Monday, March 16, 2020

The Pandemic and Policy in New Zealand


The economic lessons of the COVID 19 pandemic are clear now. The economy is about people who produce goods and services then sell them in markets, i.e., global trade. Without labor, production declines regardless of how much capital is there.

Global growth will soon decline because of a decline in aggregate supply. Declining demand will make the situation worse. Those who claim that high growth is unnecessary or damaging will have to wake up and re-examine their claim. When economies stop growing life becomes very difficult.

The problem the world is facing now is not about throwing money at people. Money and credit have nothing to do with growth. It is about getting the production of goods and services to presume as soon as possible, trade to continue, and global markets to function. It is about labor now. The longer the pandemic lasts the more difficult the problem becomes. Although loose monetary and fiscal policies are typical response in such circumstances, health policy is most important. It is about managing the pandemic, and it is about making sure that the workforce remains healthy.

The PM realizes that the problem is about people first. Closing the border is the right decision. Responsible private institutions could suspend work, gatherings, parties, games, etc. without government instructions. Nonetheless, the economy will suffer especially if the pandemic takes longer to control and NZ winter catches up with it.      

My current research is about the effect of OCR on bank lending rate in New Zealand. The paper is work-in-progress, but here is what we found so far. My coauthor and I model a profit-maximizing representative NZ bank subject to a capital-asset ratio, and estimate the model. We make baseline projections to 2024 and examine additional projections under a number of counterfactual scenarios. The counterfactual scenarios include an OCR cut to 0.50, 0.25 (which is today’s announcement), zero, then –0.25 and –0.50. Everything else remains unchanged; the bank lending rate tumbles and eventually goes negative when the OCR is negative. Banks have to generate additional revenues, or reduce cost in order to keep profit unchanged; otherwise, profit will decline sharply and some banks may suffer substantial losses. It is important that we do not create the conditions for a banking crisis.




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