Matt Nolan

Inflation targeting vs inflation trade-offs: What’s the score?

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

After placing down all the trade-offs between inflation and output, it was not clear that fighting inflation was necessarily the best cause of action. Although there are definitely costs from inflation, there are also costs from fighting it. Ultimately, it would be nice to have a method of dealing with inflation that got rid of these trade-offs, and just made us better off. One way we could try and do this is through explicit inflation targeting.

We have touched on the benefits associated with inflation targeting before here and here. However, now we will try to tie these benefits down amongst the costs and trade-offs associated with inflation and inflation fighting.

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Matt Nolan

iPredict and prediction markets

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Just been looking at the blog of the iPredict internet venture (site here, blog here). It looks like interesting stuff, and is definitely a good way of illustrating the “wisdom of crowds”.

One thing that did excite me was a “recession contract” (blog post here, contract details here). If it turns out that we have had a recession over the first half of the year then each share pays out $1 – otherwise it pays out zero.

As a result, you lose if March is revised up, and/or if the June quarter experiences real growth. While it seems quite likely that we have had a recession, the current contract price is $0.8661, which sort of implies that the market is pricing in a 86.61% chance of a recession. This appears to be a touch high – given that none of the partial indicators are actually out yet.

However, with petrol prices up 7% over the quarter, indications the drought will have reduced agricultural volumes further, and the fact that inventories in many industries were at high levels in March (and the market is working with production, not expenditure, GDP) I suppose betting that there was a recession is fairly safe money 🙂

The main risk in my mind isn’t that the June number will be negative, but that March might be revised up into positive territory! You just can’t trust those danged seasonally adjusted numbers 😉

Matt Nolan

Could Wal-mart help small business?

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Over at Anti-dismal, Paul Walker notices an article by Andrea M. Dean and Russell S. Sobel which show that the regions with a Wal-Mart tend to have a higher number of small enterprises (with 5-9 employees) than regions without a Wal-Mart. The same trend holds (albeit more weakly) for businesses with 1-4 employees, and the trend is flat for self-employment.

This is an interesting result, given that the majority of the public tends to believe that the existence of stores such as Wal-Mart and the Warehouse have driven mum and dad retailers out of business. Now we could argue about whether having large stores drive out small stores is a good thing or not (I think it generally is), however this article suggests that there may not even be a trade-off, in which case society should stop hating on these large firms for “destroying mum and dad stores”.

As a result, lets ask ourselves what the article’s cross-sectional data means.

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Matt Nolan

Why are we using market mechanisms to fight climate change?

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Over at No Right Turn, Idiot/Savant appears to view the idea of using markets to fight climate change as a touch silly. This view is captured in the following quote (here):

What’s important is that we reduce emissions now, not whether our chosen policy is perfect and cleaves to neo-liberal orthodoxy.

Now I think this skepticism of using a market mechanism stems from the way he views the issue of climate change policy, take for example this quote: Read more

Matt Nolan

July 08 OCR reveiw preview

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So on Thursday the Reserve Bank decides whether to cut interest rates or not.  Last I heard the market is pricing in a 56% chance of a cut, while economists are picking a 45% chance (I’m surprised its not 50% 😛 ).

Now I think it is clear from the writing on this blog that I don’t think we should cut – but this preview isn’t about what I think SHOULD happen, but about what I think WILL happen.  Ultimately, I don’t think that they will cut on Thursday – however, the September meeting is looking good for a cut.

There are a number of reasons why I think they won’t cut:

  1. This is the start of an easing cycle.  It is nice to start an easing cycle with as much information as possible, July is a OCR review date, not an MPS date (when they release their forecasts) – as a result, if they cut in July they will be unable to “guide” the market as to the length of cuts they expect to make.  Cutting at the same time they release new forecasts will give them this “guiding” opportunity.
  2. Labour market data is out in August.  Given the fact that inflation expectations are rising and given the length of time that non-tradable inflation has been out of the bag, the Bank will probably want some confirmation that the labour market is easing, before easing themselves.
  3. They will not want to terribly surprise the market with rate cuts because of how close we are to the election – as they want to keep the image of political independence.  Given that July would surprise many market participants but September wouldn’t, it seems a fair bet that they will wait.
Matt Nolan

One year of TVHE

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Yeppie, we have been around for a year.  It all started with this post from Rauparaha (although to be fair there was an introduction post along the lines of this one which got mysteriously deleted).

Don’t have much to say other than that – hopefully the ramblings of a bunch of economists has been useful to someone.

Don’t forget – if you want an issue to get the “economics treatment”, just contact us (details in the about us section).

Also there is a housekeeping matter. If anyone changed their link to us from http://tvhe.wordpress.com to http://tvhe.co.nz then they should probably change it back – we aren’t working from http://tvhe.co.nz anymore 🙂