Matt Nolan

Housing and the economy: How does it work?

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Skimming Stuff this morning I noticed the headline: House price slump ‘drag on economy’.  I thought that it might be useful, or possibly even interesting to discuss how a cooling in the New Zealand housing market could weaken economic activity.

When thinking about this issue we gave to ask the following question – how does house price growth influence household/consumer behaviour? For people that own houses, higher house prices act as an increase in their level of wealth, and houses are an asset. If a households wealth level is higher then they are both willing, and more able, to borrow money now to fund consumption – given peoples incentive to smooth consumption over time.

In this sense a fall in house prices would have a ‘negative wealth effect‘ (and a liquidity effect) on households, which would lead to households tightening their belts and saving more. This (along with strong wage growth) is part of the reason that so many New Zealand forecasters expect private savings to increase (along with the impact of tax cuts).

However, something is missing here. Read more

jamesz

Doesn’t God love economists too?

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It seems the Catholic church has moved into the 21st century with the addition of a few new, and decidedly modern, sins. The new sins on the block are:

  • Environmental pollution;
  • Genetic manipulation;
  • Accumulating excessive wealth;
  • Inflicting poverty;
  • Drug trafficking and consumption;
  • Morally debatable experiments; AND,
  • Violation of fundamental rights of human nature.

I don’t want to be an alarmist, but this sounds like awfully bad news for Catholic economists. Read more

Matt Nolan

Externalities and Fed monetary policy

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An interesting article by Sebastian Mallaby discussed the contrary monetary policy strategies of the US Federal Reserve (cut rates to avoid a recession) and the European Central bank (keep rates elevated to avoid inflation). (h.t. Greg Mankiw)

In the article, Mallaby alludes to the view that the US Federal Reserve might feel that it is the greater protector of the world economy – this takes for granted the positive externalities to the rest of the world from the Fed cutting rates. These are:

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Matt Nolan

February 2008 Treasury economic indicators

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I normally don’t have much to say on the economic update provided by Treasury each month, as it is mainly just a look back at historical data. However, this time around they seem to have infused their release with negative undertones – suggesting that Treasury may be looking at providing a weaker set of forecasts than we have seen from the Reserve Bank.

This pessimism about the economic outlook was extended to some type of special report according to the link (if anyone knows the report he is talking about can they send me the link, please). Most interestingly they suggested that the recent growth in employment was the result of rising labour supply as people struggled to pay their bills. I found this statement of particular interest, as it feeds into the Treasury belief that non-tradeable inflation pressures are going to ease over the year (a belief I do not share). As a result, I wish to discuss it below the flap.

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jamesz

Vonnegut on taxation

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In the comments for my post on taxing observable characteristics that are correlated with income, CPW asks what I think about Kurt Vonnegut’s tale of Harrison Bergeron. I don’t plan to venture into literary criticism which I have no expertise in, but I liked the story enough that I can’t resist posting on it! Read more

Matt Nolan

Capital market intervention: How can we make it sound like a good idea?

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A post at Kiwiblog reminded me of an issue I have wanted to discuss for a while – the optimality of capital market intervention. In this post I aim to discuss some of the basic issues surrounding capital market intervention from a selfish-country perspective.  Furthermore, I want to paint a picture where capital market intervention is actually optimal.

As DPF mentions it is fundamentally unfair that we want other countries to allow us fair access to their capital, but we are unwilling to give access to our own capital. Although this is true, the government of New Zealand is elected to maximise the welfare of New Zealander’s – not the welfare of people around the world. As a result, we have to ask if such controls are in the interest of New Zealand itself. Note: I would like it if other countries in the world cared about other people – sadly governments are really just local institutions that have been created to increase the bargaining power of a select group, so this isn’t the reality of it.

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