Matt Nolan

Re-thinking interest rate policy: Asking for submissions.

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

So Trevor Mallard is suggesting that New Zealand “re-thinks” its interest rate policy.

Now his statements that the currency is a “one-way bet” is thinking that is associated with the NZX, while his statement that higher interest rates may have caused the housing bubble is the thinking of Berl – they both stem from submissions to a monetary policy review by the Parliament’s Finance and Expenditure Committee.

In fact, at the time I wrote about both of them, here for NZX and here for Berl. Overall, I felt that both of these organisations were completely wrong – which is why I’m so troubled that the current government has decided to follow their ideas.

Now given that I have discussed this business before I would like you guys to leave some comments saying what you think about the monetary policy framework and how you think it could be improved. I will then write some posts discussing the issues raised. Hopefully some people actually comment to this post :p . Please please please, write what you think 🙂

Note: I am not going to comment on this post, although I will be reading all the comments and thinking about them. Furthermore, and other blog members may comment. Feel free to say whatever stuff you feel about inflation and policy on it, and I will try to pull it all together later on.

Links to other posts discussing this issue can be found under the flap:
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jamesz

The value of endowment

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Well, we don’t run a requests service, but never let it be said that we don’t try to give our readers what they want (or what we want them to want, anyway). The Standard asks us to have a chat about this piece in The Economist which discusses endowment effects, so here goes.

The first question to answer is probably, “Endowment effects?! Wot’s that then?” Read more

Matt Nolan

The Economist’s Inflation expectations primer

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The Economist has an excellent piece on inflation expectations (*) (ht Anti-dismal and the Economist blog). In it they mention some of the difficulties of using the inflation expectation measures as a gauge of inflation, namely:

  1. The problem with survey measures: Consumer often mis-interpret inflation, and take increases in the price of certain goods (eg fuel and food) as inflation – ignoring the reduction in the price of other things (appliances).
  2. The problem with market measures: Perceived risk also drives the same measures – implying that there can be biases.

Now I agree in large parts with what they have said, however I think they “over-sold” the first case. Read more

Matt Nolan

New Zealand March 08 GDP

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So the economy shrank 0.3% over the March quarter (or 0.6% if you buy the expenditure measure instead) – the appropriate tables are here (*).

This was bang on expectations. The stock boost we talked about was there, but everything else was sufficiently bad that it landed on expectations anyway 🙂

What concerned me was the GDP deflator (the fourth table) – 5.8% annual growth, highest since June 2001, when our dollar had tanked and inflation was sitting happily outside the target band. The aggregate supply story that I’ve shown my affection for is still running wild (*) (*) – temporary reversals in growth over the coming quarters and rising inflation.

Consumer confidence is in the toilet (*) (*) but this is because of significant price increases in food and fuel – cutting interest rates now will simply lead to bigger increases by reducing the value of the New Zealand dollar. Once lower interest rates do feed into consumer demand (once effective mortgage rates start to fall and exporters are able to change their fixed rate contracts), the drought will be well over, and economic activity will “attempt” to shoot upwards, capacity pressures will reappear, and inflation will be out of the bag. Ohhh well.

Update:  Other New Zealand blogs talk about the figure: The Standard, The Hive.

Matt Nolan

Should we thank god for our farmers?

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In an interesting move, Federated Farmers president Charlie Pedersen stated that we should “thank god for the (food) producers” (*) in New Zealand, for providing us with food and/or wealth.  Now I have to admit, I find this attitude a bit ridiculous.

Don’t get me wrong, agricultural products do create a lot of wealth, hell meat and dairy alone accounted for 29% of our exports over the year to April (Source).  However, doesn’t the farmer and the other people involved in the production process extract the surplus from this trade?

They produce these goods out of their own interest – this is the beauty of free exchange.  However, I don’t start praising to the high heavens about people I buy things off.

The idea that farmers are creating wealth for us stems from the “multiplier“, whereby a small increase in a countries wealth turns into a greater return over time, helping everyone.

However, the multiplier idea is borne from the concept that demand creates its own supply – hardly a realistic assertion in economics, which is supposed to be the study of scarce resources.

Also remember that if the land and resources were not used for farming, they could be used for something else – as a result of this opportunity cost from farm production, the reduction in wealth will not be as severe as some may suggest if the farmers decided to stop producing in the face of our “lack of appreciation”.

Ultimately I feel like Mr Pedersen is saying, “farmers own a large number of the resources, and so we should thank god that they use them well” – when I frame it this way the claim seems ridiculous!

Matt Nolan

Are New Zealand’s inflationary pressures contained: The nominal wage evidence

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Greg Mankiw has an interesting post on what would make a good inflation target (ht CPW). According to work by Ricardo Reis and himself, aiming at the nominal wage is a good way of ensuring the highest degree of price stability – according to models calibrated to recent US data (paper here *).

Using this conclusion he shows a graph of private hourly compensation growth and states that inflationary pressures in the US are not as much of a threat as some analysts are positing.

If the same implication held in New Zealand (which there is no assurance of), how would we be looking:

Source, QES wage data Statistics New Zealand (*)

Not so good it seems 😛