What is price stickiness, and what does this have to do with Chanel bags?

In this post I am going to talk about price rigidities/stickiness.  What do economists mean about price rigidities and how do we test them?  

On the face of it this sounds pretty simple – if prices change often then there doesn’t seem to be much scope for them to be sticky.  But when we think about it a bit more this isn’t true – and thinking about why it isn’t true can give us useful insights into the macroeconomy.

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Keeping track of the business cycle

Business cycles, the phases of expansion and recession in an economy, are a durable feature of macroeconomic data. Typically, quarterly real GDP data is used to determine the phase of the business cycle we are in.

Unfortunately, official New Zealand data on quarterly GDP does not go back very far in time, limiting our ability to understand recessions and expansions. Here I want to share some work I’ve done trying to build a consistent GDP series for New Zealand that goes back until 1947.

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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!

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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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