A pet hate of mine is that we use CPI to discuss inflation – without recognising the pitfalls. My solution would be to make a real inflation measure, which is something the dynamic factor model at the RBNZ is trying to do.
I discuss this reasoning in more detail in an article for Idealog here.
With a three-day weekend coming up, and a Rugby World Cup final, I published an economist’s guide to drinking responsibly in the Dom last week. You can read it here. What are my tips?
So what tips do I have when it comes to drinking? I have already mentioned only taking out a small amount of cash. You can also dress down and not take your ID (depending on your age and the types of bars you go to), or you could take up a Saturday morning activity. Feel free to thank me in advance for your much reduced hangover.
If you want to know how I got there, you’ll have to read the article 😉
I know we hear a lot about what “monetary policy is” in New Zealand. According to our media monetary policy can make our incomes the same as those in Australia, make the price of everything move in our favour, build us new houses, reduce our reliance on foreign everything, increase and decrease house prices, and make us generally happier.
Now, as readers of TVHE you have seen past this rouse, and you recognise that monetary policy is independent cyclical policy that is intended to ensure that “inflation” stays at a certain rate and that shifts in output due to “aggregate demand” are kept to a minimum. Again, this is a simplification – but it gives us our role, something we have discussed in more detail here. [BTW, there is a good post on discussing the right practical target variable here].
When thinking about what real inflation is we get to the point that “inflation” is very much driven by expectations. As a result, the goal of the monetary authority is to anchor inflation expectations! This is exactly the point made here, and it is true – Chuck Norris and the central bank have a lot in common.
When we understand this, we can get an idea of what to do when we are in a liquidity trap. Simply put, say you are going to violate the target and target a higher level – or find a way to commit to it if needs be (thereby getting those real interest rates down – something that has been forgotten recently). There is wide agreement among economists on this from the left and the right, and yet peoples refusal to look at monetary policy in this frame is stopping society from putting in place the correct monetary policy/framework.
However, we can also get an idea of the real issues in monetary policy – do we really understand how expectations are formed? Do we really have a way of measuring commitment by a central bank? Do we get commitment of the target, or of the institution, when we do this? Even so, it is off this true base of understanding that we can analyse the issue – instead of the ad hoc and patently ridiculous things that are written about monetary authorities a lot of the time.
Note: Good post here discussing monetary policy in terms of expectations and co-ordination – good links at the end as well.
In a good post by Doug Reich (ht Not PC) he discusses why the current protests appear to have a great deal of “protesting for the sake of it” rather than having explicit – or testable – desires.
The dangerous thing with such protests is the ability for someone to capture the crowd with a false goal – coming up with a solution that is not good just because it can be sold via an underlying urge of the protesters to do something that makes them look altruistic … or more generally makes them look like they were part of some change.
Unlike Doug, I am not willing to call this a problem of the left – instead, this is what I view as a problem of holism – something that exists among all political groups. For example, the “right” in New Zealand have their measurable goals – meaningless targets that are not based on anything, targets that give them the satisfaction of thinking that are causing progress (here, here, here).
Before we can really say what change in desirable, we need to understand WHY things happen and HOW changes to organisation and policy have an impact on them.
Doing this is hard – it is costly. People want the satisfaction that comes from “feeling like you are progressing society” without taking on the cost of actually thinking about the policies – as a result there is an incentive to demand change more often, and with a smaller amount of understand, than is actually “optimal”. This is obvious, it sounds obvious, people will tell me its obvious – and yet the logical conclusion of actually trying to have a real argument before pushing change is IGNORED by both the left and right.
Now some will say “its not ignored, there are studies/evidence”. But 99% of the time the studies or evidence that are used are either cherry picked, poor research, or were set up with the conclusion already in mind – forcing change down peoples throats in the face of this type of evidence is just as bad as protesting for no real reason.
When it comes to policy, the best changes we can make are in areas where we have the best understand and information – it just happens that we have the best understanding and information about ourselves. As a result, as a person our main focus on “change” and “fairness” should be within ourselves and related to our own actions. What’s that saying … be the change you want to see.
We all want to – and should – fight the inequity around us. But we can’t do this until we understand why it occurs and how it can be influenced. However, we can only get to this point by doing the hard yards and playing in the “lab in our minds” (and in conjunction with the research of other on these issues) and discerning what can be called “tendency laws“.
A willingness to work out these tendencies, and implicitly treat other people on the same intellectual level as ourselves, is the way to understand the need for change – not overwrought simplifications of what defines “others”, which appears to the basis of both the 99% protests and the push for a measurable GDP target for NZ.
I have previously stated that economists are like Jedis. However, I have recently realised the error of my ways – economists are obviously superior to Jedis.
In both disciplines you have a person trying to understand the nature of society and find what they can add.
Economists do the following:
Jedi do the following:
Seriously, the Jedi are a bunch of spoiled kids who are endowed with awesome power – wouldn’t getting them to run society be the same as just telling well meaning businessmen who grew up in a wealthy family to run society (although the business man is likely to be more balanced – as he actually got the chance to grow up, and is unlikely to still treat society in the way an 8 year old would). They may make some good choices, and they may do so with the best intentions – but both these groups are equivalent … even if many of the people who would rise up against the business man would welcome in the Jedi with open arms.