Matt Nolan

A technical recession in New Zealand: What’s the big deal?

/3 Comments/in /by

Since the March quarter retail numbers have been released it has been apparent that New Zealand was heading down the road of a technical recession (two quarters of negative economic growth – seasonally adjusted). This has led the countries finance minister to once again admit that a technical recession is likely – (something he admittedly said earlier in the year, much to my irritation at the time 😉 ).

By Tom Scott 20/06/08 (link)

The fact that we are so close to a recession that it has gotten the attention of foreign economists – in a sense we could be viewed as world leaders, in so far as we are the first developed country heading towards a technical recession 😉

For some reason or another the idea of a recession scares us. For example Queen Bee at the Hive is stating that it is imperative that the Bank now cuts interest rates. However, in order to understand whether cutting rates is appropriate, we have to ask ourselves – why are we suffering from a recession.

Read more

Matt Nolan

Liquor ban: Is there a rational

/13 Comments/in , /by

After reading this excellent post on the liquor store regulation idea on Kiwiblog (which aggregates the thinking of a number of other blog authors posts on the issue are found ,,,), I’ve decided to do a little thinking out loud about the issue.

Now, to analyse what it going on we have to ask why we want to have tighter controls on liquor outlets in the first place. From what I can tell, liquor outlets aren’t the direct cause of harm – the consumption of alcohol is. As a result, these measures are based on the causal link: More liquor outlets -> more liquor consumption -> more crime.

For fun, lets take as given that more liquor consumption leads to more crime. We still need the prevalence of more liquor outlets to cause more liquor consumption for this story to float. How does this work?

Read more

Matt Nolan

The overestimation of Pigovian taxes

/1 Comment/in , , , /by

Over at Anti-dismal Paul Walker points at a paper on Pigovian taxes by John VC Nye from George Mason university. In this paper Dr Nye makes the following point:

A claim about the optimal Pigou tax is a joint claim about the size of the externality and about the optimality of observed outcomes, not just the externality. Measuring the size of the observed Pigovian externality – even if done perfectly — is not a reliable guide to the proper level of the Pigovian tax because in a world of efficient transfers we will still observe some externalities

Now this is very true – if we sit in the world of partial equilibrium analysis (which a lot of Pigovian analysis is based on) for too long we can forgot the fact that markets do not act independently, and this is bound to colour our view on the correct level of the Pigovian tax.  At some level this is a critque of Dr Mankiw’s Pigou Club.

Read more

Matt Nolan

The value of value

/2 Comments/in , , , , /by

One of the major questions I face when discussing economics is:

Why do we feel that prices are the appropriate measure for illustrating the value someone receives from a product?

Now I only have a limited understanding of welfare economics, but I am going to attempt to discuss the issue anyway 😉 . If anyone more knowledgeable would like to correct me I would be happy to hear from them.

In a micro sense this idea could be criticised insofar as one person may have a lower “willingness to pay” for a product which may stem from having a higher opportunity cost (as they have a lower wealth level then other people) rather than truly receiving less value from the consumption of the good/service. If this is the case we may feel that we should re-distribute the resource from the wealth to the poor in order to increase the level of aggregate welfare.

Now accepting this relative ranking of preferences and the given endowment in the market this could be a suboptimal situation in terms of welfare. After all, we know that the poor person values both of these goods more than the wealthy person (assuming no linkages between them) so “total satisfaction” in society will be maximized by this implicit “redistribution” resources. However, this does not make the price mechanism pointless, let me attempt to explain.

Read more

Matt Nolan

Inflation targeting failure: Why inflation targeting?

/10 Comments/in , /by

Article from Dom Post on Saturday is here (*).

Other New Zealanders discussing inflation targeting can be found here (*) and here (*).

In order to make justify the defense of inflation targeting let me note down a few points about why inflation targeting is used and how it should work.

Read more

Matt Nolan

Why might the Fed lift rates?

/2 Comments/in , /by

There is talk that the US Federal Reserve may begin lifting interest rates again in August.

Now this is something that some commentators find unusual (*) (*). However I think it is consistent for Dr Bernanke to slash rates as he has and then turn around to tighten, given the way he views inflation targeting.

Fundamentally, we have seen two very different reactions to a domestic economic slowdown in Europe and the US. In Europe inflation targeting means sticking to your guns on the annual growth in price measure in the economy – and just looking at other economic variables as a secondary concern.

This view of inflation targeting is justifiable given the inherent commitment game that is required to stabilise growth in the general price level in the economy – however, from a welfare maximising point of view it “may” be too black and white.

In the US, Dr Bernanke is also a proponent of inflation targeting (book and a good speech). I get the impression that he enjoys inflation targeting for its ability to anchor inflation expectations – giving the bank the chance to “deviate” from its mandate temporarily to ease economic conditions.

However, this view of inflation targeting has one major catch – the Bank must stay credible! Read more