Matt Nolan

Neuroscience, determinism, and free will

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The title sounds serious, but I am (sadly) not capable of steering into too much detail in this subject matter.  However, given that I have a rising interest in neuroeconomics I felt I should type something out about this quote (ht Andrew Sullivan):

Dualists about the mind and brain – those who hold that there are thinking substances like souls in the world as well as all the ordinary physical stuff – say that the mind sees and thinks and wants and calculates. Contemporary neuroscience dismisses this as crude, but Hacker argues that it just ends up swapping the mind with the brain, saying that the brain sees and thinks and wants and calculates. He says, “Merely replacing Cartesian ethereal stuff with glutinous grey matter and leaving everything else the same will not solve any problems. On the current neuroscientist’s view, it’s the brain that thinks and reasons and calculates and believes and fears and hopes. In fact, it’s human beings who do all these things, not their brains and not their minds. I don’t think it makes any sense to talk about the brain engaging in psychological or mental operations.”

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Matt Nolan

Monetary policy and the sun

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If you can follow the idea that price setting is a co-ordination game, you can see one of the reasons why monetary policy has real effects.  When economists discuss “menu costs” as a major reason for prices not changing, they are primarily thinking of this strategic element (where there are multiple, pareto ranked, stable and state dependent eqm) – even though it isn’t really a traditional menu cost at all, and how it interacts with menu costs is of more interest.

Sure, when we think about the labour market we enjoy talking about the “relative price of labour” and using monetary policy to make “labour relatively cheaper” – in fact a co-ordination game argument can be used here.  But the existence of a co-ordination game where the “relative price of goods” is held up too high is also important.  As long as prices are “state dependent” monetary policy has traction (even if physically prices are completely flexible!).

I had never heard the daylight savings analogy before, but I like it.

Update:  Economist’s View points to Romer’s graduate macro text where this is discussed.  It is a useful rundown but:

If there were literally no cost to changing nominal schedules and communicating this information to others, daylight saving time would just cause everyone to do this and would have no effect on real schedules

This statement is true, but it is worth fleshing out.  The “communicating” issue here is important methinks – as there are multiple Nash Equilibrium, and there may be uncertainty regarding the value other firms place on different ones.  If firms could communicate, or had knowledge about each others payoffs, and if there was a single Pareto superior eqm – firms would turn around and set prices in this way.

There can be zero cost to changing prices – but the fact that we have a co-ordination game with uncertainty implies that we can slip into an inferior equilibrium.  Furthermore, even with full information – if the equilibrium aren’t pareto ranked, but can be ranked on the basis of welfare, there can still be a justification for intervention.

I always felt that the fact that monetary policy has scope even in the face of fully flexible prices is something worth recognising.

Matt Nolan

Policy analysis presentations

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No Right Turn points to a “does inequality matter” workshop thing.

Very good, I would be keen to go except – it is over a work day.  It takes up an entire Tuesday, from 8.30am to 5pm.  It is set up so that it is on at a time when lots of people have to work.

This brings me to my point – why are these workshops never on weekends, or after work.  I generally can’t manage to take time off – I’m working on weekends enough as it is [Note:  Although I am going to the sustainability conference on Friday November 12, as I wanted to keep abreast of potential policy movements here].

Anyway, that is enough of me whining – just wanted to illustrate my disappointment that I can’t get to so many of these things 🙁

Matt Nolan

Dumb statement of the week

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Dr. Bernanke unfortunately does not understand economics, he does not understand currencies, he does not understand finance,” (Jim) Rogers, 68, said in a lecture at Oxford University’s Balliol College yesterday

From here.

Look, the guy can disagree with Federal Reserve policy – it would be nice if he actually explained why – but even if he doesn’t he can.  But saying that one of the worlds top economists doesn’t understand economics really just shows that he doesn’t understand the discipline of economics.

Hey, he can disagree with the discipline of economics – but without understanding it how can he say that someone else doesn’t?

And when he says “debasing your currency” he shows his true colours – he doesn’t understand monetary policy or inflation targeting.  There is no “magic” value for money, it isn’t some god given level of what it should be.  The whole point of “printing money” at the moment is because inflation is below their target, their mandate is to hit a certain level of inflation, and by default they need to increase how stimulatory policy is to do that – if QE2 appears to be the wrong way of doing this, or will lead to unintended consequences, then criticise it on those grounds FFS.

As an investor I’m sure he understands investing – but this sort of attack on Bernanke indicates that he might not have the same level of mastery in economics.  Ben Bernanke might not be as good at investing – but he is one guy I’d sure listen to when it comes to economics.

Matt Nolan

November 10 Fed meeting

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The November 10 Fed meeting is more important for New Zealand then I think we currently recognise.  The decisions they make over the next two days are going to have a profound impact on the general monetary policy environment around the world – and New Zealand will not be immune.

Once they finally announce what they are doing I’ll be sure to stab down some thoughts.

Matt Nolan

Rate cuts: Not out of the realm of possibility

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I see that there is an article saying that another rate hike is unlikely in the near future – this is true.  If anything, uncertainty – both about the probability of a movement AND the direction of a movement is elevated.  I would not be putting a zero, or even a particularly small probability on a rate cut within the next two meetings.  Note:  I don’t expect one, I expect a lift by around March – and I think the Bank will probably have to move pretty quickly when they do.  But this point is still useful.

Why do I say a cut is possible?  Well it has less to do with the domestic economic situation, and more to do with this stemming from this.  If the Fed does start price level targeting, they will essentially be aiming for a pretty high near term value for inflation – which in turn will see their dollar tank.  If we take this as a broader part of a “currency war” our Reserve Bank would be acting well within their mandate, and likely in an optimal sense, by lowering the cash rate.  A higher dollar tightens monetary conditions (other things equal) and they will want to counter that.

Until we have some idea regarding what the hell the Fed is going to do there will be a huge amount of uncertainty regarding changes in the OCR.  And it isn’t the RBNZ’s fault, they will just be doing what they can given the situation thrust upon them from overseas.