First Quarter 1995
Federal Reserve Bank of Dallas

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Sticky Prices: What Is the Evidence?
Mark A. Wynne

This article reviews the idea that sticky prices are important for understanding business cycles. Mark Wynne begins with a critical survey of the literature documenting the stylized facts about prices in individual markets. His first point is that there is remarkably little evidence that the actual transactions prices of most products are, in fact, sticky. Such evidence as there is to support the notion of widespread price stickiness is heavily biased toward low-tech products that account for a very small fraction of total output and is a thin reed on which to base a theory of business fluctuations. Furthermore, the observation that posted prices do not change very frequently cannot always be interpreted as evidence that markets are not clearing. There is some evidence to suggest that frequently firms alter product characteristics other than price to allocate goods and services, and that these changes in product characteristics are unobserved.

In view of the difficulty in interpreting whether prices are at other than market-clearing values, Wynne argues that the only true test of a model in which price stickiness plays a major role in explaining business cycles is to look at how well it explains the cyclical phenomena it is supposed to explain. One simple test of a model along these lines consists of looking at the various correlations generated by the model and comparing them with the data. Wynne reviews some recent attempts along these lines and concludes that, while there may be some role for price stickiness in explaining business cycles in the U.S. economy, the case remains unproven.

The Texas Banking Crisis And the Payments System
Robert T. Clair, Joanna O. Kolson, and Kenneth J. Robinson

The Federal Reserve System plays a crucial role in the payments system that is especially important during periods of financial turmoil. In this article, Robert Clair, Joanna Kolson, and Kenneth Robinson explain the process and the risks involved in clearing checks in the private sector. They compare these processes and risks with the essentially risk-free check-clearing service the Federal Reserve System offers. During banking crises, they hypothesize, banks will increase their check-clearing through the Federal Reserve to minimize their risk exposure. A model of Federal Reserve check-clearing volume is constructed and estimated. The empirical results show that during banking crises, Federal Reserve check- processing volume rises as banks seek safer methods of clearing checks. Consequently, Federal Reserve payment services are important tools in minimizing the disruptive effects of banking crises on the economy.

The Role of Merchandise Exports to Mexico in the Pattern of Texas Employment
Kelly A. George and Lori L. Taylor

In 1987, Texas exported $25 billion worth of merchandise to foreign countries. Twenty-six percent, or $6.5 billion, of those exports went south to Mexico. By 1994, Texas merchandise exports to Mexico had grown to more than $18.5 billion per year (in 1987 constant dollars). Texas merchandise exports to Mexico (in real terms) have grown more than 10 percent a year for six of the last seven years.

Using input-output analysis, Kelly George and Lori Taylor find that merchandise exports to Mexico, while representing only about 5 percent of Texas output, have grown in ways that have substantially influenced the composition of the state's economy. The authors attribute a small portion of the state's overall job gains since 1987 to rising merchandise exports to Mexico but find that almost all Texas employment growth in high-tech manufacturing sectors stems from trade with Mexico.

Another Strong Year for the Eleventh District
Fiona D. Sigalla

The Eleventh District marked its eighth year of economic expansion in 1994. Employment grew strongly in all three Eleventh District states- Louisiana, New Mexico, and Texas. Although the past prominence of the oil and gas sector is well-known, in 1994 the region prospered despite continued declines in the energy industry. A robust U.S. economy stimulated demand for District manufacturing and service industries, which helped drive the economy.

Fiona Sigalla surveys the 1994 performance of the Eleventh District economy and finds that a favorable business climate and expanding trade in goods and services to Mexico helped the Eleventh District grow faster than the nation. While slower economic growth in the United States and uncertainty in Mexico will be drags on the District economy in the year ahead, 1995 should be another good year for District states.