EconSouth (Third Quarter 2002)

Research Notes and News highlights recently published research as well as other news from the Federal Reserve Bank of Atlanta. For complete text of summarized articles and publications, see the Atlanta Fed’s World Wide Web site at

Federal funds futures prices and monetary policy
The federal funds futures market enables market participants to both hedge interest rate risk and speculate on interest rate movements. Prices of federal funds futures also reveal market participants’ expectations about changes in Federal Open Market Committee (FOMC) policy. This information allows monetary policymakers to assess the degree to which asset prices already reflect potential policy moves and these prices’ likely reaction to policy changes that deviate from market expectations.

In a recent article Jeff Moore and Richard Austin examine the relationship between U.S. monetary policy changes and futures market participants’ ability to forecast these changes. Previous research has shown the federal funds futures market to be a relatively good forecaster of changes in the fed funds rate on average. But these studies treated futures market data as a single sample and failed to take into account the significant changes in forecast error behavior over different periods of the monetary policy cycle.

Moore and Austin find that futures market forecast error mean and variance differ substantially over various stages of the monetary policy cycle, with overall performance improving considerably in the latter half of the 1990s before deteriorating sharply through 2000 and 2001. The data also reveal both substantial overshooting and undershooting by futures prices around turning points in the path of the funds rate. Finally, the evidence suggests that increased disclosures of information by the FOMC during the past decade have played only a minor role in improving futures market participants’ forecasting performance.


Global banks, local crises: Bad news from Argentina
Banking crises have been a recurrent phenomenon in Latin America over the past few decades. Some have argued that the internationalization of the banking sector has ushered in a new era: What used to be systemic risk from the perspective of local banks with undiversified portfolios might no longer be systemic from the standpoint of large international banks.

Argentina’s experience shows that the presence of international banks was not enough to prevent local banking crises and sizable losses to depositors. The “bad news” from Argentina, according to a recent article by Marco Del Negro and Stephen J. Kay, is that depositors in emerging markets may not reap the full benefits of international portfolio diversification because international banks have limited liability, at least under some circumstances — for instance, when the local government heavily intervenes in the banking system. The authors emphasize that while the limited-liability feature of international banks may seem bad ex post — and, of course, it is from the perspective of Argentine depositors — this feature may well be desirable, perhaps even necessary, ex ante.

The article first presents evidence of the globalization of the banking sector in Latin America and the dramatic increase of the phenomenon in the late nineties. After reviewing the literature on the pros and cons of international banks in emerging markets, the authors focus on the legal issues behind the limited-liability feature. The authors examine the new evidence that Argentina’s recent experiences provide and conclude by analyzing the pros and cons of the limited-liability feature.


Dollar Index Chart

The dollar continued its decline in April and May 2002 against the 15 major currencies tracked by the Atlanta Fed. Decreases were registered on all subindexes except the Americas subindex, which remained unchanged in April but rose slightly in May. The dollar again declined in June, for the fourth consecutive month, and decreases were registered on all subindexes except the Americas subindex.

Note: For more detailed, monthly updates and historical data on the dollar index, see the Atlanta Fed’s World Wide Web site at

Latin American conference proceedings now online
Financial liberalization is one of the most pressing goals for policymakers in Latin America today as policies aimed at expanding, diversifying and modernizing financial services foster greater participation in the global economy. However, liberalization also presents new dilemmas.

To offer a perspective on these issues, the Latin America Research Group of the Federal Reserve Bank of Atlanta sponsored the conference Domestic Finance and Global Capital in Latin America. Regulators, policymakers, bankers and academics met in November 2001 to discuss policy concerns related to opening and developing Latin American financial markets. Original research explored theoretical issues related to capital flows and liberalization, banking sector issues and the workings of financial markets. The conference concluded with a roundtable on monetary and regulatory policy in which policymakers and academics discussed their experiences in modernizing the region’s capital markets as well as their concerns going forward.

The entire conference proceedings are now available on the bank’s Web site at

How do WSJ survey forecasters measure up?
Twice a year the Wall Street Journal surveys a group of forecasters for their forecasts of several key macroeconomic variables designed to characterize the economy’s future performance. The Journal publishes the forecasts and provides a ranking of a few of the top forecasters based on how close the forecasts of the variables are to their realized values.

The methodology used to rank the forecasters scores them on the sum of the weighted absolute percentage deviation from the actual realized value of each series; the weight for each series is simply the inverse of the actual realized value of the series. This performance-assessment method may become distorted, and even undefined, when the realized value is close to or equal to zero. Also, it does not consider the correlations in the data among the variables being forecast.

In a recent working paper, Robert Eisenbeis, Daniel Waggoner and Tao Zha propose a methodology that is designed to be used to assess the accuracy of any type of forecast and that both yields a measure of joint forecast performance and provides a single measure of how similar a joint forecast is to those of other forecasts. The method also allows the authors to assess the collective forecast accuracy of a set of forecasts flowing from economic models or individual forecasters and the accuracy of those forecasts over time. Finally, the method provides some indication of how tightly the forecasts are clustered around the realized values and can be used to compare judgmental forecasts as well as those of formal econometric models.

Among many results, the authors find great variability among forecaster performance over time, which serves to illustrate how difficult economic forecasting is.

JULY 2002

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