First Quarter 1998
Federal Reserve Bank of Dallas

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Crude Oil and Gasoline Prices: An Asymmetric Relationship?
Nathan S. Balke, Stephen P. A. Brown and Mine K. Yucel

Gasoline is the petroleum product whose price is most visible and, therefore, always under public scrutiny. Many claim there is an asymmetric relationship between gasoline and oil prices—specifically, gasoline price changes follow oil price changes more quickly when oil prices are rising than when they are falling. To explore this issue, Nathan Balke, Stephen Brown, and Mine Yucel use several different model specifications to analyze the relationship between oil prices and the spot, wholesale, and retail prices of gasoline. They find asymmetry is sensitive to model specification but is pervasive with the most general model.

Has NAFTA Changed North American Trade?
David M. Gould

The controversy over the success or failure of NAFTA is now bleeding over into discussions about the benefits of extending the trade accord to other countries in the Western Hemisphere. The NAFTA debate has typically focused on its impact on employment. But to understand the overall economic effects of NAFTA, it is important to first determine its impact on trade. In this article, David Gould explores NAFTA’s effects on North America’s trading patterns since its implementation in 1994. He finds that although it is difficult to distinguish any effect of NAFTA on trade between Canada and Mexico or Canada and the United States, trade between the United States and Mexico has significantly increased since 1994.

The Dynamic Impact of Fundamental Tax Reform Part 1: The Basic Model
Evan F. Koenig and Gregory W. Huffman

The Internal Revenue Service remains unpopular, the U.S. savings rate remains low, and pressure to efficiently raise significant new tax revenues seems certain to grow once the baby boom generation reaches retirement age. Consequently, it is likely that alternatives to the current income tax system will receive substantial political and media attention in coming years.

In this first of two articles on the economic impact of fundamental tax reform, Evan Koenig and Gregory Huffman describe a framework for analyzing how the adoption of a flat-rate consumption tax would affect the economy over time. Their analysis indicates that replacing the income tax with a consumption tax would have an immediate positive impact on saving and lead, in the long run, to higher levels of consumption, wages, and stock prices and to lower interest rates. In the short run, however, interest rates would probably rise, and consumption and stock prices would probably decline.