What is the cost of capital and investment link?

In this post I intend to motivate research that is underway by Lynda Sanderson and myself on the investment behaviour of New Zealand firms. [“Taxation, user cost of capital and investment behaviour of NZ firms” forthcoming]

The goal of our current research is to understand how changes in tax settings in New Zealand have influenced the investment behaviour of firms.  Doing this involves thinking about how taxation can influence investment. The key channel it does so is by influencing the price associated with investment – what is called the user cost of capital.

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The Big Australians

One of the most fortunate things about being a New Zealander is that we are close to Australia and we have the right to live and work there. This is not just because Australia does many things very well, but simply because Australia is such a wonderful place.

Looking back, I can’t believe I only lived there for twelve months, given how much I enjoyed the experience. One day I shall kick myself, or possibly ask an Australian to do it for me since they will know how to make a good job of that too.

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Do we make choices based on income or prices?

Last time we noted the following regarding thinking about NGDP level targeting:

To understand what is going on we need to ask what expectations are being “set”, what is the “target” and how do these reflect what a central bank can “do”?

Expectations: We know they can be adaptive (backward looking) or rational (forward looking), but what do they refer to? Are people making choices based on expected prices, or are they making choices based on expected incomes? Do they view shocks as permanent or temporary?

Target: Is the goal to anchor the price level, or to anchor the level of expected nominal income growth? Is it to limit variability in prices and output?

What they do: If a central bank wants to increase prices can it, if it wants to increase nominal incomes can it?  If they can do both, how does this influence their ability to “close output gaps”?

Here I want to discuss a little more about expectations.

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Small town dynamics

By international standards, New Zealand is a small town economy. True, Auckland now has more than 1.5 million people, but by global metrics this is not very large. In 2010 there were 449 cities with more than 1 million residents, and Auckland was ranked 307 in terms of population. Small beans indeed – even if Auckland is four times as large as the next two biggest cities in New Zealand.

So how does this small size influence outcomes for New Zealanders?

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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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Land taxes and the Zero-Carbon Act

The Zero-Carbon Act means New Zealand is to accelerate the transition to an economy that uses fewer carbon-fossil based energy sources. Given what we know about the problems of global warming, a future in which most energy is renewable is to be welcomed. (As a life-long bicycle commuter, I also hope this future involves fewer cars, to raise the probability I shall live long enough to see it.) 

However, such a transition may require public investment and redistribution to help certain groups who suffer disproportionately from the changes – implying that feasible externality taxes may not be enough. If so there may be a case for land taxes to help fill this gap.

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