Matt Nolan

Price asymmetry and my bus ticket

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A large debate in economics stems from the idea that there is a price asymmetry in the economy. What this implies is that prices are more flexible in one direction (up or down) then they are in the other direction.

The commonly provided example is petrol prices. People feel that when crude oil rises in price it is passed on immediately, but when it falls in price it takes time for the firm to react and lower petrol prices. This implies that prices are “stickier” downwards, and so the adjustment to two shocks opposite shocks is asymmetric.

Another example is housing. People find it psychologically difficult to accept that the nominal value of their house has fallen, so it tends to be harder for the nominal price to fall than for it to rise.

Now there are a large number of economists that don’t believe these asymmetries exist (I’m in the camp that I think the downward asymmetries are exaggerated). Overall studies have been inconclusive.

Now I think sticky prices exist, but I think we’ve also got an inherent bias to look at cases where they appear to be sticky downwards compared to stick upwards. I was reminded of this when I brought my Gold Pass for the bus in September.

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Matt Nolan

Are economists allowing us to wander towards the Great Depression II

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This was the feeling I got from Justin Wolfers at the Freakonomics blog and Dani Rodrik on his blog.

Both of these authors seemed to imply that our profession has:

failed to explain in clear language just what it is that credit markets do, and hence why it is so important that we fix them

However, I’m not sure I actually agree with this.

The above statement states that there is something “broken” in the credit markets – something that can be fixed.

Now when I hear the term broken and fixable in terms of a market, it tells me that there is some type of market failure – a market failure that can be solved through government intervention.

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Matt Nolan

Credit crisis outlines

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Over at Marginal Revolution, Tyler Cowen provides the world with a couple of useful posts:

  • His views on the credit crisis (here),
  • A couple of outlines of the crisis (here) – the first outline (here) is top notch and easy to understand.

I still feel that the main area where government intervention could be beneficial stems from the existence of an asymmetric information problem which is driving us towards a Pareto inferior equilibrium. In English, I think that buyers expectations have become sufficiently poor to put the credit market in a “downward spiral”.

However, in a broader sense I can buy Tyler Cowen’s point that the crisis is more complicated than we can possibly imagine – implying that it is difficult to actually pick how much of a decline in global economic activity will occur, and it is impossible to tell how much of an improvement is associated with solving the asymmetric information problem. However, isn’t this always the case with policies ex-ante?

Matt Nolan

Dom Post editorial: Outlook

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The Dom Post had a good editorial today – it can be found here. (ht the Hive)

While most economists out there appear to be turning to sensationalist comparisons of today to the Great Depression, the Dom Post has written a balanced editorial that captures how the ramifications in the credit market may impact us through the borrowing channel – namely, higher interest rates for a highly indebted nation.

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