Matt Nolan

ECON141: When cash rates go negative

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Last time I discussed how the cash rate influenced the interest rate.  But what happens when the cash rate goes negative?  This is the focus of today’s post.

After recent discussions about “negative interest rates” across Australasia I thought it would be useful to talk about how these rates appear mechanically at a high level (in terms of financial system operations).

In class (and Gulnara’s posts here) the motivation of why negative interest rates might be appropriate in a policy sense was raised.  Furthermore, she did a great job of noting that it is unlikely that negative rates will cause additional savings (as some have claimed) and so theoretically we can continue to think about our investment model with negative interest rates.

For this post we will assume that the central bank is trying to influence interest rates towards a level that will “close the output gap” or “push Y to its sustainable level” and achieve their inflation target, and it just happens that this interest rate is negative.

The wrinkle is that we achieve this negative interest rate through a settlement cash mechanism – so we need to ask, how do negative rates in settlement cash accounts translate into lending and actual interest rates?

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Matt Nolan

ECON141: The cash rate and interest rates

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Hi ECON141 students.  Unlike ECON130 there isn’t weekly material on this site, with lecture notes being provided instead.  However, I will add the occasional piece to help give what we are doing some context – so that it can be used to understand what is currently happening.

In that vein, today we are going to talk about how the central bank does influence the nominal interest rate in New Zealand (as compared to our still useful discussion of bond purchases in class).  By doing so we will also be able to ask about “negative interest rates” in a later post.

It should be noted that none of the content I cover here is assessed – you will be assessed on what we do in class and in the lecture notes and readings. Instead the purpose of this is to add a bit more detail about things for students who are interested.

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Gulnara Nolan

Is the NZ dollar 23% undervalued?

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The recent data from the Big Mac index indicated that, in New Zealand a Big Mac costs $6.60 NZD.  However, in the United States it costs $5.71 USD.  As Stuff.co.nz notes this implies an exchange rate of 1.16 in USD/NZD terms (a US dollar is worth 1.16 NZ dollars) if the price of the Big Mac is the same in both countries.  

But instead google tells us the exchange rate is 1.51, and so the New Zealand dollar appears approximately 23% undervalued.  But is that true?  Should global currencies adjust to set the price of Big Macs equal in every market on earth?  Let’s think about that a bit more below.

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Gulnara Nolan

How many New Zealand jobs can be done from home?

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The pandemic confined the vast majority of us to work from home during the quarantine period. However, there are certain types of occupations such as masseuse and hairdresser that can not be performed from home. Inspired by the recent NBER paper on how many jobs can be done at home,

I have calculated rough estimates for New Zealand regarding the labour markets capacity to work from home.  Applying the same industry correspondence to New Zealand (based on LEED data) and using the US weights (so assuming the same ability to work from home by industry) I have calculated that 31%-36% of jobs can be done from home.

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John McDermott

Keeping track of the business cycle

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Business cycles, the phases of expansion and recession in an economy, are a durable feature of macroeconomic data. Typically, quarterly real GDP data is used to determine the phase of the business cycle we are in. Learn more by reading this new post on how to sustain your business.

Unfortunately, official New Zealand data on quarterly GDP does not go back very far in time, limiting our ability to understand recessions and expansions. Here I want to share some work I’ve done trying to build a consistent GDP series for New Zealand that goes back until 1947.

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Matt Nolan

Understanding Wellington and toilet paper

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Toilet paper has been running out all around the world, with Australian’s genuinely fighting over it in supermarkets – and there has been a big show about it in the news.

This leads to some interesting thought experiments such as:

https://twitter.com/dandolfa/status/1236708527491645440

And yet, here I am in a big Wellington supermarket. It has:

  1. lots of toilet paper,
  2. specials on all the toilet paper!

This doesn’t seem to make sense. If concerns about COVID-19 are driving people to panic buy toilet paper we know that the demand curve has shifted right, and prices should have risen! So what is going on. Lets put our economics hats on and find out 🙂

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