Is the NZ dollar 23% undervalued?

The recent data from the Big Mac index indicated that, in New Zealand a Big Mac costs $6.60 NZD.  However, in the United States it costs $5.71 USD.  As Stuff.co.nz notes this implies an exchange rate of 1.16 in USD/NZD terms (a US dollar is worth 1.16 NZ dollars) if the price of the Big Mac is the same in both countries.  

But instead google tells us the exchange rate is 1.51, and so the New Zealand dollar appears approximately 23% undervalued.  But is that true?  Should global currencies adjust to set the price of Big Macs equal in every market on earth?  Let’s think about that a bit more below.

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Negative interest rates and saving

The latest speech by the RBA’s Governor Philip Lowe, they have ruled out negative interest rates as an alternative monetary policy option for Australia in the near future.

In the discussion, the RBA outlined the cost side of this tool, namely “They can also encourage people to save more, rather than spend more, so they can be counter-productive from that perspective too.”

I would like to discuss this further as it is contrary to how we often talk about monetary policy, and fleshing it out helps to make some of the assumptions made clearer. 

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How does wage stickiness contribute to the gender wage gap?

Today I am going to discuss the relationship between the gender pay gap and wage stickiness.

Wages are termed sticky when they don’t adjust to the optimal level driven by the changes in labour market conditions. The interaction between sticky wages and economic shocks helps to generate the business cycle, and also causes a lot of the most costly elements of an economic downturn – unemployment and losses in skills. 

As I have discussed in a previous post, prices as well as wages can be sticky. However, the focus here is on the inability for wages to change from a predetermined path – specifically the downward rigidity of money wages.

A strong reason why wages can be very sticky is unionisation.  Unions and employers both use size to generate a bargaining position to negotiate wages.  As part of this strategic negotiation, unions (at least in the Anglo-Saxon sense) tend to promote relatively sticky wages – and demand persistent increases in wages even when the economic cycle turns south.

But what does this have to do with wage inequality?

Note:  There are multiple models of unionisation and social assistance – Matty pointed out that the books “Varieties of Capitalism” and Chapter 13 of the Oxford handbook of the welfare state are a useful read for thinking about this.  The response of unions in Germany during the GFC and COVID show that the relationship between unions and stickiness is complex – and the assumption they are related is based on the experience of Anglo-American economies in the 1960-1980s.

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Is it time to promote working from home?

Over the past few weeks I’ve been working mostly from home as part of the COVID lockdown.  However, now with the move back to Level One I’m heading back into the office on a more full-time basis.  

In the first few days back, I have heard a lot of people from around the building talking about how they prefer different work arrangements – and I’ve heard a lot of people say that they felt more work was being done away from the office.  And yet, teams appear to be making the choice to move back to the office.  Why is this the case?

Although it may be the case that the teams stated and real preferences differ, I suspect there is something else at play – strategic complementarity.  Once we understand this concept it can become clear why we can end up in a worse equilibrium with regards to our work arrangements even when given flexi-choice, and why explicitly promoting working from home could be a “win-win”.

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ECON130 Week 10: Monopoly

In the first six weeks we described models of individual and firm choice, and given many individuals and many firms we were able to describe a competitive market.

In doing so we found that the outcomes in a competitive market allowed gains from trade – buyers who valued the products more than the sellers were trading with each other. But there were issues:

  • It assumed there were lots of potential sellers of a homogenous product whose choices have no influence on the choice of other sellers.
  • It assumed there were no systematic biases in consumer choices and ignored agency problems in production.
  • It took for granted full, or at least symmetric, information about the product and the market.
  • It didn’t incorporate the way the choice to produce or consume could impact upon a third party (externalities).
  • It assumed that the institutional structure ensured the product was excludable.

These assumptions do hold in some circumstances – and even when they don’t there could be a good reason we start with it (eg assuming a systematic bias without evidence is just assuming people are stupid – which isn’t a good starting point for trying to objectively understand their choices).

But we would like to think about other types of market structures we observe.

Since then we have built some more tools to think about choice – comparative advantage, finance, game theory, and emergent macro-phenomenon.

Armed with these tools we can return to our original market model and ask “what happens when there is only one firm – with the same motives and desires as the many firms before”. This is the case of monopoly.

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What is price stickiness, and what does this have to do with Chanel bags?

In this post I am going to talk about price rigidities/stickiness.  What do economists mean about price rigidities and how do we test them?  

On the face of it this sounds pretty simple – if prices change often then there doesn’t seem to be much scope for them to be sticky.  But when we think about it a bit more this isn’t true – and thinking about why it isn’t true can give us useful insights into the macroeconomy.

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