Matt Nolan

Note on commodity prices/exchange rate

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The ANZ  New Zealand commodity price index, in world prices, rose 1% over March – or so I’ve been told.  In New Zealand dollars the index fell – as the exchange rate rose.  This lead to the following quote:

At a time when the domestic economy is still very weak, a higher NZ dollar is likely to delay any support the export sector is able to provide

I think it is essential to keep in mind what a higher exchange rate means here.  If the exchange rate rose on the back of rising commodities prices (which was part of the story – although definitely not all, hence the fall in $NZ prices) then it is perfectly natural.  The increase in returns associated with the higher commodity prices is merely being spread across the economy – rather than directly into exporters pockets.

Now, I feel that the concern comes from the fact that we currently want to avoid declines in production – because the labour market is fragile.  A lower exchange rate makes imports more expensive and exports more competitive – leading to more production than before.

However, if this is the case then we should be clear that the issue is that we are worried about production and employment declining into some sort of “vicious cycle” – rather than just saying lower exchange rates are good.

So remember, a higher exchange rate on the back of higher commodity prices “shares the good fortune” of increasing prices across the economy – this isn’t necessarily a bad thing.

Matt Nolan

Award for worst piece of economic analysis this year

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I am virtually certain it would go to this piece by Phillip O’Connor from the University of Auckland. I mean, I thought this is the sort of award that would always go to NZPA, as they have to quickly release something that sometimes misses the point. However, a Senior Lecturer from Auckland has managed to illustrate to me how bad analysis can be.

Now in case other people can’t see some of the issues with his “analysis” I will discuss some things under the flap. And to be honest, I’m writing this in sheer shock – I have never met an economics lecture this off track. Maybe it is because I went to Victoria University – where the lecturing is top rate 😉

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Matt Nolan

Bleg: A negative OCR – how?

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I like the idea of being able to keep cutting the OCR – even once it hits zero.  It doesn’t mean that market rates will be negative, that doesn’t make any sense – but it does mean that monetary policy can push banks to lower reserves and increase the amount of money in circulation.  This is useful if we think we are facing deflation and the OCR has already hit zero.

However, how would we make it work?  If we only said reserves were reserves when they are held by a central bank, there would be no (or little) incentive for retail banks to hold reserves in this fashion when there is a penatly interest rate.  But they could just “hide money under the pillow”.

As a result, any definition of reserves in this case needs to include money hidden under banks collective pillows.

Furthermore, we need to be careful about what we do class as reserves on the other side.  If we class bonds as reserves we are only letting banks either lend or take a penalty – if lending prospects are bad then the RBNZ would just be taking money off the bank, not so much of a good move in the face of the current credit crisis.  If banks buy bonds it is still “stimulatory” – so that is something we want to leave there.

So how do we capture non-active reserves?  Does the RBNZ have enough information to do this?  Does it have the right to do this?  I would love some advice.

Matt Nolan

Why does the RBNZ want to stop long rates going up

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This is causing me a little bit of confusion. New Zealand’s yield curve has become normal – this is very rare. However, the Bank doesn’t like it – not one bit. They went as far as complaining about it. My first impression was to say – this means they will cut further and commit to a lower interest rate path. But now I want to figure out why the hell they actually want that.

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Matt Nolan

Putting tax cuts in perspective

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The Rates Blog points out a very interesting exchange between John Key and Phil Goff – they have the video available here.  The transcript is:

Hon Phil Goff: Is it correct that low-income families with children will get nothing from the tax cuts today, and that that is why the Prime Minister told high-income earners who get hundreds of dollars extra in tax cuts that they should give to charities, in line with his trickle-down theory?

Hon JOHN KEY: No, that is not true. They get a Working for Families increase, which started on 1 October. Let me make this one point: let us take somebody on $44,000 a year, with two children. It is true that he or she gets a small tax cut—

Hon Phil Goff: No tax cut!

Hon JOHN KEY: On $44,000 the person does, Phil; do the maths. But that person does not pay any tax. Somebody on $44,000 a year, with two children, pays zero tax.

So many people are talking about the fact that low income people are getting a small tax cut – but even a “standard” family on $44,000 is effectively paying zero tax.  Note that as our tax system is progressive this implies that all “standard” families earning below this level are actually paying negative tax.  When it is framed that way, the fact that this group getting a bigger tax cut makes a bit more sense doesn’t it 😉

Matt Nolan

Obama supports bankruptcy of GM

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To a degree I support this.

Then again – there is an argument to keep them afloat.

If they are subject to a binding credit constraint, and they would be profitable in the medium term, a loan to GM (at market interest rates) could be good for everyone – especially if they are unable to efficiently sell parts of their captial (eg the learning by doing associated with their workers).

Then again what am I saying – GM won’t be profitable in the medium term. Let them eat cake!

Update:  Then again it depends how they do it – this doesn’t sound very good.