Matt Nolan

Price indicies: A discussion

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Note: Other posts in this discussion are available under the tag “inflation debate“.

With the trade-off between inflation and other things behind us, and a justification for inflation targeting, we have a good base to discuss current activity and issues. The aim is to now discuss other methods of fighting inflation – however, before discussing this I think it is important to discuss another technical issue: How do we measure inflation?

This is both an incredibly important issue, and a highly contentious one. While I was going to write a long post on this, Dr Chinn at Econobrowser beat me to it (and also did an infinitely better job than I could have 😉 ). Dr Chinn discusses how we use the CPI to measure inflation, and the limitations of this measure (especially in terms of individuals expectations of what inflation is!). As a result, he covered all my main points 🙂

However, I will write some additional stuff anyway 😉

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Matt Nolan

July 2008 official cash rate cut: The long and winding road

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So the Reserve Bank has cut interest rates.

If you normally read this blog you will know that this disappoints me – and I am grateful that both of you understand the pain I’m going through 😉

There has been a lot of commentary on the Reserve Bank’s decision, which I will link to before moving into my own discussion (TUMEKE!) (The Inquirying Mind *) (The Hive) (Not PC) (The Standard) (Kiwiblog *) (No Minister *) (Colin Espiner) (Show me the money) (Jafapete). I am happy to see so many New Zealand blogs willing to discuss the issue – even though my views may be quite different 🙂

Now let me tell you what I’m thinking:

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Matt Nolan

Inflation targeting vs inflation trade-offs: What’s the score?

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Note: Other posts in this discussion are available under the tag “inflation debate“.

After placing down all the trade-offs between inflation and output, it was not clear that fighting inflation was necessarily the best cause of action. Although there are definitely costs from inflation, there are also costs from fighting it. Ultimately, it would be nice to have a method of dealing with inflation that got rid of these trade-offs, and just made us better off. One way we could try and do this is through explicit inflation targeting.

We have touched on the benefits associated with inflation targeting before here and here. However, now we will try to tie these benefits down amongst the costs and trade-offs associated with inflation and inflation fighting.

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Matt Nolan

The paradox of petrol prices and inflation

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Explain this to me. According to some New Zealand retail banks:

If petrol prices increases, it will slow the economy, which will reduce inflationary pressures, and this will allow the Reserve Bank to cut interest rates.

If the petrol price falls, imported costs are lower, which will reduce inflationary pressures, and this will allow the Reserve Bank to cut interest rates.

Why are some people willing to take contradictory pieces of information as proof of their own fabricated story – this disappoints me. Come-on guys, lets be less reactive and lets use our awesome tools to give New Zealander’s better information!
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Matt Nolan

“When the going gets tough, central banks hope for a miracle”

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Great article here: (ht Bayesian Heresy)

http://blogs.ft.com/maverecon/2008/07/when-the-going-gets-tough-central-banks-hope-for-a-miracle/

Key points for me were about the “dual supply shock”:

  1. Don’t react to the relative price movement – react to it’s impact on inflation expectations,
  2. Recognise that this relative price movement implies a lower potential rate of output when looking at your output gap (*).

I think we sometimes forget about the second point – but it is very important given what is currently going on in the world.

Matt Nolan

Money supply, leading indicators, and recessions

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Not PC has a very interesting post on identifying recessions. Using a special measure of the money supply as a leading indicator he shows that a large fall in this measure usually implies a recession (*).

This makes sense as a recession is a time when money demand falls rapidly. As the stock of money is determined by an exogenously set price and a money demand curve we would expect “money supply” in this stock sense to fall rapidly.

I disagree with his articles conclusion in the current monetary policy context (“the expansion and contraction of the money supply is the single greatest factor in causing booms and busts“) – but I do think that the method he points out is extremely clever. It is also a welcome reminder that monetary aggregates still give us some information – even if the information is all mixed up by definitional errors and technological change 🙂