Do we need to lower interest rates to battle COVID-19?

There is a lot of talk about a 50bp cut by the RBNZ in a couple of weeks due to COVID-19.  But what does this mean, and why are we cutting interest rates to battle a bad flu?  

In this post I am going to discuss the case for interest rate cuts during a natural disaster, to help to explain what demand shock they are battling and why this cut makes sense. The RBNZ already applied this logic during the Canterbury earthquake in 2011, so it is useful to think about COVID-19 from a similar perspective.

I’d like to thank the people I’ve chatted with about this issue to clarify what is going on – you know who you are, and I appreciate it.  The New Zealand economics community is wonderful!

Read more

What can a cruise ship tell us about COVID-19

The coronavirus (COVID-19) that is spreading through China is a tragedy, and I’d like to send my best wishes to those that are sick and my love to those who have passed on.

However, as yesterday’s quote noted – sometimes we need to temper our warm hearts with cold heads in order to understand social phenomenon and discover truths that lead to the improvement of society.  If we are interested in understanding the risks to a country associated with coronavirus, we need good information on how the virus spreads and the fatality rate, in order to set appropriate policy.   

In that way I’d like to talk about selection bias in the coronavirus figures – how this may overstate the death rate and understate the number of people catching it, and how the cruise ship – as well as being an incubator – may be (in part) a natural experiment which allows us to correct for this bias.  

As my economics PhD thesis consider health related questions, this is an issue I like to think through, and which I think is valuable.

Read more

Regional NZ’s exposure to China shocks

It was interesting to see Gulnara’s post about the coronavirus and the potential implications for the New Zealand economy yesterday. In it she stated that – if we use SARS to understand any potential shock we need to correct for the way New Zealand’s relationship with China has evolved in the intervening years.

Given this we felt that it would be useful for us to share an article Brad Olsen wrote in February 2019 on regional New Zealand and China (which also helped inform Brad’s recent comments on the coronavirus here) – which may shed some light on this issue. The article can be found here, and is reproduced below.

Read more

The economic impact of the coronavirus in New Zealand

In a recent post I discussed the impact on the broad economy associated with the coronavirus.  However, this is only a starting point for thinking about economic impacts – the next question is how we can understand the composition of the shocks, how we can measure this in real time, and how we can consider the areas where policy is relevant.

This is something I want to discuss here.

In that regard the Spin Off just had a good article talking about economic consequences, and interest.co.nz also had a good piece talking to the bank economists.  Finally, Westpac released a bulletin that discusses what they think is important. This is a complement to their pieces as I want to use the same “demand” and “supply” shock analysis as I did in the prior post to bring some of these concepts out.

What I’m discussing below is how I would look at this sort of crisis in real time as an interested observer – I work in research not policy, so I see this as a chance to open up a dialogue with other interested people in the comments below.  Any insights you have would be richly appreciated.

Furthermore, as I just don’t have the data on hand I would like (again I work in research, not as a forecaster, an investment analyst, or a policy person) I can only talk about what I would use – if anyone has been using this data and can discuss trends it would be great to chat about this in comments!

Note: Thanks to Matt Nolan for discussing this with me, and helping me to get the right data sources for this post.

Read more

The coronavirus and the general NZ economy

The coronavirus has been in the news, with its relatively rapid spread a cause for concern.  This has important welfare and wellbeing effects associated with the pain people might experience due to the coronavirus. 

However, today I am going to discuss how we can think about the consequences of a disease outbreak for the general economy – or in terms of broad macro stabilisation or monetary policy. 

These lessons can help us understand some of the broad consequences of a disease outbreak which can then be extended to ask other policy related questions (eg how the virus might disproportionately affect industry sectors in NZ, what areas are harm reduction policies particularly important).

Read more