Review

The Federal Reserve Banks’ share of U.S. dollar payments processing has declined since 1980, when Congress required the Banks to begin charging for their services. The authors conclude that, while this trend is not likely to lead to the inefficiencies that existed before formation of the Fed, the Reserve Banks must continue to provide services to fulfill the central bank’s obligation to ensure the safety of the payments system.

For several years, Federal Reserve monetary policy actions have appeared to reflect an objective of stabilizing the inflation rate around a 3 percent trend. The author reviews the 1995 actions of the Federal Open Market Committee (FOMC), examining them in the context of a declining role for monetary targets and an increasing emphasis on the Federal Reserve’s inflation objective.

Two of the Federal Reserve’s most important policy mandates are to foster price stability and to oversee the integrity and efficiency of the payments system. Although these policy goals are seldom discussed together, the author illustrates how price stability could enhance the efficiency of the payments system.

Recent controversy in macroeconomics research concerns the cyclical behavior of prices. The author uses quarterly data for Korea and Taiwan to show that the price level has moved countercyclically in both countries, while the inflation rate has been procyclical. These results are consistent with post-WWII experience in the G-7 countries.