Gulnara Nolan

Do we need to lower interest rates to battle COVID-19?

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There is a lot of talk about a 50bp cut by the RBNZ in a couple of weeks due to COVID-19.  But what does this mean, and why are we cutting interest rates to battle a bad flu?  

In this post I am going to discuss the case for interest rate cuts during a natural disaster, to help to explain what demand shock they are battling and why this cut makes sense. The RBNZ already applied this logic during the Canterbury earthquake in 2011, so it is useful to think about COVID-19 from a similar perspective.

I’d like to thank the people I’ve chatted with about this issue to clarify what is going on – you know who you are, and I appreciate it.  The New Zealand economics community is wonderful!

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John McDermott

GDP forecasters: can we have your confidence intervals please

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There are many forecasts of how well, or otherwise, our economy will do over the next year. However, as a rule these forecasts are not very good at providing a candid account of the uncertainty that is present. Most forecasters simply provide a point estimate for what they expect quarterly GDP growth to be in the next quarter or so.

Unfortunately, the margin of error around these forecasts (if revealed) would encompass the possibility of a spectacular boom or a fairly nasty recession.  Let’s have a look at these below.

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Andrew Coleman

Manuscript untitled: Retirement income, tax, and NZ

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As many of you know, I have done a lot of work on New Zealand’s retirement and tax systems in the last decade. I have been attracted to this issue because New Zealand has tax and retirement income systems which are now substantially different from those in most high income countries. 

Standard economic theory suggests many of the choices New Zealand has made impose disproportionately large costs on current and future young generations. Of course standard economic theory may be wrong. Nonetheless, when a country adopts a path that is different from standard economic theory and normal international practice, it suggests that the path should be carefully investigated to ensure it is in an appropriate direction.

To this end I am planning to write a monograph, serial fashion. Over the next few weeks i propose to write the thing a few pages at time (in between a very busy lecturing schedule in which I am teaching four courses) and post them on this blog. My thanks to Matt and Gulnara for giving me this opportunity. I am not sure how far I shall get, but all feedback is welcome.

Feedback from younger readers is especially welcome, for reasons that will soon be obvious.

Here is page 1 – the good bits version – or, at the moment, the only bits version.

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Infometrics

Regional NZ’s exposure to China shocks

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It was interesting to see Gulnara’s post about the coronavirus and the potential implications for the New Zealand economy yesterday. In it she stated that – if we use SARS to understand any potential shock we need to correct for the way New Zealand’s relationship with China has evolved in the intervening years.

Given this we felt that it would be useful for us to share an article Brad Olsen wrote in February 2019 on regional New Zealand and China (which also helped inform Brad’s recent comments on the coronavirus here) – which may shed some light on this issue. The article can be found here, and is reproduced below.

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Gulnara Nolan

The economic impact of the coronavirus in New Zealand

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In a recent post I discussed the impact on the broad economy associated with the coronavirus.  However, this is only a starting point for thinking about economic impacts – the next question is how we can understand the composition of the shocks, how we can measure this in real time, and how we can consider the areas where policy is relevant.

This is something I want to discuss here.

In that regard the Spin Off just had a good article talking about economic consequences, and interest.co.nz also had a good piece talking to the bank economists.  Finally, Westpac released a bulletin that discusses what they think is important. This is a complement to their pieces as I want to use the same “demand” and “supply” shock analysis as I did in the prior post to bring some of these concepts out.

What I’m discussing below is how I would look at this sort of crisis in real time as an interested observer – I work in research not policy, so I see this as a chance to open up a dialogue with other interested people in the comments below.  Any insights you have would be richly appreciated.

Furthermore, as I just don’t have the data on hand I would like (again I work in research, not as a forecaster, an investment analyst, or a policy person) I can only talk about what I would use – if anyone has been using this data and can discuss trends it would be great to chat about this in comments!

Note: Thanks to Matt Nolan for discussing this with me, and helping me to get the right data sources for this post.

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Gulnara Nolan

Tax, cost of capital, and investment

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Last time I discussed the relationship between the cost of capital and investment.

Given that motivation, the goal of this post is to understand whether investment is responsive to changes in the UCC due to changes in tax settings. This does two things:

  • Provides evidence regarding whether the capital stock will ultimately be influenced by corporate tax policy changes.
  • Helps us understand how changes in the cost of capital can “shift” investment through time, thereby helping economic stabilisation. Note: The cost of capital varies with both taxes and interest rates, so this relates across to monetary policy!
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