Would a fixed exchange rate save NZ?

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According to the Standard, having a free floating exchange rate puts New Zealand at the mercy of speculators – I take this to mean that the author would prefer New Zealand having a fixed (or at least semi-fixed) exchange rate.

What does having a fixed exchange rate mean? Well, if we have a fixed exchange rate we are setting the value of our dollar compared to the value of other countries currencies. In this case, we have certainty about the future export and import price of goods – which is a good thing.

However, in this case our currency is just as open to currency speculation (if not more so, as the price of the currency is fixed, making yield focused attacks more of a “sure thing”), implying that this perceived benefit does not exist – it merely moves on to influence another economic variables. In fact what it does (as long as we don’t close the country off to all capital markets) is removes New Zealand’s ability to control its interest rate (as the government has to print money at a level required to keep the exchange rate fixed) . In economics this is termed the impossible trinity.

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The economics of entertainment books

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In Australasia we have this thing called an entertainment book (the Wellington example is here). The book costs $55 dollars and you get also sorts of deals on restaurants, hotels, and other entertainment options in the local area.

Even when I was a student this book paid for itself by making my Burger King cheaper and saving me money when I took my girlfriend out for a date. As a result, I am confident that there are a large number of consumers who will be happy to use this sort of book and I will abstract from the (interesting) issue of consumer demand.

In fact, if you are interested in a Wellington entertainment book, contact me at matt@infometrics.co.nz – my hockey club is selling them in order to raise funds ;)

Instead I am going to look at some of the reasons why the firms in the book are willing to be in the book.

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Politicians making a difference

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I’ve just come across a post from a week ago by Dani Rodrik which previews a forthcoming book by Larry Bartels. The post includes this fascinating diagram:

What this diagram shows is the percentage growth in income under a Republican and a Democratic administration over the course of a four year Presidential term. It gives the lie to the common assertion that it doesn’t matter to the ordinary citizen who is in power. Continue Reading →

Myth of the selfish voter

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Every election time you hear the same old story that rational people don’t vote. Why is it that so many people mix up rationality with selfishness? Over at Vox a pair of political scientists set the record straight:

If you think your preferred candidate could bring the equivalent of a $100 improvement in the quality of life to the average person in your country… you’re now buying a billion-dollar lottery ticket. With this payoff, a 1 in 10 million chance of being decisive isn’t bad odds.

And many people do see it that way. Surveys show that voters choose based on who they think will do better for their country as a whole, rather than their personal betterment. Indeed, when it comes to voting, it is irrational to be selfish.

So the people who vote are the altruists amongst us, who care more for the nation than for themselves. It’s not just a heartwarming tale though: it’s a lesson in sensibly reconciling the evidence with the theory. If it doesn’t make sense for selfish, rational beings to vote then why would we model them as selfish?

Reply: What’s the Matter with Utilitarianism

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Over at the very good blog Long ago and not true anyway, Terence has stated what he believes is one of the main problems with utilitarianism:

Utilitarianism leaves no place for justice at a philosophical level … (in utilitarianism) justice is there simply because it helps make us all better off; not because it is right to put wrongs to right

Given that the economic method is fundamentally utilitarian I feel that I have to say a little about this.

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Making sense of insurance

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I recently mentioned that prospect theory tells us that most people are risk seeking in losses. CPW commented that this seems to be at odds with the fact that people buy insurance. After all, if people like risky losses, why would they pay money to avoid them by purchasing insurance? According to John Nyman the answer lies in a straightforward reframing of the choice consumers face when they buy insurance. Continue Reading →