Matt Nolan

2008 crisis in history

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Econbrowser has a great post which takes this post by Brad Delong and adds some historical background.

The post mentions that policy action will aim to prevent the mistakes of 1929, the 1970’s, and Japan in the early 1990s – behind the slight humor this is actually a very important comparison.

One thing I would like to add is that the 1970’s crisis involved a huge negative terms of trade shock for a lot of the developed world (oil prices!) which we have already experienced this time around (I believe there was a smaller TOT shock in the early 90’s) – as a result, policy need to take into account this difference.

It isn’t just that policy was too tight in 1929 and the early 1990’s and too loose in the 1970’s – there are fundamental differences in the shocks being faced. Furthermore the structure of the economy is entirely different (unions are weaker, communications and information dissemination is a lot more rapid, prices appear to be more fluid in a lot of cases). As a result, a historical comparison can only take us so far – although we must not discount histories ability to provide an intensely useful benchmark.

Matt Nolan

Lessons from capital inflows

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Capital inflows are the reverse side of the current account deficits that we like to discuss on this blog (most recently here). For some reason a capital account surplus is often seen as a good thing by journalists while a current account deficit is seen as a bad thing (ht Bluematter). This does not make sense to us as economists, as we know they are the same thing.

However, I suspect the difference in attitude stems from some dose of reality – fundamentally there are good and bad elements in a current account deficit/capital account surplus, and when the two attitudes shown by journalists are put together we get a fairly good breakdown of what is really going on 🙂

On that note, Dani Rodrik discusses a paper on capital inflows. As Dr Rodrik states:

They find that capital inflow bonanzas have become more frequent as restrictions on international capital flows have been removed, that these episodes can last for quite some time (lulling policy makers into thinking that they are permanent), that they end with an abrupt reversal “more often than not,” that they are are associated with greater incidence of banking, currency, and inflation crises (except for in the high income countries), and that economic growth tends to be higher in the run-up to a bonanza and then systematically lower

Now New Zealand is a country that has had some capital inflows – so lets discuss what this view of capital inflows means for us:

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Matt Nolan

Credit crisis: Doomsaying in perspective

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It appears that many people fear a contraction in the economy – and are determined to bring to justice any factors that could lead to such a situation.

As of late, one such factor was the “credit crisis”, which has lead to a sudden freeze in lending and potentially to a contraction in economic growth in many of the worlds largest economies.

Given that it was a seemingly inevitable freezing in the credit market that has caused this reduction in economic activity many people state that it we should have regulated the credit market more – to prevent this sort of contraction from happening.

However, even if we do take the current slump in the credit market as inevitable – I am not convinced that this type of regulation would have improved the situation.

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Matt Nolan

Credit crisis mark 2: How will it impact on New Zealand

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I see that this is a popular topic at the moment, so I thought I would add my two cents.

Before doing so I’d like to point out that the Rates Blog has a good piece on it, and this Stuff article gives the opinion of most of the banks (BNZ’s currency strategist also gives a good breakdown on the Rates blog).

Now the way I see it, there are two channels that this crisis can and will impact on the New Zealand economy:

  1. Impact on export/import prices and volumes,
  2. Impact on domestic interest rates.
  3. Update: Impact on capital investment

Outside of these two channels global events will have no impact on New Zealand. This involves assuming that external factors don’t beat around our consumer and producer confidence for no reason, and that net migration does not change. Although these assumptions aren’t completely true, I think it is fair to assume that the impact of these factors is relatively minor.

As a result, lets talk about these channels.

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Matt Nolan

Macroeconomics: The scientist and the engineer

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Over at Econlog, Arnold King is telling us how he lost his macro religion. It is an interesting post, and it gives me the impression that he believes any type of technical macroeconomics (either empirical or theoretical) to be somewhat of a fraud – a fair description given the difficulty of stringing out cause and effect in macroeconomic data.

In the post he discusses a essay by Greg Mankiw called the Macroeconomist as scientist and engineer. Far from presuming that macroeconomists do the same thing as scientists and engineers, the point of the essay is to describe the difference between macroeconomists that thrive in the abstract and those that work in the face of policy and data. Although there is not a clear split between the two – the distinction allows him to discuss how many of the recent (last 20 years) conclusions in macroeconomics do not appear to be useful for forming policy.

The essay by Mankiw is very good, and it provides a much better description of the evolution of macroeconomics ideas then my earlier retort to Chris Trotters claim about Keynesianism. However, I would also beware the partisan element of what he states.
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goonix

Putting your money where your mouth is

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ISCR have just launched New Zealand’s first prediction market.

From iPredict:

Who’s going to be the next Prime Minister – Helen or John? Will the price of petrol be $3 a litre by Christmas? Will Winston be sacked before election day?

These are some of the questions Kiwis may find themselves backing their opinions on with iPredict – www.iPredict.co.nz – New Zealand’s first real money online prediction market, which launches tomorrow (9 September).

The online marketplace enables users to trade on their predictions on a broad range of future political and business events that pay real money if their prediction comes true.

Established as a research tool by Victoria University of Wellington and think tank ISCR, iPredict harnesses the wisdom of crowds via the Internet to predict future outcomes and has a strong focus on helping companies, government agencies and academics with research. …

Mr Burgess says that iPredict is like a simple stock exchange, trading real money.

“How it works is that contracts pay $1 if an event comes true – nothing otherwise – and the price these contracts trade for is the prediction. For example, you could have a contract that pays $1 if Helen Clark is the next Prime Minister, and pays nothing otherwise. If that contract trades for 60 cents, then the market’s prediction is a 60% probability that Helen Clark will stay on as Prime Minister.”

Mr Burgess says that prediction markets are the gold standard for forecasting.

“Traders on prediction markets combine information from polls, expert commentary and any other source to produce a prediction that is more accurate than any available alternative,” Mr Burgess says.

“Prediction markets work because they ask traders to put their money where their mouths are, so it pays to be honest, objective, and even do a little homework.” …

Anybody can browse iPredict and see the predictions for free by going to www.iPredict.co.nz but traders have to be 18 years and older to set up an account. Accounts are free to set up and people can start trading with as little as $5.

Get some money on your account and get predicting.

Goonix