Matt Nolan

Uncertainty and asymmetric risks

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Justin Wolfers says Charles Plosser is being a bit silly on the Freakonomics blog.

Specifically he says that:

  1. Plosser says we should tighten more quickly than estimates of “slack” suggest, as the level of slack is uncertain,
  2. However, since slack is uncertain it could be higher or lower – so this doesn’t make sense unless you weigh the outcome with lower slack more highly than the outcome with higher slack, which seems wrong!

Now I think he is being a bit sneaky here.  Yes there is uncertainty, but the perceived ex-ante risks around this uncertain variable are asymmetric.

What the hell am I trying to say here?  Well, we know that potential economic activity seems to be “trend stationary” over time (so it tends to rise at an average rate), however we aren’t quiet sure of the trend.  When we measure “slack” in a “recession” we are normally coming off a high point – which biases up our trend estimate.  Macroeconomists do heaps of stuff to try and correct it – but we often end up with a higher estimate than seems fair.

As a result, even though slack is uncertain there is a greater likelihood that slack will turn out to be smaller than it is currently thought to be rather than larger.

Of course, on an unrelated note I would say that economists should look at the unemployment rate as a measure of slack a lot of the time – as we have a measure of it, and it does give us an indication of the relative “hole” in the economy.  With unemployment over 10% the US should still be looking at substantial stimulus – so Plosser seems a little gun ho.

Matt Nolan

Are excess reserves driving a “currency misalignment”

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One of my favourite excuses for the “high” NZ dollar is currency reserves being built up overseas (in order to “keep their currency low” they need to buy up foreign dosh, building up currency reserves you see).  It is an argument the US likes to make without actually doing any analysis as well.

However, work has been done … a while back.

The linked to paper found that reserves were not excessive anywhere, expect China.  A good point to keep in mind no doubt.

goonix

Quote of the day: F.A. Hayek on economists

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The economist is the last to claim that he has the knowledge which the co-ordinator would need [for planning].

F.A. Hayek in The Road to Serfdom, 1944

Matt Nolan

Merry Christmas

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From TVHE.

And don’t forget – if it wasn’t that we arbitrarily valued the idea of people spending time “thinking” about our gifts (and that the gift givers sometimes value looking like they are thinking) it would just be optimal for us to give each other money 😉

Also note that the cost of Christmas dinner has fallen 3.5% this year (or closer to 5% in real terms).  Is this the result of deficient demand, improving productivity, or some other shock.

Christmas always raises a lot of important economic questions 😛

Matt Nolan

September quarter NZ GDP

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What happened!  It will be here.

I’m not around (I am currently visiting our lucky neighbour in Australia).  I bet that we had a negative quarter didn’t we.  That would be a pretty negative shock for people, given that some OK growth was expected.

If we did have negative growth does that mean we are back in recession?  Having one positive quarter doesn’t seem like enough to rule a recession out (that is if June wasn’t revised down to be honest).

My pick for what just happened?  I think June has been revised negative and September is a small positive.

Matt Nolan

Wages and recovery: A note

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There seems to be some hatred for the idea that if nominal wages were more flexible unemployment would not rise as high (here, here, and here).

However, I am a fan of the flexibility argument – and not just because my mind struggles to get outside of partial equilibrium 😉

When I view wage flexibility I think about it in THREE ways that would lead to an improvement in outcomes – in so far as they would reduce the “market failure” that leads to a “surplus of labour”.  These are both RELATIVE PRICE arguments:

  1. Wages relative to substitute inputs:  Wages need to be able to adjust more quickly than other inputs.  If this is the case then employers would cut back on other inputs ahead of labour.  Given that there is both substitutability and complementarity in inputs this is a difficult issue – but nonetheless.
  2. Wages relative to goods:  Wages need to be able to adjust more quickly than goods prices.  That way real wages will decline, making labour relatively cheaper.
  3. Relative wages:  This is the big one for me.  Often during a recession there may need to be a reallocation of labour resources, or there may be uneven shifts in demand for types of labour.  If relative wages can adjust then we ensure that the cost (in terms of climbing unemployment and general economic inefficiency) can be minimised.