The visible hand in economics

Archive for July 2008

As I said, I will discuss the RBNZ speech from yesterday.

Personally, I thought the speech was spot on – Dr Bollard understands the issues associated with inflation targeting, but he also more than understands the benefits.

Look at this statement surrounding oil prices shocks:

Instead, the key policy requirement in this situation is to allow the initial externally driven relative price changes to occur, but keep monetary policy sufficiently firm to ensure that generalised second-round inflation effects do not take hold – in other words, to keep inflation expectations anchored.

This is all I wanted the Bank to say in their latest statement – that they would react to the second round of price increases stemming from an increase in oil prices if it occurs. Tell the market that, although the CPI figure looks bad, once we’ve cleared the recent shocks inflation will again be the primary concern.

Furthermore, the Bank damned alternatives to inflation targeting – specifically:

Another alternative that could appear superficially attractive is to require monetary policy to target multiple objectives such as growth, employment, export and the balance of payments. This was the approach taken in New Zealand and many other countries in the post-war period up to the early 1980s. It inevitably had a short-term focus, and resulted in stop-go policies and high inflation. We now know that one instrument cannot succeed in achieving multiple objectives over the cycle. The move to inflation targeting, with its single, clear objective, resulted from the lessons learned in that period. We do not want to re-learn those lessons.

Very good πŸ™‚
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I’m currently in the US on business/visiting family and thought I might share with our kiwi readers back home some interesting things (from an economics perspective of course!) that I have come across in my travels. I’ll post any other random things I come across while in the land of the free.

A few things have jumped out so far:

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The Standard(*), No Right Turn(*), and Hard News(*) have all commented on a graph showing the declining share of labour compensation in national output over the period 1981-2002. The claim/implication is that right-wing policies have contributed to the drop in labour’s share, and that the Labour government’s policies have reversed that trend somewhat in recent years. Does this explanation make sense?

Source: Stats NZ (national accounts)

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According to the Rates Blog, Dr Bollard will be doing a speech on “Flexibility and the Limits to Inflation Targeting”.

I am looking forward to the speech – it is an important issue, and Dr Bollard and the staff at the RBNZ definitely know what they are talking about.

Generally I have shown myself to be an inflation hawk and passionate lover of inflation targeting (*) (*) – but I am looking forward to hearing the arguments provided in this speech, and will be more than happy to be proven wrong if that is the case πŸ˜‰

I may write about the speech at some point – if there turns out to be anything of great interest in it.

Update: The speech was very good – I will comment tomorrow, another commentator is writing something tonight and I’m not a fan of having more than three posts a day on the blog πŸ˜‰

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Over at Econlog they mention a uncomfortable question that is asked at Instapundit:

If somebody offered us our current income tax system for the first time, would we buy it?

Now when we have defended progressive taxes on this blog we have often assumed that it is a revealed preference for society – in fact this is a favored measure we have for actually revealing (to some degree) what is optimal (here, here, can’t actually find any of the tax posts πŸ™‚ ).

How could this work? How could we have a system that is not optimal.
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In a discussion on our trade balance frog blog states that mainstream economists won’t talk about the import side of the ledger. Now I’m a mainstream economist (I think I should put that on my business card πŸ™‚ ) so I decided that I should take up the challenge.

So lets have a look at the tables. First I will discuss Frog Blog’s claims about the import series, and then I will discuss the way I see it:

Update:Β  Anti-Dismal captures the essence of confusion surround the issue of exports and imports here, fundamentally reminding us all that it is consumption that is good – not employment per see (the end is the target, not the assumed means!).Β  Very good πŸ™‚

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When people look at government they often see a group of people that they feel are responsible for taking care of the country. Looking deeper, some people see a representation of society that is supposed to do what is in the social interest. Looking again we might see an organisation who is dominated by interest groups and competes with other institutions for resources in the national economy.

All these views of government are true. This does not make them evil or virtuous, they are merely a central component of the current social structure.

Now no matter what view you have of government, there is one thing you are likely to believe – that government should do what is in your countries best interest. However, is this right?

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Following the freezing of Hanover finance’s finances we have heard that the National Australia Bank, and the Australia New Zealand Bank have both had to increase provisions for bad debt (NAB, ANZ).

These revelations put the relatively dovish stance of the RBA and the RBNZ in perspective – after all, central bankers are more than aware of the fact that the Great Depression was, at least partially, the result of a collapse in the banking sector which exacerbated a tightening in credit conditions. In a sense, the credit crisis in Australasia is now as bad as it has been in modern times – even if (arguably) things are improving in other parts of the world.

Even so, every time I attempt to pat the RBA or RBNZ on the back a couple of phrases come in the back of the head and prevent me, these phrases are “moral hazard” and “inflation”.

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Idiot/Savant disputed our claim that market mechanisms are the best way to fight climate change on pragmatic grounds – namely stating that a regulatory solution that works would be better than a “market-based” solution that does nothing. Now I don’t disagree with this – however, I do think that I/S heavily mis-represented both our claim, and our initial criticism of what he said.

As comments are disabled on I/S’s blog No Right Turn, I have to reply by way of a blog post πŸ™‚

In this post, I/S makes a number of claims I would like to dispute:

  1. We accuse I/S of anti-market bias for considering regulation,
  2. We state that a market mechanism is always superior to regulation,
  3. The argument is whether regulation is better than nothing – not better than the ETS,

Now it is best to answer these claims backwards – lets start with 3:

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Over at the excellent intersection between anthropology and economics blog, there is a discussion about the Lil Wayne, his latest album, and how this fits into the idea of a gift economy.

[Disclaimer: I haven’t listened to Lil Wayne, so my knowledge on the marginal benefit of his music is severely limited.]

Here the question is asked:

Specifically: who’s going to buy this album when they have been so generously gifted with Carter’s work for free?

But it has been popular – very popular. This raises the next query:

It may be that Lil Wayne has succeeded here because he is, in the opinion of Rolling Stone, the “best rapper alive.” If you are this good, ubiquity and generosity have no penalty. Free for all or fee for all, it doesn’t matter. We have to listen. But intuitively this seems wrong. Surely the incentive for “giveaways” should be more pressing for lesser talents.

This is what I would like to discuss more, in context of a “gift economy”.

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Hi all,

Does anyone know why ASB cut mortgage rates following the OCR decision? Bank credit funding costs have been going through the roof – which is why the RBNZ felt that it needed to cut the OCR just to prevent large increases in mortgage rates!

I’ve heard that Kiwibank can cut rates because of the large amount of domestic funding it has under its thumb. I was wondering if there is there something specific to ASB that has allowed them to cut rates? If anyone has any idea I would love to hear from them in the comments.

Update: Westpac as well – still only the two year rate though, so it could still be viewed as “cheap” advertising.

Update 2: According to Good Returns this was the interest rate action:

Following the Reserve Bank cutting the official cash rate by 25 basis points last Thursday, ASB, TSB, Bank Direct, Sovereign and Westpac all reduced their two-year rates.
ANZ and National Bank broke ranks with their competitors and announced they would cut one year fixed rates as well as two year rates. Their two year rates came down 25 basis points to 8.95% and their one-year rates are down 20 points to 9.20%.


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

With the trade-off between inflation and other things behind us, and a justification for inflation targeting, we have a good base to discuss current activity and issues. The aim is to now discuss other methods of fighting inflation – however, before discussing this I think it is important to discuss another technical issue: How do we measure inflation?

This is both an incredibly important issue, and a highly contentious one. While I was going to write a long post on this, Dr Chinn at Econobrowser beat me to it (and also did an infinitely better job than I could have πŸ˜‰ ). Dr Chinn discusses how we use the CPI to measure inflation, and the limitations of this measure (especially in terms of individuals expectations of what inflation is!). As a result, he covered all my main points πŸ™‚

However, I will write some additional stuff anyway πŸ˜‰

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So the Reserve Bank has cut interest rates.

If you normally read this blog you will know that this disappoints me – and I am grateful that both of you understand the pain I’m going through πŸ˜‰

There has been a lot of commentary on the Reserve Bank’s decision, which I will link to before moving into my own discussion (TUMEKE!) (The Inquirying Mind *) (The Hive) (Not PC) (The Standard) (Kiwiblog *) (No Minister *) (Colin Espiner) (Show me the money) (Jafapete). I am happy to see so many New Zealand blogs willing to discuss the issue – even though my views may be quite different πŸ™‚

Now let me tell you what I’m thinking:

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So the Reserve Bank cut interest rates to 8.0%.

The only new information that has come out since June is a higher inflation outcome as a result of larger than expected increases in petrol and food prices. Furthermore recent increases in funding costs have helped to convince the Bank to cut.

Even ignoring inflation, it appears that the Reserve Bank values the livelihood of those who have mortgages above people who are struggling to pay their food and fuel bills (which will go up, as a lower exchange rate will increase the New Zealand price of both).

Good Bloomberg piece here.

More discussion to come later (the additional discussion has now appeared).

Cactus Kate states that men should pay the bill when taking a woman out – because of the substantial expenses associated with being a woman.

As an economist, I’m not so sure if this does it – after all, aren’t these all sunk costs, which implies that they shouldn’t have any impact on the final negotiation at the end of the night that determines who should pay the bill for the date.

As a result, the demands that Ms Kate place on men to pay the entire bill, based on these costs, may seem somewhat “irrational” (I hate that word).
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