In recent years, central banks around the world have greatly increased the monetary policy information they have provided the public. The Federal Reserve has taken a number of actions to promote transparency including, most recently, the announcement of enhancements to the FOMC's (Federal Open Market Committee) economic forecasts that are released to the public.

The movement toward increased transparency arises largely from the view that increased transparency has important benefits, including more effective monetary policy. This view is based on theoretical and empirical research that has emphasized the importance of public expectations about monetary policy as a key factor in determining interest rates and other asset prices. In particular, this research suggests that improved predictability of monetary policy may reduce the volatility of asset prices and make monetary policy more effective by increasing a central bank's leverage over longer-term interest rates.

Sellon uses information from the Blue Chip Long Range Financial Forecasts to examine whether longer-horizon predictability has been associated with increased transparency. The analysis suggests several interesting conclusions. First, consistent with previous studies using futures data, there has been a marked reduction in survey forecast errors at short-term horizons. But, the survey data suggest there has been much less improvement at longer horizons. Second, to the extent private sector longer-horizon forecasts of future monetary policy have improved in recent years, most of the improvement occurred from 2003 to 2006, when the Federal Reserve provided more explicit guidance about the future path of the federal funds rate. During this period, forecast errors over all horizons dropped remarkably. Indeed, this period appears to have driven most of the improvement in the Blue Chip survey forecasts seen over the entire 1986-2007 sample period. Third, the survey evidence reported in this article does not support the finding of some studies that forecasting improved suddenly after 1994. Fourth, the longer-horizon forecast errors have been largest when policy was being actively tightened or eased, especially during the 1990-92 and 2001-03 periods of extended policy easing. Finally, longer-horizon forecast errors appear to have diminished during periods of tightening, but not during periods of easing.

Can Smart Cards Reduce Payments Fraud and Identity Theft? (PDF 219K)
By Richard J. Sullivan

In the United States, when a consumer presents a payment to a merchant, the merchant typically makes a request for authorization before accepting the payment. Personal information, such as an account number, address, or telephone number, are often enough to initiate a payment. A serious weakness of this system is that criminals who obtain the correct personal information can impersonate an honest consumer and commit payments fraud.

A key to improving security-and reducing payments fraud-might be payment smart cards. Payment smart cards have an embedded computer chip that encrypts messages to aid authorization. If properly configured, payment smart cards could provide direct benefits to consumers, merchants, banks, and others. These groups would be less vulnerable to the effects of fraud and the cost of fraud prevention would fall. Smart cards could also provide indirect benefits to society by allowing a more efficient payment system. Smart cards have already been adopted in other countries, allowing a more secure payments process and a more efficient payments system.

Sullivan explores why smart cards have the potential to provide strong payment authorization and thus put a substantial dent into the problems of payments fraud and identity theft. But adopting smart cards in the United States faces some significant challenges. First, the industry must adopt payment smart cards and their new security standards. Second, card issuers and others in the payments industry must agree on the specific forms of security protocols used in smart cards. In both steps the industry must overcome market incentives that can impede the adoption of payment smart cards or limit the strength of their security.

The Growth and Volatility of State Tax Revenue Sources in the Tenth District (PDF 664K)
By R. Alison Felix

With the sluggishness in the national economy in 2008, many state governments are projecting budget shortfalls for the 2009 fiscal year. This trend is a concern to policymakers, as the health of a state's tax revenues is important to its economic growth and its ability to finance the public services that residents demand. State governments provide physical infrastructure, educate the future workforce, and protect people and property. In addition, in the Tenth Federal Reserve District, state and local governments employ over 16 percent of the workforce.

While a number of factors influence the growth and volatility of state tax revenues, one key determinant is the composition of each state's tax portfolio. Governments desire a portfolio of tax instruments that allows for revenues to grow with the economy so that spending demands can be met without much change in tax rates. At the same time, stability in the revenue stream is important so that governments are not left with large financing constraints during downturns.

Felix analyzes the impact of portfolio composition on the growth and stability of state tax revenues, particularly in the states that make up the Tenth District. She uses long-run and short-run elasticity estimates to analyze the growth and stability of each tax instrument and discusses implications for Tenth District states.

Is Commercial Real Estate Reliving the 1980s and Early 1990s? (PDF 826K)
By C. Alan Garner

Concern has been rising about the health of the U.S. commercial real estate market and any impact it may have on financial markets and institutions. It is too early to judge the full extent of any problems, but commercial real estate financing has been shaken by the financial market turmoil associated with recent residential mortgage defaults. The spreads of commercial mortgage-backed securities have widened relative to Treasury securities, and recent reports suggest that prices for many commercial properties are declining. In addition to the direct effects on construction activity, large commercial real estate losses by financial institutions might dampen broad-based economic growth by causing banks to cut back on commercial, industrial, and household lending.

One way to gain perspective on the current commercial real estate market is to look back at historical experience. A natural comparison is with the 1980s and early 1990s. In the 1980s, commercial construction boomed, resulting in a massive oversupply of commercial space and creating serious financial problems for many depository institutions and real estate investors. Many analysts believe these problems helped cause a broader credit crunch in the early 1990s, which reduced the availability of funds to small and middle-sized businesses and slowed overall economic growth.

Garner explores how the current economic and financial situations in commercial real estate are similar to, and different from, the conditions leading up to the real estate bust in the late 1980s and early 1990s. The recent commercial construction boom was not as large as in the 1980s, suggesting excess supplies of commercial space may not grow as large. Another major difference from the early 1990s-increased commercial real estate securitization-may expose developers and investors to shocks originating outside the commercial real estate sector. A major similarity is that commercial banks currently have a large direct exposure to commercial real estate loans.