What does cash hoarding mean for the economy?

New Zealand banks noticed an increase in cash withdrawals by households since the day of lockdown announcement. Banks believe this might be due to the panic stockpiling of nervous households as was mentioned in the article.

In this post I want to discuss what drives the households to behave in this way, and how this comes into our thinking about economics and monetary policy. 

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Does monetary policy need to respond to the surge in inflation during pandemic?

Inflation went up to 2.5% in the March quarter, its highest rate since 2011. This was a fair amount above expectations, with the RBNZ expecting a 2.2% rate. They were not alone with private sector forecasters also expecting weaker inflation outcomes. 

This raised two questions from me:

  1. Is this evidence that COVID was a supply shock more than a demand shock?  
  2. And does it mean that monetary policy should respond? 

I want to think about the later point in this post – as the first question will get answered as we work through it.

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Have supermarket prices shot up? Evidence from the Stats NZ data

I have been hearing anecdotes from my friends in Europe that prices in supermarkets have increased since the last couple of months. Interested I had a look online and found a number of articles outlining this around the world.

According to the media, NZ shoppers have faced this as well. 

“Some customers have taken to social media to complain that prices of items like soap, meat and fresh veggies have increased sharply.”

However, supermarkets kept denying the fact. It’s hard to judge the case from my experience, as Matt and I were lazy and were primarily eating outside before the lockdown. However, Stats NZ provides data here – so let’s look at the latest release on the Food price index to figure out whether the customers are right.

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The economic consequences of the pandemic of 2120

Greetings reader from 2120, I see that you are trying to work out what the economic consequences of the unfolding pandemic in your time will be – and so are looking up information on the COVID-19 pandemic from 2020. I am a random person from 100 years earlier, and I am here to guide you on this journey.

Gulnara has done a great job of highlighting the broad way to view this pandemic and understand how such a shock works through the economy – but I think it is important that I give you some cautious advice about applying the 2020 lessons to your time.

Ultimately you can’t just take the economic consequences of a past pandemic (even if this virus itself looks similar) and state that this will be the consequence of it now – a lesson we have learned when looking at the Flu of 1918-20 in our time. However, I want to talk through some key issues to help you think about it.

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How many New Zealand jobs can be done from home?

The pandemic confined the vast majority of us to work from home during the quarantine period. However, there are certain types of occupations such as masseuse and hairdresser that can not be performed from home. Inspired by the recent NBER paper on how many jobs can be done at home,

I have calculated rough estimates for New Zealand regarding the labour markets capacity to work from home.  Applying the same industry correspondence to New Zealand (based on LEED data) and using the US weights (so assuming the same ability to work from home by industry) I have calculated that 31%-36% of jobs can be done from home.

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How is monetary policy useful given the COVID-19 shock?

In my last post I noted that the “supply or demand shock” framing for COVID-19 could be useful, but hid important elements – namely even when there is a real shock if we aren’t noticing rising factor prices (eg wages) there is a demand element.

Given current concerns most focus is on the question of how to deal with the consequences of a disaster now – in a way that doesn’t lower productive capacity in the future.  This is a good frame, and the New Zealand discussion has been strong relative to a lot of other countries.

However, even though a lot of the stores are closed now “demand” management is not just about that future – it needs to occur now as well.  As a result, monetary policy does have a role.

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