Matt Nolan

Macroeconomics: The scientist and the engineer

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Over at Econlog, Arnold King is telling us how he lost his macro religion. It is an interesting post, and it gives me the impression that he believes any type of technical macroeconomics (either empirical or theoretical) to be somewhat of a fraud – a fair description given the difficulty of stringing out cause and effect in macroeconomic data.

In the post he discusses a essay by Greg Mankiw called the Macroeconomist as scientist and engineer. Far from presuming that macroeconomists do the same thing as scientists and engineers, the point of the essay is to describe the difference between macroeconomists that thrive in the abstract and those that work in the face of policy and data. Although there is not a clear split between the two – the distinction allows him to discuss how many of the recent (last 20 years) conclusions in macroeconomics do not appear to be useful for forming policy.

The essay by Mankiw is very good, and it provides a much better description of the evolution of macroeconomics ideas then my earlier retort to Chris Trotters claim about Keynesianism. However, I would also beware the partisan element of what he states.
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Matt Nolan

Quick links for Lehman

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Can be found at this excellent post on Economist’s View.

Lehman is down, Merrill Lynch is sold – this is far bigger than the collapse of Bear Stearns (especially since it appears to be absent a straight bailout).

I suppose we will have a clearer indication of what is going on tomorrow. Expect our dollar to suffer on the back of the higher perceived risk in the world economy – the level of volatility today (without any clearly terrible economic information, although manufacturing was quite average 😉 ) indicates that expectations of increased risk are already feeding into investor movements:

Source (NBNZ)

Just remember there are two main risks to NZ from any foreign crisis:

  1. Cost of credit (as we have a large stock of debt),
  2. Our export prices/volumes.

These aren’t independent – if the second factor stays solid, our ability to fund debt (and people’s willingness to lend) will stay fine. So lets just hope our milk and meat stay popular 😛

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Matt Nolan

How do we compare Keynesian and modern economics?

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Over at policy.net, Chris Trotter states (ht Rates Blog):

Keynesian economics was never more than the rational response of decent and compassionate men to the human cost of economic management when reposed in the hands of the avaricious and the uncaring

This is an incredible mis-representation of “Keynesian economics” – however, it is also an incredibly common mis-representation.

Among many on the left and right of the political spectrum there is a belief that Keynesianism is left-wing macro-economics and modern economics (which people attribute to Friedman – even though in general terms his ideas only apply to monetary policy, not the whole shabang). However, as CPW once said to me, the correct comparison is not one of political ideology, but one of science – Keynes was like Newton, while Lucas/Friedman/the crew are like Einstein.

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Matt Nolan

What’s behind the 50-point cut?

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So the Reserve Bank surprised (almost) everyone by cutting the OCR by 50 basis points (there was one analyst who picked it – I can’t seem to find out who it was though). Lets discuss why they cut by 50 points and then move on from there.

The Bank appeared to cut on the basis of three over-riding issues:

  1. Downward revision to domestic growth,
  2. Huge downward revision to world growth,
  3. Concern that a smaller cut would not loosen financial conditions.

Given there forecasts and assumptions a 50-basis point cut was a good call – if the “equilibrium” interest rate has fallen why not just cut rates straight away to get there. However, in the current environment I believe that a 50-basis point cut was not right – as I don’t believe their forecasts (I had the same problem with the forecasts in June a lot of the reasoning is the same as then).

Another kicker for me is what they think will happen to inflation expectations.

Update: A detailed post by Eric Crampton over at Anti-Dismal.
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Matt Nolan

September 2008 MPS and OCR decision

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Hi everyone,

So what happened – I will be in the lockup when this post comes out so I currently do not know whats going on. If you want to see the decision while I’m away go here (*).

Like everyone else, I’m guessing 25 basis points of cuts and a more dovish set of forecasts than June (weaker in the short term, the same in the long term) – as discussed in the preview. Will add to this post when I am back.

Update (9.20am): 50 basis points! The reasons for the cut were funding pressures and world growth falling. This is a mistake methinks.  We do a brief discussion of issues here.