Is the NZ dollar 23% undervalued?

The recent data from the Big Mac index indicated that, in New Zealand a Big Mac costs $6.60 NZD.  However, in the United States it costs $5.71 USD.  As Stuff.co.nz notes this implies an exchange rate of 1.16 in USD/NZD terms (a US dollar is worth 1.16 NZ dollars) if the price of the Big Mac is the same in both countries.  

But instead google tells us the exchange rate is 1.51, and so the New Zealand dollar appears approximately 23% undervalued.  But is that true?  Should global currencies adjust to set the price of Big Macs equal in every market on earth?  Let’s think about that a bit more below.

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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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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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Understanding Wellington and toilet paper

Toilet paper has been running out all around the world, with Australian’s genuinely fighting over it in supermarkets – and there has been a big show about it in the news.

This leads to some interesting thought experiments such as:

And yet, here I am in a big Wellington supermarket. It has:

  1. lots of toilet paper,
  2. specials on all the toilet paper!

This doesn’t seem to make sense. If concerns about COVID-19 are driving people to panic buy toilet paper we know that the demand curve has shifted right, and prices should have risen! So what is going on. Lets put our economics hats on and find out 🙂

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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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