Second Quarter 1993
Federal Reserve Bank of Dallas

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Regulation, Bank Competitiveness, and Episodes of Missing Money
John V. Duca

John Duca reviews three episodes of "missing money," periods during which one of the monetary aggregates was unusually weak. Duca finds that in each of these episodes, an increased regulatory burden on banks encouraged households and firms to bypass the banking system in favor of nonbank financial liabilities and assets. Using a standard analytical framework, he shows how these shifts by investors can lead to cases of missing money and declines in banks' role in providing credit. Duca further shows that increases in bank regulatory burden can create potential problems for analysts in using either interest rates or real-time monetary aggregates as indicators of nominal economic activity. Given these findings, Duca argues that because regulatory changes have implications for conducting monetary policy, the Federal Reserve should continue to have a role in formulating bank regulations.

What Determines Economic Growth?
David M. Gould and Roy J. Ruffin

Does increased investment in education enhance long-run economic growth, or does it simply reduce current consumption? Will free trade stimulate growth, or will it merely increase imports?

For a long time, economists relied on an economic growth theory that offered little scope for understanding long-run growth movements. Recently, however, the study of economic growth has been reinvigorated by new developments in theory and empirical findings that suggest how long-run growth evolves.

Because economic growth determines whether our grandchildren will have better lives than ours or whether poor nations will catch up with or fall further behind rich nations, David Gould and Roy Ruffin investigate recent lessons learned about growth and apply them to the above issues. Gould and Ruffin report on recent research suggesting that investment, particularly human capital investment, increases economic growth. They also investigate evidence showing that political stability, well-defined property rights, low trade barriers, and low government consumption expenditures enhance growth through positive effects on investment.

The Pricing of Natural Gas in U.S. Markets
Stephen P. A. Brown and Mine K. Yücel

Stephen Brown and Mine Yücel examine how different natural gas users and the market institutions serving them affect the transmission of price changes throughout various markets for natural gas. Electrical utilities and industrial users buy much of their natural gas in a competitive spot market served by brokers and interstate pipeline companies. In contrast, most commercial and residential customers are dependent on local distribution companies, which earn a regulated rate of return and buy their gas under long-term contracts.

Using time-series methods, Brown and Yücel find that even in the long run, changes in prices are not transmitted uniformly throughout the various markets for natural gas. Electrical and industrial customers have seen a greater benefit from falling natural gas prices than commercial and residential customers. Differences in market institutions and in the ability of the end users to switch fuels may account for the lack of uniformity.

Investing for Growth: Thriving in the World Marketplace
Fiona D. Sigalla and Beverly J. Fox

Free trade is rapidly expanding the world marketplace, providing new opportunities to raise living standards and stimulate long-term economic growth. To capitalize on these opportunities, the United States must overcome problems that reduce its competitiveness, such as regulations that distort market incentives, an education system that may not be preparing a work force equipped to compete in the twenty-first century, and a health care system whose skyrocketing costs have become a burden to taxpayers, government, and business.

The Federal Reserve Bank of Dallas addressed the opportunities presented by free trade and the concomitant need to increase U.S. competitiveness at the Bank's recent economic conference, entitled "Investing for Growth: Thriving in the World Marketplace." In this article, Fiona Sigalla and Beverly Fox summarize concerns and strategies reviewed and debated in conference sessions.