Matt Nolan

We now have insurance based on risk!!

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Thanks goodness – they have changed the deposit insurance scheme such that the premium depends on risk!!!!

We have discussed that here (*, *, *, *).

Also they have capped the amount you can insure at $1m – very good.

The one concern left is the wholesale market. With no wholesale insurance available the wholesale market for funds is threatening to dry up. With many other countries doing it we have a problem – because of other nations choice to insurance wholesalers domestic credit for banks could dry up.

However, I would like to point out that there is unlikely to be a “bank run” on wholesalers, and as a result if they were willing to pay market rates for private insurance I’m sure they could get it – as a result in of itself government wholesale insurance is not a good idea. As a result, the only reason for doing it would stem from this “international prisoner’s dilemma” – something the Bank must not see as a sufficient threat.

Matt Nolan

NZ Rate Cut October 2008: 100 Basis points

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So the OCR is now down to 6.5%. This was in line with market expectations given recent credit market turmoil.

According to the statement “ongoing financial market turmoil and a deteriorating outlook for global growth have played a large role in shaping today’s decision” – consistent with the view of the market

Although I was unimpressed by this statement:

With weaker short-term growth and sharply lower oil prices we now expect that annual CPI inflation will return to the target band of 1 to
3 percent around the middle of 2009

Given that a drop in CPI growth as a result in a fall of tradables does NOT imply that the Reserve Bank is achieving its mandate, they partially made up for it with this:

However, we still have concerns that domestically generated inflation (particularly in labour costs, local body rates, electricity prices and construction costs) is remaining stubbornly high

Non-tradables is a problem – we have had a recession and they haven’t declined. The Bank does need to ensure that non-tradable inflation goes below 3% before it can be confident about heading into easing territory.

Matt Nolan

Brain drain: Why looking at only emigration doesn’t make sense

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Often in New Zealand we bemoan the fact that so much of our “skilled labour” is heading overseas.

This concern is fine – however, looking at this factor by itself does not tell us anything about the change in our skill base domestically.

In a paper by Satish Chand and Michael Clemens it is claimed that skilled migration out of Fiji has been caused by the same factor behind the increase in the stock of skilled labour in Fiji (ht Market Movers) – namely an increase in the return on skills overseas.

This makes sense, an increase in demand for skilled labour overseas increases the return for skilled labour overseas – with an open labour market skilled labour will then bugger off. This in turn will reduce the supply of skilled labour, increasing the wage and increasing the incentive for people to train in these specific skills – increasing the long-run supply of this labour type.

I find the perceived result that the skilled capital stock INCREASES (which is what they find) a touch implausible, as if domestic demand for those skills does not change and a higher return on labour exists overseas (holding the wage rate up) surely the equilibrium level of employment for that skill is lower. Still I do not know what mechanism they use to explain this – as I have not gone through most of the paper. Once I have I’ll correct myself in the comments 😛

Still it is a valid point that we have to look at why people are leaving before making judgments – instead of merely stating that people leaving is a bad thing.

Matt Nolan

How one could blame government for inflation

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To put my personal value judgments out initially, I generally DO NOT think that government (through fiscal policy) can be blamed for inflation. However, among many people, and even many economists there is a feeling that government is to blame in some way. Personally, I completely blame monetary policy for the failure to control inflation – and although I think they are behaving in an appropriate way in the current crisis – I think that policy was too weak in the past, which has made things more difficult now.

However, the view that it is “the government fault” is not completely without merit. Iprent at the Standard asked me to link to a discussion of how this COULD happen, and as a result I will write a post and link to it here 🙂

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Matt Nolan

“Twin deficits” and Ricardian equivalence

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A while ago (after the Pre-EFU) Brian Fallow discussed the upcoming “twin deficits” New Zealand is likely to face.

Fundamentally, the private sector in New Zealand has been borrowing a lot from overseas while the public sector has been saving. His fear is that, once the public sector starts borrowing again our debt levels will rise and we’ll be in big trouble.

However, there is a nifty little thing called Ricardian Equivalence which we can call on to state why this may not be such a problem. In the case of Ricardian Equivalence, when households see the government borrowing, they know that the government will have to increase taxes in the future (as they assume that government spending will itself grow at some rate). As a result, private people save a bit more in order to cover there future tax liability. In this case, it is the national level of debt that is the concern – not the idea of “twin deficits”.

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Matt Nolan

Quality from the Dim Post

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Truly, this guys satire is brilliant. I love the new post so much I have to stick bits of it up here 😛

Investors, economists and prominent businessmen have all praised the new economic plan unveiled by National Party leader John Key this weekend.

Key’s proposed strategy to kickstart the New Zealand economy was announced yesterday in a speech to local party members at the Winter Palace restaurant in Parnell. Key has promised that if elected the government will provide unlimited liquidity to banks and other major businesses in exchange for 100% equity.

…

‘A National government will buy out the mortgage of every property in New Zealand, both business and residential,’ Key said. The news was met with cheers of support from the enthusiastic crowd of National supporters.

…

Business Round Table Director Roger Kerr welcomed National’s new scheme. ‘It’s about time we ditched the tried and failed socialist ideas of the Labour Party and moved on as a country,’ Kerr said.

The last sentence made me laugh – alot 😛