GDP forecasters: can we have your confidence intervals please

There are many forecasts of how well, or otherwise, our economy will do over the next year. However, as a rule these forecasts are not very good at providing a candid account of the uncertainty that is present. Most forecasters simply provide a point estimate for what they expect quarterly GDP growth to be in the next quarter or so.

Unfortunately, the margin of error around these forecasts (if revealed) would encompass the possibility of a spectacular boom or a fairly nasty recession.  Let’s have a look at these below.

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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).

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From the Great Depression to the contemporary days: is the reallocation of resources a solution?

Former Governor of the Bank of England, Mervyn King is suggesting that Economics Needs a Post-Crash Revolution in a seeming admission that current frameworks don’t work in a world of radical uncertainty and necessary reallocation.

Is the former BOE governor and academic icon correct, or is this an unfair critique of the mainstream?  As a summary, I have two issues with his argument:

  1. Reallocation does not have anything to do with “average demand”, which is predominantly a monetary policy issue,
  2. If excessive reallocation is necessary and requires government assistance, where are the “high return” industries that need reallocation to them?

Let me explain.

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Explaining labour-income share and constant elasticity of substitution

When we model production functions in macroeconomics, the broad ingredients we have for output growth are labour and capital – our factors of production. Both of these factors need to be remunerated, which raises the question of what share of income goes to each.

This is the question of factor income shares.

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How does nominal income targeting work?

Thanks to Dr. Kirdan Lees for prompting me to write today’s post. Today’s topic of discussion is nominal income targeting.

What is nominal income targeting? 

Nominal income targeting is usually viewed as an alternative monetary strategy to inflation targeting, and has never explicitly been applied in practice by any central bank. However, there is an overwhelming amount of literature discussing this monetary policy tool and how it compares to the flexible (inflation) targeting.

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When to run the economy hot?

Former Fed Chair Janet Yellen has recently suggested it is a good time to run the US economy hot (in the short-run) underpinned by the argument that the further fall in unemployment rate didn’t drag the inflation up.

The justification behind this is that the Phillips curve appears to have become quite flat.  As a result, stronger demand need not drive up inflation by much – suggesting we have a situation where, even with relatively low unemployment, inflation expectations are strongly anchored. 

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