternatives, although it is a commonly used number in the literature and roughly
corresponds to the length of the policy horizon of
the Federal Open Market Committee.
The simplicity of such tests has some wellNovember 1981/Voice
known costs. On the other hand, simplicity is after
all a prime reason for using intermediate monetary
targets. They lead to a more understandable and
more easily accountable policy. If an aggregate
has only a very complex relationship with economic activity, it is comparatively difficult to explain how targets are chosen or why they are
missed.
Among the costs are the following. Money
growth in the current period may not be exogenous,
as assumed by the regression technique; under
past policies of targeting interest rates, money
growth was often a by-product, not a control
variable. Furthermore, the change to new policy
procedures may have led to a different relationship. The equation also estimates a constant lag
structure, but many structural models imply a
changing lag pattern depending on the amount of
slack in the economy.2 Finally, many important influences upon GNP growth have been excluded
from consideration. Coefficients of money growth
variables may be biased to the extent that they
are proxies for excluded variables. If, for example,
money growth was manipulated so as to stabilize
the economy in response to nonmonetary economic
shocks, the coefficients would be biased downward.
With those provisos in mind, the evidence in
Table 1 is still instructive. In three sets of regressions, one covering the nearly 20 years for which
data are available and the others covering two
subperiods, Ml-B consistently outperforms the
large aggregates. The sum of coefficients is generally more nearly equal to 1 for Ml-B than the
others. A sum of 1 implies that an increase in the
money stock leads to a proportionate increase in
GNP in the long run, a common theoretical proposition. The R2 measures, indicating the proportion
of the variance of GNP growth explained, are uniformly highest for Ml-B. The F statistic is a measure of the statistical power of the estimated relationships. It is significant at the 5-percent level for
each equation except that for M2 in the latest
period and is highest for the Ml-B equations.
Finally, the standard errors of estimate are lowest
for Ml-B throughout. Among the large aggregates,
L is generally the best, although M3 has a higher
R2 in the second period.
2. Patrick J. Lawler, "Today's Monetary Policy Affects
Tomorrow's Economy," Voice of the Federal Reserve
Bank of Dallas, September 1978, pp. 1-10, discusses such
changes in the MIT-PENN·SSRC model.
3
Table 1
REDUCED·FORM REGRESSIONS OF GNP GROWTH
ON CURRENT AND LAGGED MONEY GROWTH
M1·B
M2
1.15
.91
.85
.90
SEE .......................
.41
10.41
2.00
3.27
.26
5.63
1.88
3.68
.23
4.98
1.76
3.75
.33
7.73
1.92
3.48
1960:03 through 1973:04
Sum of coefficients on money ...
1.02
.86
.65
.79
SEE .......................
.38
6.40
2.05
2.95
.25
3.88
1.81
3.25
.24
3.77
1.78
3.27
.33
5.42
1.98
3.06
1974:01 through 1980:04
Sum of coefficients on money ...
.90
.75
1.34
.90
OW
SEE .......................
.55
6.55
2.00
3.15
.17
1.90
1.97
4.30
.47
4.96
1.62
3.44
.36
3.53
1.59
3.77
Chow F for differences
between regressions .......
2.89
1.40
3.90
2.24
1960:03 through 1980:04
Sum of coefficients on money ...
R' ........................
.........................
OW .......................
F
R' ........................
.........................
OW .......................
F
R' ........................
F
.........................
•••••••••••
NOTE:
0
•••
0.0
••••
0
L
M3
R' is the correlation coefficient adjusted for degrees of freedom.
F is a test statistic for regression significance
DW is the Durbin·Watson autocorrelation test statistic
SEE is Ihe standard error or Ihe estimate.
The break between periods was chosen on the
basis of widespread agreement in the literature
that the money-GNP relationship changed about
1974, probably because of improved techniques of
cash management. Indeed, a Chow F test shows a
statistically significant difference between the two
periods for M1-B, M3, and L. The low statistic for
M2 is accounted for by the weakness of the relationship in the second period. 3
The effect of the changed relationships is illustrated in Table 2, which shows errors in GNP
growth predictions from fourth quarter to fourth
quarter in each of the past seven years based on
the relationship estimated for the earlier regression period and the actual money growth during
the year. Again, M1-B does noticeably better.
These exercises confirm that prior to this year,
M1-B was the superior monetary aggregate. But
3. The poor showing for M2 in this period may be partly
due to the distorting effects of disintermediation. As
deposit ceiling rates are deregulated, the M2-GNP relationship may strengthen. One would expect M2 to behave
more and more like M3 and L.
4
how successful has the adjustment for NOW accounts been in 1981? Table 3 shows the 1981 GNP
prediction errors based on the equations estimated
with the data from 1974 on. Using M1-B data, the
reduced-form estimates would have substantially
underpredicted GNP growth in the first three quarters of this year. M2 would have done little better;
only M3 and L have matched GNP growth well.
... and are hard to control
A second critical quality of intermediate targets
is that they be controllable by the Federal Reserve.
Since 1979 the Fed has been using reserve targets as
the means of control, and this gives the smaller aggregates an apparent advantage. Required reserve
ratios are highest on demand deposits. Ratios on
time and savings deposits are much lower and are
being phased out for deposits in accounts held by
individuals. Nondeposit liquid assets are generally
not reservable at all.
One would expect, therefore, that the variability
of the ratio of monetary aggregates to reserves
Federal Reserve Bank of Dallas
Table 2
OUT·Of·SAMPlE ERRORS IN fOUR·QUARTER
AVERAGE GNP GROWTH PREDICTIONS
BASED ON REDUCED·fORM ESTIMATES
(In percent)
Year ended
in fourth Quarter
1974
1975
1976
1977
1978
1979
1980
••••••••••
0
•••••••
0
...................
...................
••••••••••
0
••••••••
...................
•••••
0
•••••••••••••
...................
Mean error ..............
Mean absolute error ......
Root-mean·square error ...
would be higher the larger the aggregate. However,
a recent study found monthly and quarterly standard deviations of multipliers for M2 to be about
equal to those for Ml-B in the decade ended last
year. 4 Still, the increasing portion of nonreservable
money market mutual fund shares in M2, in addition to the deposit shifts to NOW accounts, may
have diminished M2 multiplier stability somewhat.
Certainly, the mechanics of money control using
reserves as the operating target do not appear as
effective for the large aggregates as for Ml-B. They
are not as fast or as automatic. If a surge in the
economy stimulates unexpected growth in demand
deposits, demand for reserves rises. If the Fed
is following a fixed non-borrowed-reserve path,
banks will have to borrow more from the Fed.
Their reluctance to do so will raise market interest
rates and thereby reduce depositors' desired holdings of demand balances, which are now more
costly in terms of lost interest earnings. But if the
asset growth stimulated by the economy is in
money market mutual funds, there is no increase
in reserve demand, no automatic increase in interest rates, and, therefore, no counterbalancing effect
on the demand for liquid assets. Money control
in this case requires judgmental adjustments in
4. David Lindsey and others, "Monetary Control Experience Under the New Operating Procedures," Table 2, in
Ncw Monetary Control Procedures, a Federal Reserve
Staff Study (Washington, D.C.: Board of Governors of the
Federal Reserve System, February 1981), vol. 2.
November 1981/Voice
1.41·8
1.42
1.43
L
-0.3
2.6
.2
.7
3.1
-.5
-.4
0.5
1.9
-3.2
5.2
1.6
.3
-1.9
2.5
.6
2.3
4.5
.9
1.0
0.6
2.8
1.9
3.5
3.7
2.5
1.3
.7
1.1
1.6
1.0
1.6
2.5
1.4
2.0
2.3
2.3
2.3
2.6
.4
the reserve path after the data on the mutual funds
are compiled.
An alternative would be to switch back to an
interest rate operating target. But recent and future institutional changes reduce the responsiveness of the large aggregates to interest rate
changes.
The behavior of the aggregates earlier this year
may reflect this development. A large increase in
interest rates in early May sharply reduced Ml-B
growth. It actually declined at a compound annual
rate of 1.7 percent from April to September, after
increasing at a 13.6-percent rate in March and
April, when interest rates were lower, But M3
growth was little affected by the interest rate
change, increasing at an 11.5-percent rate in March
and April and a 10.6-percent rate in the following
five months. After growing at a 16-percent rate in
March and April, M2 did slow down sharply in
May and June. One reason is that changes in rates
paid by money market mutual funds lag changes
in other market rates since their portfolios hold
past issues. By July the funds' shares started zooming again, pushing M2 growth back to a doubledigit rate in the three months ended in September.
The rate would have been higher had it not been
for the rapid growth of retail term RPs, which are
not included in M2.
The problem is simply that, unlike in the 1960's
and 1970's, households have access to assets earning market rates of return. The opportunity cost
6
Table 3
OUT·OF·SAMPLE FORECAST
ERRORS FOR 1981 GNP
GROWTH BASED ON
REDUCED·FORM ESTIMATES
(In percent, at annual compound rates)
Average
prediction
error,
first
three
Quarters
of 1981'
M1-B (shift-adjusted)
M2.......................
M3.......................
L'........................
4.4
3.0
-.7
-.8
1 Sample period of reduced form estimates
was 1974:01 fhrough 1980:04
2 Error lor only the tirst two Quarters 01 1981;
later data were not available
of holding liquid assets during a period of high
yields is much less than before, so the aggregate
size of these assets is much less responsive to interest rate changes.
There is currently another problem in controlling
the large aggregates. Information on their levels is
available with a longer lag than for Ml-B. In the
case of L, the lag is much longer, up to three
months or more-too long to make it of much use
as an intermediate target. But if there were greater
interest in using L that way, the lag could perhaps
be shortened, although at the cost of an increased
reporting burden.
Divisia aggregates offer great promise . ..
In several papers over the past four years, William
Barnett, with the help of Paul Spindt and Edward
Offenbacher, all members of the Federal Reserve
Board staff, has developed a new series of large
aggregates that attempts to correct a major deficiency of the existing series. 5 That is the problem
that the large aggregates treat all component asset
types equally. It is unlikely that savings bond
holdings have the same relationship to economic
activity as currency holdings. 6 These assets are
hardly perfect substitutes in the eyes of their
holders.
One striking aspect of liquid assets is their wide
range of yields. Standard micro theory holds that,
at the margin, the last dollar invested in each different asset must yield the same benefits to the
6
investor, ignoring transaction costs. Those assets
with nominal yields less than the best available
alternative must be providing other benefits. The
differences between yields of the various liquid
assets and the yield of the highest paying alternative are measures of the relative costs, in terms
of forgone interest earnings, of holding those
assets.
Suppose the top-yielding asset, corporate bonds
for example, pays 10 percent, while another asset,
savings deposits, pays 5 percent and a third asset,
currency, has no nominal yield. An optimizing
asset holder must be roughly indifferent between
two extra dollars in his savings account, on the
one hand, and an extra dollar of currency plus
an extra dollar's worth of corporate bonds, on
the other hand. The holding costs of these alternatives are equal. If an investor preferred one to the
others, he presumably would have moved his funds
accordingly. Yet any monetary aggregate that excluded corporate bonds would be affected by
which of the two alternatives an investor chose.
Worse, a monetary aggregate that included all
three assets would treat a dollar of currency and
a dollar of corporate bonds equally, while an asset
holder clearly would not.
A solution is to construct a quantity index of
the noninterest benefits arising from holding liquid
assets, using the relative holding costs of different
asset types as weights. If those noninterest benefits
are what characterize money, the resulting index
should be a far truer measure of money growth in
a period in which there are substantial shifts of
funds between assets.
Barnett makes a further refinement. Large and
frequent shifts in the relative holding costs of
different assets, caused by interest rate swings,
5. See, especially, William A. Barnett, "Economic
Monetary Aggregates: An Application of Index Number
and Aggregation Theory," Journal of Econometrics 14
(September 1980) :11-48, and William A. Barnett, Paul A.
Spindt, and Edward K. Offenbacher, "Empirical Comparisons of Divisia and Simple Sum Monetary
Aggregates," NBER Conference Paper Series, no. 122
(Cambridge, Mass.: National Bureau of Economic
Research, August 1981). Data are available in William A.
Barnett and Paul A. Spindt, Divisia Monetary Aggregates:
Compilation, Data, and Historical Behavior, Staff Studies
(Washington, D.C.: Board of Governors of the Federal
Reserve System, forthcoming).
6. P. A. Tinsley, P. A. Spindt, and M. E. Friar, "Indicator
and Filter Attributes of Monetary Aggregates: A Nitpicking Case for Disaggregation," Journal of Econometrics
14 (September 1980) :61-91, provide supporting evidence.
Federal Reserve Bank of Dallas
create problems for the common Laspeyres and
Paasche indexes, which use holdings in one particular period as weights. He uses a chained index
called the Tornquist-Theil Divisia index. It has
the property that the growth rate of the index
from one period to the next is a weighted average
of the growth rates of the component asset types.
The weights are averages of the first- and secondperiod shares of total holding costs accounted for
by the different assets. 7 The weights change gradually over time and so keep up to date.
Suppose now that commercial paper has the
largest available yield over a period of time. Then
the growth rate of this component would be assigned a zero weight. The weight of commercial
bank savings deposits, paying 51;'" percent, would
be the product of the quantity of these deposits
and the difference between the commercial paper
yield and 5 1/4 percent divided by the sum of all
such products for all the different liquid assets included in the aggregate.
While the result is a clear-cut theoretical improvement over the existing aggregates, some
technical problems remain. For one, it is not clear
that all the yield given up to hold an asset is offset
by what may be called "monetary services." For
example, corporations holding large checking balances often get free or low-priced financial services-reduced loan rates, investment advice, and
so forth. Service charges are a related problem.
If a per-check service charge or minimum balance
for a checking account changes, the net fiow of
b nefits to the holder changes but is nol captured
by looking at the nominal yields. Nor is the distinction between NOW deposits and savings deposits
captured. Both deposit types have the same nominal yields. But NOWs typically have service
charges and minimum balances, so they must provide more monetary services.
7. The index, Q. is defined as:
n (/
)'/, [(Vi'!:!:1 Vjl)
mil m i ,l_l
Q I -_ Q r -1 i
+
(Vi.l_
/1:" vj,l_lll
so its growth rate is computed as:
o/!AQ_~.I<[Vi'l
OLl
, -
L:l2
,
--
~V'I
i
I·
Vi.I-I]O<A_
+:;tOWII.
~V.
j
o
I
/.1- 1
The ith component asset (m;) is weighted by the v's, where
Vi equals the difference between the return on the benchmark
asset and that on the ith asset times the dollar value invested
in that component.
8. To adjust for this, the Divisia aggregates have added
an imputed yield to business demand deposits.
November 1981/Voice
High transaction costs may also be a problem
with respect to some of the more illiquid assets.
When relative yields change rapidly, it may be
difficult for asset holders to adjust their holdings
to desired levels. For example, if rates rise sharply,
consumers can only withdraw funds from lowyielding fixed-rate time deposits if they are willing
to pay a substantial interest penalty.
Divisia aggregates share an important conceptual
problem with their traditional counterparts. They
give no special treatment for the differing character of medium-of-exchange services and other
liquidity services. It is this last distinction that
undoubtedly accounts for the persistently better
performance of M1-B, standard or Divisia. Although asset holders may value both money aspects
3qually at the margin, the medium-of-exchange
quality seems more closely related to GNP.
... but their behavior so far
has been somewhat erratic
The charts compa~re the historical behavior of
Divisia aggregates and the standard aggregates.
Differences between M1-B and Divisia M1-B in
both charts are negligible since the yields on all the
assets included in this aggregate are very low. At
higher levels of aggregation, the differences become more notable. The larger Divisias follow the
growth pattern and trend of GNP more closely
than the others until 1978. After that, the growth
rates of the Divisias plummet, and their income
velocitie~ soar. It is not clear exactly why. Evidently, they are more interest-sensitive than their
standard counterparts.
But why didn't the same thing happen in 1974,
when rates were also high? The answer probably
lies in the introduction of money market CDs in
1978 and in the increased popularity of money
market mutual funds starting about the same time.
These new assets have dramatically improved the
investment opportunities available to households
in periods of high interest rates. Shifts in deposits
from savings accounts to either of the two new
assets reduce the Divisia aggregates. Since the
relative advantage of these assets over traditional
deposits, such as savings accounts, varies with the
level of interest rates, they may well have made
the Divisia aggregates more sensitive to changes
in interest rates.
In addition, the creation of a new asset type
leads to a one-time adjustment of funds to take
7
Comparison of Growth Rates of Monetary Aggregates and GNP
16 PERCENT CHANGE FROM FOUR QUARTERS EARLIER - - - - - - - - - - - - - - - - (A)
14-
12 -
10-
8-
6-
4-
2-
0----------------------------18 PERCENT CHANGE FROM FOUR QUARTERS EARLIER - - - - - - - - - - - - - - - -
(8)
14-
12-
10-
8-
6-
4-
2-
O-,r----r----.---r---yo--.,.....-......--..---....,...--.----.---,r----r1971
1973
1975
1971
1979
1981
SOURCES: Boord 01 Governors, Federol Reserve Syslem.
U.S. Oeportmon' 01 Commerce.
II
Federal Reserve Bank of DaUas
16 PERCENT CHANGE FROM FOUR OUARTERS EARLIER - - - - - - - - - - - - - - - - - (C)
••
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I
I
I
•
•
•
•••
•
•••
••
•••
•
••
••
14 -
I
I
I
12-
I
10-
I
8-
6-
••
••
••
•
••
I
4-
2-
0----------------------------16 PERCENT CHANGE FROM FOUR QUARTERS EARLIER - - - - - - - - - - - - - - - - (0)
14 -
12-
10-
8-
6-
4-
2-
1971
November 1981/Voice
1973
1975
19n
1979
9
Income Velocity Behavior of Standard and Divisia Monetary Aggregates
1.6(1969:01=1.0)------
_
(A)
1.5 -
1.4 GNP/M1·B (Ml·B SHIFT·ADJUSTED IN 1981)
1.3 -
1.2 -
1.1-
1.0-
.9-
.8 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
1.6 (1969:01 = 1.0) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (B)
1.5 -
1.4 -
1.3 -
1.2 -
1.1-
GNP/DIVISIA M2
1.0GNP/M2
.9-
.8 -~1~9':':69~--""T-1~9~7~1"T'"--r-1-9~7-3"T'"--r-1-9-7-S""--'T"-1-9-n-r---'T-1-9-7-9-r--'T""-19-8-1""TSOURCE: Board 01 Govarnors, Feder.1 Rese",. System.
10
Federal Reserve Bank of Dallas
1.611969:01 = 1.0) - - - - - - - - - - - - - - -
_
Ie)
1.5-
1.4 -
1.3-
1.2 -
1.1-
1.0-
.9-
GNPIM3
.8 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
1.6(1969:01 =1.0) - - - - - - - - - - - - - - - - - - - - - - - - - - - - (0)
1.5-
1.4-
1.3-
1.2 -
1.1-
1.0 -
.9-
--or----.----,.--...--......---r----....--,.--...,..---,.--or--.,...---,.-
.8 ........
1969
November 1981/Voice
1971
1973
1975
1979
1981
11
Table 4
REDUCED·FORM REGRESSIONS USING DIVISIA AGGREGATES
(1974:01 through 1980:04)
Divisia
M1·B
M2
.69
.30
2.89
1.42
3.96
.49
Sum of coefficients on money. . .
R'
1.05
.56
.16
F..........................
6.68
OW........................
SEE.......................
2.03
3.13
1.84
1.67
NOTE:
Divisia
M3
Divisia
4.33
Divisia
L
.79
.31
3.05
1.31
3.91
Fl' is the correlation
coelficient adiusted for degrees of freedom
F is a test statistic for regression significance
OW is the Durbin Watson autocorrelation test statistic
SEE is the standard error of the estimate.
advantage of the new opportunity it provides, If
the adjustment is spread over time, Divisia growth
rates can be lowered Jor a prolonged period before
returning to normal. This adjustment effect probably makes the Divisias seem much more interestresponsive now than they will be in the future.
The adjustment to{the new asset types may be
responsible for the unimpressive Divisia reducedform results as well (Table 4). Comparing them with
the corresponding results for the standard aggregates (Table 1) shows the results to be roughly
equivalent. Table 5 shows the predictive success
of these equations for the large aggregates in the
first three quarters of 1981. As could be expected
given the apparent change in the behavior of the
Divisia aggregates since 1978, the results for
Divisia M2 and Divisia M3 are clearly poorer than
the predictions of the standard aggregates. Although Divisia L does well for the first two quarters, existing data indicate that its error for the
first three quarters will likely be at least as large
as the others,9
Table 5
OUT·OF·SAMPLE FORECAST
ERRORS FOR 1981 GNP
GROWTH BASED ON DIVISIA
REDUCED·FORM ESTIMATES
(In percent, at annual compound rates)
Average
prediction
error,
first
three
Quarters
of 1981
Oivisia M2
5.9
Oivisia M3
7.1
Oivisia L'. . . . . . . . . . . . . . . . . .
.5
1 Error for only the first two Quarters of 1981.
9. Barnett, Spindt, and Offenbacher, "Empirical Comparisons of Divisia and Simple Sum Monetary Aggregates," report a large number of tests comparing Divisia
aggregates with the traditional ones. The Divisias
generally do about as well as or slightly better than their
counterparts; the authors' interpretation of their results
is more favorable to the Divisias.
12
Federal Reserve Bank of Dallas
Summary and conclusions
Simple tests with historical data, based on reducedform equations, show a consistent superiority of
M1-B over the larger aggregates. Monetary control
procedures also seem best adapted to the narrow
aggregate. But problems arising from the nationwide spread of NOW accounts have complicated
the interpretation of M1-B estimates and recent
high interest rates may have led to ~ new round
of improv~ments in cash management techniques,
much as III 1974. However, their arbitrary construction, potential control problems and weak
statistical relationships with econo~ic activity
argue against use of the larger aggregates as intermedi~te targets. Furthermore, the large aggregates,
espeCIally M2, are also affected by institutional
changes, such as the legislation permitting all-
savers certificates.
The large Divisia aggregates are, in theory, a substantial improvement over the current large aggregates. Unfortunately, recent institutional changes
allowing small investors to earn high rates of interest have apparently distorted the behavior of
the Divisias. They may well be unsurpassed in a
world where depositors have fully adjusted to all
their new opportunities. But with the establishment
of the alI-savers certificates and with deregulation
of ceiling rates on savings accounts, that world
may be far away. Alternatively, improved implementation of the theoretical principles of the Divisia index may yet lead to a more attractive set
of aggregates. In the meantime, none of the large
aggregate measures, traditional or Divisia, measure
up well.
New State Member Bank
Citizens Bank & Trust, Manvel, Texas, a newly organized institution located
in the territory served by the Houston Branch of the Federal Reserve Bank
of Dallas, opened for business October 5, 1981, as a member of the Federal
Reserve System. The new member bank opened with capital of $500,000
and surplus of $500,000. The officers are: Joe H. Harwell. Chairman of the
Board and President; James H. Phillips, Vice President and Cashier; and
Janet B. Hall, Assistant Cashier.
November 1981/Voice
13
••GF'ed Quotes ~~
Brief Excerpts from Recent Federal Reserve Speeches. Statements, Publications, Etc.
"Today, we face extraordinarily high interest rates. Those interest rates are a
particularly heavy burden on credit-dependent sectors of the economy-the
homebuyer and builder, the car dealer, many small businesses and farmers. Financial
markets are distorted, bond financing impaired, and part of our institutional structure
under heavy strain. Other sectors seemingly are able to shrug off high interest rates,
at least for a time-the rapidly expanding energy sector, high technology and
defense industries, to take some examples. And, of course, Federal borrowing
continues unabated.
"Interest rates are ultimately set in the market-by individuals and businesses
acting upon their own judgments of their current needs and the future. The influence
of the Federal Reserve on interest rates is limited and short-term-except as our
policies bear on the future course of the economy and inflation. If anyone still doubts
that proposition, look at market developments in recent months. Viewed broadly, the
money supply has been under satisfactory control in terms of our basic policy
objectives of restraint. In those circumstances, and consistent with the operating
techniques I discussed with this group last year, pressures on bank reserve positions
have been less intense in recent weeks. The most sensitive short-term interest rates
are well below their peaks, by 2 1/2 percent or more. Yet, bond rates and mortgage
rates during the same period reached new peaks, and the prime lending rate of banks
has subsided only a bit. Clearly, the markets have been preoccupied with other
concerns-including the current and prospective volume of financing and questions
about the longer-term inflation outlook."
Paul A. Volcker, Chairman, Board of Governors of the
Federal Reserve System (Before the National Press
Club, Washington, D.C., September 25, 1981)
14
Federal Reserve Bank of Dallas
Another Look at the Incidence
and Duration of UnemployInent
By James E. Pearce
Unemployment statistics are among today's most
closely watched data on the performance of both
the economy and the labor market. The aggregate
unemployment rate is used to gauge how fully resources are being utilized. And unemployment
rates for groups within the labor force are presumed to provide information on how uniformly
access to attractive jobs is distributed across the
population. Although unemployment rates draw
attention to developments that may warrant action,
they often do not convey enough information for a
full understanding of the causes and consequences
of these developments. In some cases, other statistics, such as on employment or earnings, are
needed to reveal more of the story. But looking at
the two dimensions of the unemployment rateincidence and duration-can sometimes provide
insights not given by either the unemployment
rate or the other indicators.
For example, the high unemployment rates of
young workers could be attributable to the large
proportion of members of this group in transitional
phases of their careers or to the greater difficulty
younger workers might experience in finding suitNovember 1981/Voice
able work. Evidence presented in this publication
a year ago revealed the higher unemployment rate
among workers 20 to 24 years of age to be entirely
a consequence of a higher incidence of unemployment, where "incidence" is the percentage of
workers becoming unemployed during any given
year. 1 This finding, suggesting that obtaining work
is not a great problem for these individuals, provides some reassurance that the difference in
unemployment rates by age is not a sign that the
labor market is malfunctioning.
This article presents further examination of the
recent behavior of unemployment by decomposing
the unemployment rate into incidence and duration.
The evidence presented enhances the results of the
previous article in that the conClusions can be
expressed more precisely and drawn more confidently. Last year's article covered 1967 through
1977. Because the period did not extend far enough
1. See James E. Pearce, "Differences in Unemployment
Incidence and Duration Produce Differences in
Unemployment Rates," Voice of the Federal Reserve Bank
of Dallas, November 1980. p. 12.
15
Table 1
COMPARISON OF OFFICIAL AND WORK EXPERIENCE UNEMPLOYMENT RATES
(In percent)
WORKERS 20 AND OVER
ALL
Year
1967 ...
1968 ...
1969 ...
Males
Total
civilian
labor
force
Official
rate
3.0
2.7
2.8
4.0
4.9
4.5
3.7
4.5
7.3
6.5
5.9
4.9
4.7
6.9
6.1
5.2
4.2
4.1
1970
1971
1972
1973
1974
.. :
...
...
...
...
3.8
3.6
3.5
4.9
5.9
5.6
4.9
5.6
1975
1976
1977
1978
1979
...
...
...
...
...
8.5
7.7
7.0
6.0
5.8
Work
Females
estimate
Official
rate
Work
ex peri.
ence
estimate
2.4
2.1
2.3
2.3
2.2
2.1
2.3
1.9
2.1
3.7
4.4
4.1
3.3
4.1
3.5
4.4
4.0
3.2
3.8
6.7
5.9
5.2
4.2
4.1
ex pen·
ence
Official
rate
Whites
Blacks
Work
expen·
ence
estimate
Official
rate
ence
estimate
Work
Work
expen-
ex pen-
Official
rale
ence
estimate
2.6
2.5
2.4
2.7
2.5
2.4
2.1
1.9
2.0
5.5
5.0
4.6
4.6
4.3
4.3
3.6
4.3
4.0
3.1
4.1
4.2
3.8
3.7
4.8
5.7
5.4
4.8
5.5
3.7
4.6
4.2
3.7
4.0
3.7
4.5
4.1
3.4
4.1
3.4
4.1
3.7
3.0
3.7
6.2
7.9
7.7
6.8
7.5
6.8
6.1
5.1
4.1
4.1
8.0
7,4
7.0
6.0
5.7
7.0
6.2
5.4
4.3
4.2
6.7
5.9
5.3
4.3
4.1
6.3
5.7
4.6
3.7
3.6
11.6
10.9
10.8
9.6
9.2
5.9
7.3
7.3
6.0
7.2
11.9
10.1
10.1
8.1
8.2
NOTE: The work experience estimate is computed from information obtained from the March Current Population Survey each year. covering
the preceding January·December period. Estimate IS ("2.wi Ui / lWi Li) x 100. where Wi IS the individual's sampling weight-the inverse of
the probabiiity of his inclusion in the CPS sample-and Ui and L, are weeks unemployed and weeks in the iabor force. respectiveiy, as
reported by the individual. The sample is restricted to workers in the labor force at least 40 weeks.
SOURCES; U.S. Department of Commerce. Bureau of the Census.
U.S. Department of Labor. Bureau of Labor Statistics.
Federal Reserve Bank of Dallas.
beyond the recession of 1974-75, it was not possible to identify the degree to which the higher
unemployment of the 1970's was produced by
cyclical forces and, therefore, likely to dissipate
with the passage of time. Here, data from two additional years facilitate separation of the influences
of short-term fluctuations and longer-term trends.
In addition, the confidence that could be placed
in the conclusions was somewhat limited by the
disparity between official unemployment rates and
the unemployment rates estimated from the data
used to compute incidence and duration. The
sample has been enlarged slightly here, and the
change brings the two unemployment series closer
together. 2
A noteworthy feature of the 1967-79 period is
the divergence in the unemployment rate series
for blacks and whites. Unemployment was higher
in the 1970's for all workers, but the increase was
larger for blacks than for whites. Moreover, the
rising trend continued further into the decade for
2. The sample used in "Differences in Unemployment
Incidence and Duration" did not contain individuals who,
in the year in question, were in the labor force more
than 40 weeks but did not work at all. The procedure
used here added such individuals to the sample.
16
blacks. The evidence reported in this article reveals that for the population as a whole, the higher
unemployment rates of the 1970's resulted primarily from higher incidence. On the other hand,
more of the increase in unemployment of blacks,
particularly since 1975, has been due to a rise
in duration. This indicates the increase in the
unemployment rates of blacks has a distinct and
somewhat more disturbing character.
Incidence and duration estimated
from information on work experience
The measure of incidence has been defined above.
"Duration" is defined as the mean number of
weeks of unemployment accumulated over a calendar year by individuals who experienced some
unemployment that year. As before, the estimates
have been computed using responses to work experience questions that the U.S. Bureau of the
Census adds to the March Current Population Survey [CPS) each year. The analysis is again confined to adults in the labor force at least 40 weeks. s
3. Nearly all the respondents satisfying that criterion
were in the labor force 52 weeks.
Federal Reserve Bank of Dallas
The sample was restricted in this manner because
estimated unemployment rates using responses to
retrospective interviews are sufficiently consistent
with official statistics for full-year workers only.4
Before turning to the evidence on incidence and
duration, consider how the unemployment rates
estimated from the retrospective work experience
information compare with the official statistics
published by the U.S. Bureau of Labor Statistics.
Because nearly all adult males participate in the
labor force the year round, the two unemployment
measures for this group should be nearly equal,
and they are. This provides some assurance that
the work experience information is consistent with
the data underlying the official statistics.
Nevertheless, the unemployment series for the
entire civilian labor force lies about 11/2 percentage
points above the work experience series for all
full-year adults. Excluding teenagers from the
sample population accounts for about two-thirds
of this difference, and restricting the sample to
full-year workers accounts for the other third. The
part-year adult labor force consists primarily of
women, and official unemployment rates have been
1.3 to 2.0 percentage points higher for adult females than for adult males. Nearly all this difference is attributable to the larger proportion of
v,omen in the labor force only part of the year.
Table 2
UNEMPLOYMENT INCIDENCE
AND DURATION FOR FULL·YEAR
WORKERS 20 AND OVER
Year
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
.....
.....
.....
.....
.....
.....
.....
.....
.....
.....
.....
.....
.....
Percent
Unem·
ployment unemployed
1 week
rate l
or longer
(Percent)
Mean
une%e~~~ed'
2.4
2.1
2.3
3.7
4.4
4.1
3.3
4.1
6.9
6.1
5.2
4.2
4.1
8.6
7.9
8.6
11.9
12.6
11.8
10.6
12.9
17.0
15.9
14.4
12.4
12.8
14.5
14.0
13.5
16.0
18.0
17.5
16.0
16.5
21.0
20.0
18.5
17.5
16.5
2.3
4.6
4.1
8.4
13.2
12.1
14.0
17.5
17.0
Mean
1967-69 ...
1970·79 ...
1967·79 ...
1. Computed from work experience information
obtained from the March Current Population
Survey each year (see note with Table 1).
2. Includes only workers experiencing some
unemployment. Rounded to the nearest 0.5 week.
SOURCES: U.S. Department of Commerce. Bureau
of the Census
Federal Reserve Bank of Dallas.
A rise in incidence led to higher unemployment
The difference between the unemployment statistics of the 1970's and those of the late 1960's is
pronounced. The average unemployment rate in
the first 3 years of the 1967-79 period was more
than 2 percentage points below the average for
the subsequent 10 years. The recessions in the early
and middle 1970's account for some of the disparity, but saying how much is difficult since the
4. "Retrospective" interviews consist of questions about
the respondent's past. In the March CPS, questions on
work experience refer to the January-December period
preceding the interview. Official unemployment rates, on
the other hand, are computed from responses to questions
about the activity of the respondent at approximately the
time of the interview. The annual average unemployment
rate estimated from a single retrospective survey may not
be the same as the estimate computed from month-bymonth monitoring of the employment status of the
individuals. The disparity is greatest for people who do
not work for pay throughout the year. For more discussion of the shortcomings of the data used in this study,
see "Differences in Unemployment Incidence and Duration," p. 14.
November 1981/Voice
persistence of the effects of these business contractions can only be estimated. In any case, the lowest
unemployment rate in the 1970's was a full percentage point above the average for the 1960's.
The duration estimates provide some help on the
question of persistence, however. Most instances
of prolonged unemployment occur late in recessions and in the early months of the subsequent
recoveries. Layoffs account for a larger share of
the additional unemployment associated with recessions. Mean duration increases as those laid
off must wait longer for recall or the appearance of
an attractive offer. Durations remain high even
after growth resumes because many firms accumulate unwanted inventories that must be sold before
the firms return to normal rates of production. The
rise in inventories in the 1974-75 recession was
particularly massive, and the effects on the mean
duration of unemployment were both large and
long-lived. Nevertheless, by 1979, duration had
nearly subsided to its 1973 level-a fact indicating
that the influence of the recession had dissipated.
17
Table 3
UNEMPLOYMENT INCIDENCE AND DURATION
FOR FULL·YEAR WORKERS 20 AND OVER, BY RACE
Unemployment
rate!
__
(Perc~
Blacks
7.9
7.1
8.0
14.0
14.1
13.3
14.0
13.5
13.0
16.5
15.5
17.0
5.9
7.3
7.3
6.0
7.2
11.9
10.1
10.1
8.1
8.2
11.3
12.1
11.2
10.0
12.2
16.2
15.2
13.6
11.7
12.0
16.3
17.6
16.8
15.9
19.4
24.5
21.6
21.2
18.8
19.7
15.5
17.5
17.0
15.5
16.0
18.5
21.5
22.5
19.5
19.0
20.0
19.0
17.5
16.5
15.5
25.0
24.0
24.5
22.0
21.5
4.4
7.7
12.6
13.8
13.5
16.5
19.2
17.9
17.0
16.0
22.0
20.5
1967 .....
1968 .....
1969 .....
2.1
1.9
2.0
4.6
4.3
4.3
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
3.4
4.1
3.7
3.0
3.7
6.3
5.7
4.6
3.7
3.6
.. '"
.....
.....
.....
.....
.....
.....
.. '"
oj
Whites
Whites
.....
Mean
weeks
unemployed-
Blacks
Yea'
.....
Percent
unemployed
1 week or longer
Blacks
Whites
Mean
1967-69 ...
1970-79 ...
2.0
4.2
1967-79 ...
3.7
8.2
7.3
11.4
1 Computed from work experience informa.tion obtained from the March Current
Population Survey each year (see note wIth Table 1)
2. Includes only workers experiencing some unemployment. Rounded to the nearest
05 week
SOURCES: U S Department of Commerce, Bureau of the Census.
Federal Reserve Bank of Dallas.
Unemployment rose again in 1980, so looking at
an additional year would not show any further
decline in duration.
These considerations suggest using the figures
for 1979 as the basis for approximations of what
unemployment would have been during the last
half of the decade if no recession had occurred.
Although the incidence and duration of unemployment were both significantly higher after 1969, the
rise in incidence was larger in percentage terms.
It was also the more important contributor to the
increase in the unemployment rate. If incidence
had remained 8.5 percent and mean weeks unemployed had risen from 14.0 to 16.5, the unemployment rate would have increased from 2.3 percent
to 2.7 percent. But a rise in incidence to 13 percent
while duration remained 14 weeks would have
increased the unemployment rate to 3.5 percent.
The interaction of the two dimensions was also
important. Given that incidence had already risen
to about 13 percent, the 2.5-week rise in mean
duration pushed the unemployment rate to the
neighborhood of 4 percent. s
18
Rising duration increased
unemployment rates of blacks
A disturbing development of the 1967-79 period
was the divergence of the unemployment series for
blacks and whites. In the late 1960's the unemployment rate for black adults was, on average, about
21/2 percentage points above the rate for white
adults. In the late 1970's the difference averaged
about 4 1/2 percentage points. Again, the business
cycle was responsible for some of this change. In
the slack labor markets of the middle 1970's, the
difference had been as high as 51/2 points. Blacks
are more heavily concentrated in occupations that
are sensitive to changes in business conditions, so
5. When the sample contains people who are in the labor
force the same amount of time, the expression relating
the unemployment rate to incidence and mean duration is
U = I X DI L, where U is the unemployment rate, I is the
percentage unemployed at least one week, D is mean
weeks unemployed for workers experiencing some unemployment, and L is the mean weeks in the labor force
for workers experiencing some unemployment.
Federal Reserve Bank of Dallas
their unemployment rates increase more when the
overall demand for labor falls.
Unemployment rates for blacks not only increase
faster during periods of economic contraction but
also fall more slowly during the subsequent recoveries. Although the mean duration of unemployment rises sharply in recessions for all groups,
it remains high longer for blacks than for whites.
Thus, the evidence suggests that, on average,
blacks who lose their jobs when the economy is
weak must wait longer after the economy begins
to expand again before they can expect to return
to work.
But the widening of the gap between the unemployment rates for blacks and whites does not
appear to be attributable to cyclical forces alone.
In 1979, duration for blacks-although below the
1975-77 highs-was still up at levels not observed
since the 1970-71 recession. In 1973-74 the difference in mean durations for blacks and whites was
in the range of 31/2 to 4 percentage points, only
slightly higher than the difference in the late 1960's.
In 1978-79 the difference had risen to around 6
percentage points. This rise in duration contributed
heavily to the larger increase in unemployment
rates for blacks.
Implications
The knowledge that higher incidence was responsible for most of the difference in unemployment
between the late 1960's and the 1970's appears to
be of little immediate value in understanding why
November 1981/Voice
the unemployment rate increased. The information
may, however, be helpful in directing future research. The factor at work does not appear to be
a worsening of "hard-core unemployment"-a term
used to characterize the condition of those experiencing great difficulty finding and keeping jobsbut, rather, more frequent job changes or greater
use of temporary layoffs to meet seasonal variation
in demand. Further progress on this subject will
require additional information from other sources,
such as a series of surveys on how long individuals
have been working for their current employers.
The findings on the higher unemployment rates
of blacks may be applied more straightforwardly.
The duration evidence indicates that chronic unemployment did contribute significantly to the greater
increase in unemployment of blacks. This discovery is somewhat ironic, because the Federal Government went to great lengths to ameliorate prolonged unemployment, particularly of minority
races, during the 1975-78 period. Expenditures on
employment and training programs were increased
sharply in an effort to lighten the burden of the
recession on the disadvantaged and reduce hardcore unemployment. 6 The programs have been
widely regarded as unsuccessful, however, and the
divergence in the unemployment durations for
blacks and whites indicates the effectiveness of
these programs has yet to be demonstrated.
6. See James E. Pearce, "The Use of Employment and
Training Programs to Reduce Unemployment," Voice of the
Federal Reserve Bank of Dallas, November 1979, pp. 2-12.
19
GReguJatoryGJ3riefs
andc.f/nnouncements
Guides Provided for Conversions
to All-Savers Certificates
Member banks in the Eleventh Federal Reserve
District have inquired about the rate of interest
to be paid on all-savers certificates (ASCs) resulting from conversions.
The Economic Recovery Tax Act of 1981 stipulates that ASCs must have an annual investment
yield equal to 70 percent of the average investment
yield for 52-week U.S. Treasury bills sold at the
most recent auction preceding the week in which
the ASC is issued. The ASC must be issued at a
rate that will result in the annual investment yield
mandated by the act.
One condition for converting an existing time
deposit to an ASC or any other deposit at the same
institution without imposition of the early-withdrawal penalty is that the rate paid on the new
deposit cannot exceed the lower of (a) the rate
being paid on the existing time deposit or (b) the
regulatory ceiling rate, if any, applicable to the
new deposit category at the time of conversion.
In the case of a conversion of an existing time
deposit to an ASC, the regulatory ceiling rate is
the rate in effect for the ASC at the time of
conversion.
However, member banks may not offer ASCs
that have an annual yield less than that required
by law. If, to allow for a penalty-free conversion,
a certificate is issued at a nominal rate that produces an annual yield less than that required by
law, it will not qualify as an ASC under the regulations issued by the Depository Institutions
Deregulation Committee.
Member banks that have issued all-savers certificates having an annual investment yield below
the mandatory annual investment yield effective
on the date of their issuance should take appropriate action to modify the certificates to conform
with the regulations authorizing the tax-exempt
certificates.
20
Regulation K:
Proposed Amendment
Broadens Activities
of Edge Corporations
The Federal Reserve Board has requested comment
on a proposal to permit Edge corporations to
engage in the United States in certain investment
advisory and management services.
The proposal would amend Regulation K (International Banking Operations) to add a new activity
to the list of activities permissible for Edge corporations in this country: providing economic,
financial, and investment advisory services and
managing, on behalf of customers who are not
residents of the United States, investment portfolios comprised of securities, and other financial
instruments, and real estate.
In addition to requesting comment on this proposal, the Board has asked for comment on the
question as to whether the provision of these services might be extended, with respect to foreign
investments, to customers who are residents of the
United States.
Comments must be received by December 18,
1981. They should be submitted to the Secretary,
Board of Governors of the Federal Reserve System,
20th Street and Constitution Avenue. N.W.,
Washington. D.C. 20551, and should include a
reference to Docket No. R-0366.
Federal Relerve Bank of Dallal
Deregulation Committee
Announces Decisions
The Depository Institutions Deregulation Committee (DIOC) has announced decisions regarding
the passbook savings rate ceiling, a new
IRA/ Keogh deposit category, MMC and SSC
rates, MMC rate calculation, a new short-term
deposit category, and a new deregulation schedule.
The decisions made by the committee are summarized as follows:
• Passbook savings rate ceiling-increase
postponed. The DIDC voted on October 19, 1981,
to postpone indefinitely the one-half of 1 percentage-point increase in the nontransaction savings
rate ceiling that was scheduled to become
effective November 1, 1981. Accordingly, the
maximum rates payable on passbook and statement savings accounts will remain at 5.50 percent
for thrift institutions and at 5.25 percent for commercial banks.
• New IRA/Keogh category. A final rule creating a new IRA/ Keogh account category has also
been issued by the DIOC. The new account has a
minimum maturity of 11/2 years and no regulated
interest rate ceiling. This means that depository
institutions may provide instruments with fixed
or floating interest rates. Additional deposits
during the term of the account will not require
extending its maturity. In addition, any depository
institution may waive its mandatory earlywithdrawal penalties for transfers within the same
institution from existing IRA/ Keogh deposits to
the new IRA/ Keogh account category.
The new IRA/ Keogh account category becomes
effective December 1, 1981, but it does not change
the current eligibility requirements or contribution
limits for IRAs (individual retirement accounts) or
Keoghs contained in the Internal Revenue Code.
The extended eligibility changes enacted by the
Economic Recovery Tax Act of 1981 do not become
effective until January 1, 1982.
November 198t/Voice
• MMC and SSC ceiling rates. The DIOC issued
final rules concerning the maximum interest rates
payable on 26-week money market certificates
(MMCs) and the 21/2- to 4-year small-savercertificates (SSCs). These final rules reaffirm the DIDC
rules that were adopted on May 28, 1980, and
subsequently were amended to remove the interest
rate caps and to change the dates that the MMC
and SSC rates become effective.
• MMC ceiling-optional four-auction average.
In a separate action, the DIOC also adopted rules
at its September 22 meeting that would permit the
use of a 4-week average of 26-week U.S. Treasury
bills in calculating the maximum interest rates
payable on MMCs issued by thrift institutions and
commercial banks. Current rules limit the MMC
maximum rate to the Treasury bill discount rate
plus one-quarter of 1 percentage point. The new
rules would set the current ceiling rate at the
higher of (a) the most recent auction discount
rate plus 25 basis points or (b) an average of the
discount rates for the four auctions immediately
prior to the date of the deposit plus 25 basis points.
The committee believes that the alternative
methods of calculating the maximum rate will
enable banks and thrift institutions to be more
competitive with money market mutual funds
throughout an interest rate cycle, and especially
during a declining rate environment, when money
market funds traditionally have been able to pay
more than the money market certificates.
• New short-term deposit category. The committee will consider several specific new shortterm deposit categories to be developed by the
staff and published for public comment.
• New deregulation schedule. The committee
also voted to publish for public comment a proposal to authorize a new schedule for the phaseout
of all interest rate ceilings through the creation
of new categories of time deposits. The first proposed new deposit instrument would become
effective February 1, 1982, and would have an
21
initial maturity of 3 1/2 years or more, no interest
rate ceiling, a minimum denomination of $250, and
other characteristics that would identify it as a
new account. According to the proposed schedule,
the two other new accounts would become effective in 1984 and 1985.
Board Extends Deferral
for Small Nonmember
Depository Institutions
The Board of Governors of the Federal Reserve
System has again deferred reserve and reporting
requirements for nonmember depository institutions with less than $2 million in total deposits.
The deferral will now extend through April 1982.
Legislation is under consideration in Congress to
make the exemption permanent.
The Board had previously deferred until November 1981 reserve requirements for institutions with
less than $2 million in total deposits as of December 31,1979, in an effort to lessen the burden for
smaller institutions. Nonmember depository institutions became subject to reserve requirements
under provisions of the Monetary Control Act of
1980.
Regulation T:
Amendment Requires
Good Faith Margin for Options
on Government Securities
The Federal Reserve Board has adopted an amendment to its Regulation T (Credit by Brokers and
Dealers) to require brokers and dealers to obtain
"good faith" margin from customers who write
uncovered options on government securities.
The good faith margin is to be based on the
maintenance margins of the exchange that trades
the option. Under the amendment, no loan value
may be accorded to the option itself.
22
Federal Reserve Bank of DaUas
New National Member Banks
Plaza National Bank of Dallas, Dallas, Texas, a newly organized institution
located in the territory served by the Head Office of the Federal Reserve
Bank of Dallas, opened for business October 7, 1981, as a member of the
Federal Reserve System. The new member bank opened with capital of
$1,000,000 and surplus of $1,000,000. The officers are: William R. Waugh, Jr.,
Chairman of the Board; Jack Griggs, President; James E. Morgan, Senior
Vice President; and Dolores L. Williams, Vice President and Cashier.
Texas Commerce Bank-Quorum, N.A., Addison, Texas, a newly organized
institution located in the territory served by the Head Office of the Federal
Reserve Bank of Dallas, opened for business October 19, 1981, as a member
of the Federal Reserve System. The new member bank opened with capital
of $1,500,000 and surplus of $1,500,000. The officers are: J. Rick Barnes,
President and Chief Executive Officer; Bart McCain, Vice President and
Cashier; Thomas C. Flood, Vice President; Steven W. Coley, Assistant Vice
President; and Virginia F. Cowan, Assistant Vice President.
Charter National Bank-Westheimer, Houston, Texas, a newly organized
institution located in the territory served by the Houston Branch of the
Federal Reserve Bank of Dallas, opened for business October 23, 1981, as
a member of the Federal Reserve System. The new member bank opened
with capital of $1,250,000 and surplus of $1,250,000. The officers are: A.
Harrel Blackshear, Chairman of the Board; Gary Karter, President; D. Mack
Butler, Vice President; Becky R. Hamlin, Vice President; Lynn Chasin,
Cashier; and Mary E. Rodriguez, Assistant Vice President.
First National Bank of Azle, Azle, Texas, a newly organized institution
located in the territory served by the Head Office of the Federal Reserve
Bank of Dallas, opened for business October 26, 1981, as a member of the
Federal Reserve System. The new member bank opened with capital of
$750,000 and surplus of $750,000. The officers are: G. Scott Allred, President,
and Bruce Rose, Executive Vice President and Cashier.
Lamar National Bank, Paris, Texas, a newly organized institution located
in the territory served by the Head Office of the Federal Reserve Bank of
Dallas, opened for business October 26, 1981, as a member of the Federal
Reserve System. The new member bank opened with capital of $2,000,000
and surplus of $2,000,000. The officers are: Artis Edzards, Chairman of the
Board; Lonnie R. Abrahams, President and Chief Executive Officer; Douglas
Dowler, Assistant Vice President; and Pamela Kinslow, Cashier.
Security National Bank, Nacogdoches, Texas, a newly organized institution
located in the territory served by the Houston Branch of the Federal Reserve
Bank of Dallas, opened for business October 30, 1981, as a member of the
Federal Reserve System. The new member bank opened with capital of
$1,150,000 and surplus of $1,150,000. The officers are: Paul H. Smith, Chairman of the Board; Jerry D. Nichols, President; Richard C. Rawlins, Vice
President and Cashier; Billie Ontiveros, Assistant Cashier; and Elaine
Wingate, Banking Officer-Administration.
November 198I/Voice
23
(JVowJIvailable
Recently issued Federal Reserve circulars, speeches, statements to Congress, publications, etc., may
be obtained by contacting the Department of Communi,::ations, Financial and Community Affairs,
Federal Reserve Bank of Dallas, Station K, Dallas, Texas 75222, unless indicated otherwise. Requests
for circulars should specify the circular numbers.
Circulars
Regulation C (Home Mortgage Disclosurel. 14 pp. Circular
No. 81-194 (October 6, 1981).
Depository Institutions Deregulation Committee. 8 pp. Circular No. 81-195 (October 8, 1981).
Depository Institutions Deregulation Committee: All Savers
Certificates. 4 pp. Circular No. 81-197 (October 19,
1981).
Revised List of OTC Margin Stocks. 25 pp. Circular No. 81·
199 (October 21,1981).
All Savers Certificate: Clarification of Circular No. 81·181.
2 pp. Circular No. 81-200 (October 21, 1981).
Amendment to Regulation T (Credit by Brokers and Dealers].7 pp. Circular No. 81-201 (October 22, 1981).
Results of Election. 1 p. Circular No. 81-202 (October 22,
1981).
Regulation J: Collection of Checks and Other Items and
Wire Transfer of Funds. 18 pp. Circular No. 81-203
(October 26, 1981).
Equal Credit Opportunity Act and Fair Housing Act Enforcement: Policy Statement. 6 pp. Circular No. 81-204
(October 27,1981).
Depository Institutions Deregulation Committee: All Savers
Certificate Rate and Proposals for Short-Term Time
Deposits. 9 pp. Circular No. 81-205 (October 28, 1981).
Depository Institutions Deregulation Committee: Proposed
Deregulation of Time Deposits. 10 pp. Circular No. 81206 (October 28, 1981).
Regulation M (Consumer Leasingl: Proposed Commentary.
6 pp. Circular No. 81-207 (October 29, 1981).
(Deferral of Reserve Reporting for Small Nonmember Insti.
tutions]. 2 pp. Circular No. 81-208 (October 29, 1981).
Policy Change Regarding Monetary Charges for Overdrafts in Reserve Accounts and Clearing Accounts. 2
pp. Circular No. 81-209 (October 29, 1981).
Speeches and Statements
Statement by E. Gerald Corrigan before the Subcommittee
on Conservation, Credit and Rural Development of the
Committee on Agriculture, U.S. House of Representatives. 8 pp. October 1, 1981.
Remarks by Paul A. Volcker ("Banking: A Framework for
the Future") at the Annual Convention of the American
Bankers Association, San Francisco, California. 15 pp.
October 7, 1981.
Statement by John E. Ryan before the Select Committee on
Narcotics Abuse and Control, U.S. House of Representatives. 7 pp. October 9, 1981.
Remarks by Paul A. Volcker at the Owens Graduate School
of Management, Vanderbilt University, Nashville, Tennessee. 12 pp. October 15, 1981.
Statement by Nancy H. Teeters before the Subcommittee
on Consumer Affairs and Coinage of the Committee
on Banking, Finance and Urban Affairs, U.S. House of
Representatives. 5 pp. October 21, 1981.
Statement by Theodore E. Allison ("The Federal Reserve's
Role in the Payments Mechanism and Its Communication Plans") before the Subcommittee on Government Information and Individual Rights of the Committee on Government Operations, U.S. House of
Representatives. 10 pp. October 22, 1981.
Remarks by Henry C. Wallich ("Policies for 1982 and Beyond") at Northern Arizona University's Sixth Annual
Economic Outlook Seminar, Flagstaff, Arizona. 11 pp.,
including summary. October 23, 1981.
Statement by Lyle E. Gramley before the Subcommittee on
Domestic Monetary Policy of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives. 10 pp., including table. October 27, 1981.
Statement by Paul A. Volcker before the Committee on
Banking, Housing, and Urban Affairs, U.S. Senate. 31
pp. October 29,1981.
Statement by Nancy H. Teeters before the Task Force on
Enforcement, Credit and Multi-Year Budgeting of the
Committee on the Budget, U.S. House of Representatives. 12 pp. October 29, 1981.
Remarks by Henry C. Wallich ("Are There Alternative
Ways of Fighting Inflation?") at Cornell University,
Ithaca, New York. 17 pp., including summary. October
29,1981.
Statement by Paul A. Volcker before the Subcommittee on
Financial Institutions Supervision, Regulation and Insurance of the Committee on Banking, Finance and
Urban Affairs, U.S. House of Representatives. 8 pp.
October 1, 1981.
24
Federal Reserve Bank of Dallas
@FedFRASER