Infometrics

Small New Zealand: It’s advantages and the growing importance of trade

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Matt Nolan discussed the benefits of trade for a small open economy on Rates Blog (Infometrics copy here), and some of the specific factors for New Zealand.  Namely, the fact that New Zealand’s comparative advantage is in a homogenous product, where New Zealand as a whole only provides a tiny amount of the world’s supply.  In this context, if demand or supply changes in our of New Zealand’s target markets it is relatively easy for dairy or meat producers to slip the products somewhere else for a slightly lower process (relative to if New Zealand sold very specific goods within a global supply chain).

New Zealand’s small size and exporters reliance on homogenous goods actually makes the country relatively resilient to global economic shocks – an important point to keep in mind when demanding that the government interfere to “restructure” or “rebalance” the economy.

However, he does touch on the idea of terms of trade shocks, and the justification for insurance.

Then Matt wrote up a guest Top-ten at ten last week.  In this, he focused on trade during the Great Depression and now – before swinging to a couple of posts by Aaron Schiff and Eric Crampton discussing the importance of competition to domestic industries.  That can in turn be expanded by thinking about services and the changing nature of scarcity.  At the end of it all he concluded:

We are moving into a world where trade in services is becoming more important, more valuable, and where it is removing the burden of distance from New Zealand firms.  The fact the world is changing, and that New Zealand firms and households have to be prepared to change with it, is an important point to keep in mind – both in terms of what we can expect, and what policies government should be putting in place.

Matt Nolan

Confusion on income and poverty

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I have heard this sort of claim quite a bit from friends in recent months:

Doesn’t that sound grand – if the richest 100 people in the world gave up a quarter of their income then SLAM poverty gone.  Ez.

However, this isn’t quite right.  In fact it is very much not right.

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Matt Nolan

That’s it, I’m done: RBNZ takes the path of discretion

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A paper from the latest RBNZ bulletin.

It has always been clear that the aim should be to increase the resilience of the system to adverse shocks, but is it possible to be more ambitious? The traditional prudential approach has had a strong focus on shock-absorbing capacity; for example, increasing capital requirements so that banks are better able to absorb loan losses. This approach largely takes movements in credit and asset price cycles as a given, and aims to provide an adequate safety net should systemic risks be realised. A more ambitious approach is to try to reduce the amplitude of the financial cycle – in a sense lopping off the extremes of the cycle. Swing low but not too low; swing high but not too high. The potential benefits of this approach are obvious but it is also much more demanding, as it requires the authorities to answer some difficult questions.

Hmmm.  This seems to be saying that simply ensuring the resilience of the financial system is not enough, the central bank should be trying to exert direct, and discretionary, control over what financial markets do and where investment heads.  Fine tuning at its finest.  It does appear that policymakers here have been strongly influenced by Borio.

That’s me, I’m done with writing about macroprudential policy in New Zealand.  If you want to know why, read below the flap 😉

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Matt Nolan

Where does the burden of proof lie?

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Antonio Fatas discusses inherent bias in economics given our reference point – an important issue, and one that economists need to think on (Note:  James wrote on this as well – we did our posts separately, so are focusing on different points).  Specifically:

This subtle (or not so subtle) bias in economic analysis is my biggest source of frustration with my profession. Not being able to predict crisis, the stock market or exchange rates does not bother me, it is just a reflection of the limits of our knowledge and I can live with it. But using the same naive predictions of models that refer to a fictitious world as the reference and only moving away from them when someone produces an unquestionable piece of empirical evidence is in my mind the true cost of our profession to society.

His post raises good points, but I suspect that what he is laying out runs into the same problem many of us run into when using models to think about policy and the impact of policy – we are not being clear on where the “burden of proof” lies or what we think about assumptions.

Now I like his writing, and this is a good post, but I have a bit of a different view on what economists do with reference to this.  Perhaps New Zealand economists are a bit different?  Essentially, the question of burden of proof is usually treated as a central part of how we frame and discuss policy questions in New Zealand, so it becomes part of the way we discuss models.

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jamesz

How do we deal with evidence? Badly.

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We deal very badly with empirical falsification of our reference model:

Many of these assumptions are unrealistic but they are justified as a way to set a benchmark model around which one is then allowed to model deviations from the assumptions.
…
the problem is that the model becomes (or has become) the reference in a way that sets a high burden of proof for any deviations from it. If you think individuals are not rational, go ahead and model their behavior but you should do it in a way that is realistic and backed by data (good luck). Read more

Matt Nolan

Endogeneity is one of the advantages of economics above naive heuristics

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Sometimes you hear a comment that helps you see that something may be unclear, when economists may not have thought it was previous:

(ENPOG here stands for endogenous potential output gap)

The statement in that tweet made little real sense to me [Note, I could build an explanation – say that the endogenous credit cycles he’s saying have some impact on measures of potential output, so that you get a non-inflationary cycle. Of course, this doesn’t say too much – unless you are willing to take it as far as Borio. But remember with all this we are talking mainstream economics again …].  In the same way that I found it weird how people went on and on about endogenous money/credit as a way of seemingly winning a myriad of entirely different arguments!

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