ECON141: When cash rates go negative

Last time I discussed how the cash rate influenced the interest rate.  But what happens when the cash rate goes negative?  This is the focus of today’s post.

After recent discussions about “negative interest rates” across Australasia I thought it would be useful to talk about how these rates appear mechanically at a high level (in terms of financial system operations).

In class (and Gulnara’s posts here) the motivation of why negative interest rates might be appropriate in a policy sense was raised.  Furthermore, she did a great job of noting that it is unlikely that negative rates will cause additional savings (as some have claimed) and so theoretically we can continue to think about our investment model with negative interest rates.

For this post we will assume that the central bank is trying to influence interest rates towards a level that will “close the output gap” or “push Y to its sustainable level” and achieve their inflation target, and it just happens that this interest rate is negative.

The wrinkle is that we achieve this negative interest rate through a settlement cash mechanism – so we need to ask, how do negative rates in settlement cash accounts translate into lending and actual interest rates?

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ECON140 teaching under level 2 preference vote

As noted on blackboard we will need to decide if we continue with these lectures, or move to prerecorded lectures and no in person component . As a result I have popped a vote for this below – we will move to the type of lecture the majority of the class wants.

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ECON141: The cash rate and interest rates

Hi ECON141 students.  Unlike ECON130 there isn’t weekly material on this site, with lecture notes being provided instead.  However, I will add the occasional piece to help give what we are doing some context – so that it can be used to understand what is currently happening.

In that vein, today we are going to talk about how the central bank does influence the nominal interest rate in New Zealand (as compared to our still useful discussion of bond purchases in class).  By doing so we will also be able to ask about “negative interest rates” in a later post.

It should be noted that none of the content I cover here is assessed – you will be assessed on what we do in class and in the lecture notes and readings. Instead the purpose of this is to add a bit more detail about things for students who are interested.

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ECON130 Week 10: Monopoly

In the first six weeks we described models of individual and firm choice, and given many individuals and many firms we were able to describe a competitive market.

In doing so we found that the outcomes in a competitive market allowed gains from trade – buyers who valued the products more than the sellers were trading with each other. But there were issues:

  • It assumed there were lots of potential sellers of a homogenous product whose choices have no influence on the choice of other sellers.
  • It assumed there were no systematic biases in consumer choices and ignored agency problems in production.
  • It took for granted full, or at least symmetric, information about the product and the market.
  • It didn’t incorporate the way the choice to produce or consume could impact upon a third party (externalities).
  • It assumed that the institutional structure ensured the product was excludable.

These assumptions do hold in some circumstances – and even when they don’t there could be a good reason we start with it (eg assuming a systematic bias without evidence is just assuming people are stupid – which isn’t a good starting point for trying to objectively understand their choices).

But we would like to think about other types of market structures we observe.

Since then we have built some more tools to think about choice – comparative advantage, finance, game theory, and emergent macro-phenomenon.

Armed with these tools we can return to our original market model and ask “what happens when there is only one firm – with the same motives and desires as the many firms before”. This is the case of monopoly.

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ECON130 Week 9: Finance

This week was a topic that a lot of students take the course for – finance.

Finance seems like an exciting topic, with a lot of the economic metrics we see flashed around day to day related to financial markets rather than the abstract markets we’ve been talking about so far.

However, what do we mean when we talk about finance here, and how does it fit into what we’ve talked about so far? For the murky details of how we “do” finance I will leave you to work through the lectures (and slides here and here) – this post is just about motivating why we do those calculations.

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ECON 130: Week 8(b) Game theory

One week, two big topics! Today we’re discussing Game Theory.

This topic is awesome, and really wish we could give it more space – in future economics you will.

So what are we thinking about here.

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