Abstract
The IMF Research Bulletin, a quarterly publication, selectively summarizes research and analytical work done by various departments at the IMF, and also provides a listing of research documents and other research-related activities, including conferences and seminars. The Bulletin is intended to serve as a summary guide to research done at the IMF on various topics, and to provide a better perspective on the analytical underpinnings of the IMF’s operational work.
Paula R. De Masi
The terrorist attacks of September 11 exacerbated underlying weaknesses in U.S. economic activity, resulting in considerable downward revisions to short-term growth prospects. Nevertheless, over the last decade, U.S. economic performance was nothing short of remarkable, hailing the longest U.S.expansion on record. Strong GDP growth combined with low inflation and an acceleration in productivity brought the unemployment rate down to levels not seen in 30 years. Sound fiscal and monetary policies provided a strong foundation supporting the expansion; the federal fiscal balance improved dramatically, culminating in large surpluses in 1998–2001, and monetary policy allowed the economy to expand at a robust pace. This article provides an overview of recent IMF research on some of the key features of U.S. economic performance, the associated policy implications, as well as the potential risks arising from the decline in the personal saving rate, the appreciation of the U.S. dollar, the widening of the U.S. current account deficit, and the rise and subsequent correction in equity prices.
During most of the 1990s, the unified federal fiscal balance improved more consistently and rapidly than expected. Leidy (1998) shows that the improvement in the cyclically adjusted budget deficit was largely the result of legislated tax increases that raised the structural revenue-to-GDP ratio (by about 2 percentage points) and, to a lesser extent, cuts in discretionary spending.1 Also contributing to the rise in revenues were shifts in the distribution of income toward higher income groups and a shift in the composition of total income to more of the types that tend to be taxed at higher rates (e.g. wages and salaries).
The fiscal surpluses in FY 1998 reduced the level of federal government debt. The shrinking supply of treasury securities—which play a role in monetary policy operations and serve as benchmarks in financial markets—raised a number of important technical issues. Arora and Luzio (2001) discuss how the Federal Reserve could adapt its operations by broadening the range of financial instruments used in conducting monetary policy.2 Schinasi, Kramer, and Smith (2001) consider the implications for financial markets where treasury securities serve as benchmarks for pricing fixed-income securities, instruments for hedging market risk, and safe-haven assets. 3 If government surpluses were to continue and cumulatively exceed the level of redeemable debt, then these funds could be saved to pay for the future liabilities of the Social Security and Medicare programs. Arora and Dunaway (2001) explore the challenges of trying to ensure that such investments are insulated from political pressures and do not have adverse effects on economic efficiency and long-term growth prospects.4
With regard to longer-term fiscal issues, a number of studies have addressed various options for reforming Medicare and Social Security as well as the tax system.5 Leidy and Tokarick (1999) evaluate recent reform proposals and raise concerns about suggestions to transfer general revenues to the Social Security Trust Fund. While most Social Security reform proposals are assessed in terms of the effect on the economy’s output, national saving, or the present value of expected benefits relative to contributions, Valdivia (1997) takes into account the value of the Social Security insurance against poverty among the elderly. His analysis illustrates that risk pooling provides welfare gains despite the adverse effects Social Security may have on aggregate saving, employment, and output.6 Altig, Auerbach, Kotlikoff, Smetters, and Walliser (2001) simulate the impacts of various tax reform proposals and conclude that, while some reforms could offer significant long-run gains in output and welfare, these gains might come at the expense of certain economic groups.
Since the mid-1990s, labor productivity growth has risen to an average annual rate of about 2¼ percent, up from about 1½ percent over the period 1973–95. Whether productivity growth remains strong will be a key determinant of the economy’s future course, with implications, in particular, for equity price valuations and the continuation of the improved inflation-unemployment tradeoff.7 De Masi (2000) reviews recent evidence on the role of information technology in boosting labor productivity growth, and clarifies the debate about whether a “new economy” exists in the United States.8
In recent years, the decrease in the personal saving rate and the rise in household debt have raised concerns about the financial stability of households. Cerisola and De Masi (1999) present econometric evidence which suggests that the trend decline in the U.S. personal saving rate can largely be explained by a rise in household equity wealth, improved household access to credit, higher public saving and per capita Medicare transfers, and lower inflationary expectations.9
Since 1995, the dollar has appreciated by about 40 percent on a real, effective basis. With the U.S. current account deficit widening to 4½ percent of GDP in 2000, concerns have centered on the risk of a sustained and sharp depreciation. A number of studies have examined prospects for the dollar and the current account, as well as explanations for the dollar’s strength against the euro.10 In particular, Obstfeld and Rogoff (2001) argue that a reversal in the U.S. current account deficit could have a substantial impact on the real exchange value of the dollar over the medium term; the magnitude of which will depend on the kinds of economic shocks that set off the correction.11 Arora, Dunaway, and Faruqee (2001) simulate alternative paths for how the current account deficit might evolve, and analyze how the adjustment to a sustainable level could occur over the longer term.12
IMF staff have also conducted research on various related U.S. economic issues including the empirical analysis of business cycles,13 labor markets,14 aspects of U.S. asset markets,15 and consumer price index measurement issues.16
Michael Leidy, “A Postmortem on the Achievement of Federal Fiscal Balance,” United States: Selected Issues, IMF Staff Country Report No. 98/105 (September 1998).
Vivek Arora and Rodolfo Luzio, “Implications of the Reduction in U.S. Treasury Securities for Monetary Policy and Financial Markets,” United States: Selected Issues, IMF Staff Country Report No. 01/149 (August 2001).
Garry Schinasi, Charles Kramer, and Todd Smith, “Financial Implications of the Shrinking Supply of U.S. Treasury Securities,” IMF Working Paper 01/61, 2001.
Vivek Arora and Steven Dunaway, “Investing Government Assets in Private Securities: Policy Options and International Experience,” United States: Selected Issues, IMF Staff Country Report No. 01/149 (August 2001); and Michael Leidy, “Investing Social Security Trust Fund Assets in Private Securities,” IMF Working Paper 97/112, 1997.
Jan Walliser, “Would Saving U.S. Social Security Raise National Saving?” IMF Policy Discussion Papers 99/7, 1999; Laurence Kotlikoff, Kent Smetters, and Jan Walliser, “Privatizing Social Security in the U.S.: Comparing the Options,” Review of Economic Dynamics, Vol. 2, No. 3, 1999; Michael Leidy and Stephen Tokarick, “Fixing Social Security,” United States: Selected Issues, IMF Staff Country Report No. 99/101 (September1999); and David Altig, Alan Auerbach, Laurence Kotlikoff, Kent Smetters, and Jan Walliser, “Simulating Fundamental Tax Reform in the United States,” American Economic Review, Vol. 91, No. 3, 2001.
Victor Valdivia, “The Insurance Role of Social Security,” IMF Working Paper 97/113, 1997.
Martin Cerisola and Jorge Chan-Lau, “Tales from Two Neighbors: Productivity Growth in Canada and the United States,” IMF Working Paper 00/169, 2000; Martin Cerisola and Gustavo Ramirez, “U.S. Equity Prices and the Technology Boom,” United States: Selected Issues, IMF Staff Country Reports No. 00/112 (August 2000); Jorge Chan-Lau and Stephen Tokarick, “Why Has Inflation in the United States Remained So Low?” IMF Working Paper 99/149, 1999; and Vincent Hogan, “Explaining the Recent Behavior of Inflation and Unemployment in the United States,” IMF Working Paper 98/145, 1998.
Paula De Masi, “Does the Pickup in Productivity Growth Mean That There is a New Economy?” United States: Selected Issues, IMF Staff Country Report No. 00/112 (August 2000).
Martin Cerisola and Paula De Masi, “Determinants of the U.S. Personal Saving Rate,” United States: Selected Issues, IMF Staff Country Report No. 99/101 (September 1999).
Michael Mussa, “The Relationship Between the Euro and the Dollar,” Journal of Policy Modeling, Vol. 22, No. 3 (May 2000); and Enrique Alberola, Susana Cervero, Humberto Lopez, and Angel Ubide, “Global Equilibrium Exchange Rates: Euro, Dollar, ‘Ins,’ ‘Outs,’ and Other Major Currencies in a Panel Cointegration Framework,” IMF Working Paper 99/175, 1999.
Maurice Obstfeld and Kenneth Rogoff, “Perspectives on OECD Economic Integration: Implications for U.S. Current Account Adjustment,” in Global Economic Integration: Opportunities and Challenges, a symposium sponsored by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming, August 24–26, 2000;.
Vivek Arora, Steven Dunaway, and Hamid Faruqee, “Sustainability of the U.S. External Current Account Deficit,” United States: Selected Issues, IMF Staff Country Reports No. 01/149 (August 2001).
Magda Kandil and Aghdas Mirzaie, “Exchange Rate Fluctuations and Disaggregate Economic Activity in the United States: Theory and Evidence,” forthcoming in Journal of International Money and Finance; Vivek Arora and Athanasios Vamvakidis, “The Impact of U.S. Economic Growth on the Rest of the World: How Much Does it Matter?” IMF Working Paper 01/119, 2001; and Zenon Kontolemis, “Analysis of the U.S. Business Cycle with a Vector-Markov-Switching Model,” IMF Working Paper 99/107, 1999.
Marcello Estevao and Saul Lach, “The Evolution of the Demand for Temporary Help,” in Nonstandard Work, ed. by Francoise Carre, Marianne Ferber, Lonnie Golden, and Stephen Herzenberg (Champaign, IL: Industrial Relations Research Association, forthcoming); Gordon Hanson, Raymond Robertson, and Antonio Spilimbergo, “Does Border Enforcement Protect US Workers from Illegal Immigration?” forthcoming in Review of Economics and Statistics; Dalia Hakura, “The Impact of Trade Prices on Employment and Wages in the United States,” IMF Working Paper 97/116, 1997; and Eswar Prasad and Alun Thomas, “Labor Market Adjustment in Canada and the United States,” Canadian Public Policy, Vol. 24 (February), 1998.
Salim Darbar, and Partha Deb, “Linkages Among Asset Markets in the United States,” IMF Working Paper 99/158, 1999.
Seyitali Erbas and Chera Sayers, “Is the United States CPI Biased Across Income and Age Groups?” IMF Working Paper 98/136, 1998.