Models vs knowledge

The Age reports on Australian legislation that forced banks to make ATM transaction fees explicit to the customer:

In place of the indirect fees were direct fees in which the owner of each foreign ATM took the money directly from our accounts each time we made a foreign withdrawal. But the size of the charge, typically two dollars, didn’t change. All of the economic models – including the Reserve Bank’s own model – suggested we would use ATMs pretty much as we had before. The incentives were much as they had been.

Instead withdrawals from foreign machines dived from around half of all ATM withdrawals to just 40 per cent. …A Reserve Bank study released yesterday says it’s behaviour that “cannot be accounted for by the model of ATM fees presented in this or any other existing paper”. To work out why, it has turned to research on retailing and a finding that point-of-sale displays can change purchasing decisions even when they convey no new information… The RBA’s tentative conclusion is that it is not the fee that is frightening us, it is being continually told about it.

  1. Framing effects such as loss aversion are hardly new so I’d be staggered if the RBA didn’t know about them.
  2. Just because your model doesn’t include an effect that you know to exist, that doesn’t mean it disappears or has no effect. It also doesn’t mean that you don’t know about it. I think we all know that being prompted to pay money affects behaviour so it would be surprising if the legislation was expected to have no effect. Of course, since it isn’t normally a relevant effect for the RBA they may well not have included it in their models previously. That doesn’t mean they’re idiots or didn’t know about framing.

No free lunches in economic reform

A recently released report from the Grattan Institute in Australia surveys ‘game-changing’ ways to increase GDP. Its conclusions on the priorities for economic reform are summarised in a diagram:

Notably, two of the three most urgent changes that they identify relate to lifting workforce participation. That’s a tricky topic because, while more labour might increase GDP, it also decreases leisure time. Read more

April 12 Aussie unemployment rate drops: What about NZ migration?

There seem to be concerns about the number of New Zealanders permanently heading over to Australia.  In the year to March 53,237 people permanently left NZ for Aussie, up 12,331 from March 2011.  To put this in perspective Australia accounted for 61% of all permanent departures – and annual departures to other countries were actually down 1,106 from a year earlier.  This is all via good old Stats NZ.

To me this is all much of a muchness – however one thing I do know is that the level of the Australian unemployment rate, and the gap between their UR and NZ’s has a strong impact on the level of permanent departures over there … unsuprisingly.

As a result, the drop in the Australian unemployment rate to 4.9% in April should be seen as a signal that we will see departures stay high for a while yet.  We can easily see this by just comparing the unemployment rate figures (which you can grab simultaneously off the OECD site):

In this environment, people are moving overseas to find work.  It’s not surprising, and in of itself doesn’t lead to any policy conclusions – we need to add a few more pieces before we can really start to say anything.  So this is just a little thing to keep in mind.

Australia and New Zealand in monetary policy

Sorry for my lack of posting recently, my high level of disorganisation is taking its toll at what is quite a busy time for some reason.

As a result, I will post today with a comment I wrote somewhere else – hopefully, one day I can do a real post on this issue 😉

Over at Money Illusion Marcus Nunes links to an interesting post comparing monetary policy outcomes during the GFC between Aussie and NZ.  One conclusion is that, during the GFC both central banks did some good work – but Aussie was better (from the market monetarist standpoint).

I stab down a reply stating that I think this is unfair on the RBNZ.  I list some reasons why and discuss.  Key points are:

  • I think that the potential output gap suggested are wrongish,
  • In per capita terms the divergence is much weaker,
  • Australia had more of a TOT boost – which needs to be taken into account in this framework,
  • New Zealand suffered a myriad of other “supply side shocks”, which even in the market monetarist framework are expected to lead to an ex-post deviation from trend even with an optimal central bank,
  • If we stretch things out for the latest data, and look in per capita terms, the RBNZ appears to have got us back to this “trend” once we were finally free of the effects of drought, earthquakes, and regulatory changes.

The one argument I can see pulled out against the RBNZ is the same one being pulled out about the BOE – that they changed the structural framework in banking without compensating for any current drop in money supply indirectly linked to this change.  However, even this is a bit rough – given the high level of uncertainty about the impact of those structural changes … in essence “ex-ante” they will have been taking this into account (they were saying it), the impact may have just been larger than they reasonably expected.

Why I’m in a bad mood

Agnitio asked me what has been going on recently, as I was complaining its a mess.  I emailed him my summary, so I thought I’d also put them down here:

The ECB announced that its going to accept some things as collateral – but dump others.  Leaving markets confused about what the hell was going on, and what it means for sovereign debt purchases.

The US followed this up by saying that they would buy a smaller amount of long-term debt than forecast, sell short-term debt, and flatten the yield curve.  They say it will be stimulatory because NK models say so – however, a flat yield curve is a bit dodgy, given that it’s formed by expectations of either weak growth or weak inflation in the future.  In essence NK models say “get the long-run real interest rate down as much as possible” which you do by increasing inflation expectations, not nominal rates – so markets collapsed after that.

US government decided to get involved by refusing to extend the debt limit AGAIN, if they can’t make up by Sep 30 the US will default.

Then the European commission decided that it was a good time to say they were going to introduce a financial transactions tax – just when financial markets are panicking – and for good measure they said they hadn’t figured out what level it would be at, or what would be taxed yet, just to add to uncertainty.

While all this is happening Italy and Greece have continued to say they’ll get their fiscal situation in order – but they keep delaying introducing actual policies.  Given Greece is effectively insolvent, the dithering by them, other European governments, and the ECB, makes it unclear who holds the liability the entire European financial system is at a stand still.  Given the exposure of Australian banks to this, we have seen funding costs rise considerably (luckily no-one in NZ is actually borrowing anything).

With Europe having fluffed around while the crisis has been in full swing over the past 2 months, purchases from China have pulled back, seeing activity there slow as well.  A slowdown in China will have the impact of lowering our export prices.


This mix of awesome factors has seen the cost of insuring against default in Australian banks increase to within a whisker of their Lehman Brother peaks.  It has seen uncertainty measures push at new highs.

Unlike the Lehman Brother’s collapse there is no reason for these indicators to be high solely based on the financial fundamentals – the debt burden, and who holds what, is known.  However, while policy makers were trying to improve outcomes during the crisis in 2008, they seem more interested in trying to cause a crisis this time around.

Terms of trade: An Australian perspective

Institutional Economics has some good points on the boost to Australia’s terms of trade – points we can keep in mind over here.

Relative to what we pay for our imports, Australia now gets higher prices for its exports than at any time since at least 1870. This was illustrated by Reserve Bank Governor Glenn Stevens’ observation that ‘five years ago, a ship load of iron ore was worth about the same as about 2,200 flat screen television sets. Today it is worth about 22,000 flat-screen TV sets.’

This increased international purchasing power is attributable not only to rising commodity prices, but also lower prices for imports, not least manufactured goods. The flip side of Australia’s terms of trade boom is the collapse in the terms of trade for countries like Japan.

So a higher terms of trade allows us to buy more imports for the same quantity of exports – something that is important to keep in mind when we bang on about “rebalancing” the economy.  Furthermore:

Our best response to the terms of trade boom is to become even more open to inflows of foreign labour and capital and to reduce the government’s command over resources so that the mining industry can expand with less pressure on other sectors. While the non-mining sectors will contract relative to mining, they can still expand in absolute terms if we continue to remove government-imposed resource constraints to overall economic growth.

The industries that aren’t experiencing higher returns should be expected to fail – proping them up is a policy that will just lead to worst outcomes from everyone.

So much of what has happened to New Zealand has been due to massive changes in the terms of trade – both in the 1970’s and in the 2000’s.  Asking for the “balance” of the economy to return to some past point doesn’t make sense – when the “prices/values” that dictate this point have changed … a change in economic structure is what NEEDED to happen.

It is possible some things may have gone a bit far – but it is better for us to try and understand why, where, and how before introducing policy, rather than aiming to meet some magical level of tradable to non-tradable GDP (or real consumption as a share of GDP).  If you want more details on the why, where, and how – look around the blog (pro-tip search imbalance), or contact me directly.