tag:blogger.com,1999:blog-26809788048018598852024-02-19T06:03:58.793+03:00W A Razzak Economics Today (الاقتصاد اليوم )Economic discussions and analysis razzakwhttp://www.blogger.com/profile/04087757393890499853noreply@blogger.comBlogger81125tag:blogger.com,1999:blog-2680978804801859885.post-34538535060307470532021-01-28T03:41:00.000+03:002021-01-28T03:41:24.525+03:00Is the world happiness report informative?<div style="text-align: left;"><span style="font-family: helvetica;">The eighth World Happiness Report (2020) ranked Finland number 1. </span></div><div style="text-align: left;"><span style="font-family: helvetica;"><br /></span></div><div style="text-align: left;"><span style="font-family: helvetica;">The happiness score is described as a ladder, where zero is not happy at all and as you climb up, 10 is maximum happiness, hence the ladder score. Finland is no. 1 with a score of 7.8087. </span></div><div style="text-align: left;"><span style="font-family: helvetica;"><br /></span></div><div style="text-align: left;"><span style="font-family: helvetica;">The happiness index is a <i>subjective </i>measure of well-being, the report says. When Professor Sachs talks about it he says it is supposed to measure <i>satisfaction</i>. Say, <i>utility</i> in economics jargon. In neoclassical economics, utility is a function of consumption of goods and services and leisure. Leisure is time spent not working in market activity and it is assumed to be a normal good. </span></div><div style="text-align: left;"><span style="font-family: helvetica;"><br /></span></div><div style="text-align: left;"><span style="font-family: helvetica;">To measure happiness, they conduct a survey. Then they take a national average response to a question, e.g., they ask 1000 people a question, record the answers and take the average.There are a number of variables that make this happiness ladder score. They include, not surprisingly, real GDP per capita. Additionally, it includes health life expectancy at birth; social support - i.e.,having someone to rely on in times of need or trouble; freedom to make choices, where people are asked whether he or she is satisfied or dissatisfied; generosity - i.e., they ask, "have you donated money to charity in the last month?" take the average response, then run a regression of this average measure on GDP per capita. Generosity is the residuals of this regression; corruption perception, is the national average of the response to this question "is corruption widespread in government and businesses, or not?"</span></div><div style="text-align: left;"><span style="font-family: helvetica;"><br /></span></div><div style="text-align: left;"><span style="font-family: helvetica;">They use regression analysis to measure how much each of these variables explains of the happiness score! The reported data suggest that only three variables could actually explain most of the happiness ladder score. The most significant explanatory variable is not surprisingly, real GDP per capita, followed by social support, and health life expectancy at birth. The rest do not seem to have enough variations to explain the variation of the ladder score. In addition, they have something called dystopia residual, dystopia happiness, which I could not find its definition so I Googled it. Google says, "it is the score of a hypothetical country that has a lower rank than the lowest ranking country in the report, plus the residual of each country. This happened to have a lot of explanatory power! </span></div><div style="text-align: left;"><span style="font-family: helvetica;"><br /></span></div><div style="text-align: left;"><span style="font-family: helvetica;">Having briefly explained this subjective well-being index, which is supposed to inform policymakers, and us, about the well-being of every country, now I want to show you the statistics for Finland, the No.1 ranking country and New Zealand, the No.8 ranking country.The differences are small in magnitude, but statistically significant (I tested that). Finland's score is 7.8087 and NZ score is 7.2996. The first two columns in the graph below are the country ladder scores, the rest of the columns are the amounts of the ladder score that are explained by the factors mentioned above. </span></div><div style="text-align: left;"><span style="font-family: helvetica;"><br /></span></div><div style="text-align: left;"><span style="font-family: helvetica;"><br /></span></div><div style="text-align: left;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg-pYCfYbzZHzxVl0NJQ1P5qIQL7aLBlsPPsZTz3WKL7QXPIqDWkDsKNOD9Sma01DKuc6J0aPwsN-yXEMFzRNX1TrZY1yWTnHUKMhRl-VVFFu9sk50U-zHuQSrExssW6voajbrIaC6_nbir/s483/Happiness_1.jpg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="291" data-original-width="483" height="241" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg-pYCfYbzZHzxVl0NJQ1P5qIQL7aLBlsPPsZTz3WKL7QXPIqDWkDsKNOD9Sma01DKuc6J0aPwsN-yXEMFzRNX1TrZY1yWTnHUKMhRl-VVFFu9sk50U-zHuQSrExssW6voajbrIaC6_nbir/w400-h241/Happiness_1.jpg" width="400" /></a></div><br /><div class="separator" style="clear: both; text-align: center;"><br /></div></div><div style="text-align: left;"><span style="font-family: helvetica;">So what makes the </span><span style="font-family: helvetica;">Fins happier than the Kiwis.The populations are almost the same size. COVID-19 killed more than 600 Fins, but only 25 died in NZ. NZ government and businesses are the least corrupted in the world according to the corruption perception index 2020; it ranked no.1 and Finland No.3. Both countries are democratic and freedom is relatively similar. Are the Fins more generous than Kiwis? </span></div><div style="text-align: left;"><span style="font-family: helvetica;"><br /></span></div><div style="text-align: left;"><span style="font-family: helvetica;">So if log real GDP per capita explains more of the happiness index than any other variable, why calculate this index? </span></div><div style="text-align: left;"><span style="font-family: helvetica;"><br /></span></div><div style="text-align: left;"><span style="font-family: helvetica;">That's not all. </span><span style="font-family: helvetica;">Going through the list show more strange results. </span></div><div style="text-align: left;"><span style="font-family: helvetica;"><br /></span></div><div style="text-align: left;"><span style="font-family: helvetica;">Would anyone believe that Iraq is a happier and a better place to live than Jordan? </span></div><div style="text-align: left;"><span style="font-family: helvetica;"><br /></span></div><div style="text-align: left;"><span style="font-family: helvetica;">Historically, Iraqis, unlike the Syrians and Lebanese, are not known for migration. However, t</span><span style="font-family: helvetica;">hey have been migrating all over the world and to Jordan in particular since the American invasion in 2003. The wars devastated Iraq (see Wikipedia). Millions were displaced. Millions of women lost their husbands and have no jobs, income, and social benefits. There are millions of homeless children, and millions are disabled persons. </span><span style="font-family: helvetica;">Millions lost family members, properties, income, and more. The society has been torn apart by violence. Furthermore, Iraq is more corrupt today according to the corruption perception index than ever. It is environmentally unsafe. Its health and education systems are dysfunctional, and the list goes on. </span><span style="font-family: helvetica;">I believe that the Iraqis abroad are also unhappy because the majority believe that they lost their country to terrorists and foreign powers. S</span><span style="font-family: helvetica;">o what do we make of this ranking? </span> </div><div style="text-align: left;"><span style="font-family: helvetica;"><br /></span></div><div style="text-align: left;"><span style="font-family: helvetica;"><br /></span></div><div style="text-align: left;"><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi5ylcAeN0SHJY4VUBL5tzt0imyImTx_o2ByuyMuI8vFrjrK99Wdg3vZcAUylcbpqCiRztSeXJ94JL5xtUej8D_klXq64hakMGYQHcVn_Qg_S5maLlqRv3XTf5Tx5Xe2HTkk-G1ZWhXLA5b/s483/Happiness_2.jpg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="291" data-original-width="483" height="241" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi5ylcAeN0SHJY4VUBL5tzt0imyImTx_o2ByuyMuI8vFrjrK99Wdg3vZcAUylcbpqCiRztSeXJ94JL5xtUej8D_klXq64hakMGYQHcVn_Qg_S5maLlqRv3XTf5Tx5Xe2HTkk-G1ZWhXLA5b/w400-h241/Happiness_2.jpg" width="400" /></a></div><br /><div class="separator" style="clear: both; text-align: center;"><br /></div></div><div style="text-align: left;"><span style="font-family: helvetica;"><br /></span></div><div style="text-align: left;"><span style="font-family: helvetica;">Finally, who would believe that Libya, another war torn country, is a happier and a better place to live than Malaysia,Turkey, China, and Morocco? None of these countries has been in war let alone a continuous devastating war for decades.</span></div><div style="text-align: left;"><span style="font-family: helvetica;"><br /></span></div><div style="text-align: left;"><span style="font-family: helvetica;">I could go through the list and examine it country by country, but there is no point. I have some serious doubts about this statistic.I do not think that </span><span style="font-family: helvetica;">it is more informative than simply looking at real GDP per capita. Yet, m</span><span style="font-family: helvetica;">any governments have adopted similar methodology as a guide for policy rather than focusing on productivity. I think tat there is more politics in this than economics behind it. </span></div><div style="text-align: left;"><span style="font-family: helvetica;"><br /></span></div>razzakwhttp://www.blogger.com/profile/04087757393890499853noreply@blogger.com0tag:blogger.com,1999:blog-2680978804801859885.post-28493087493435570202021-01-16T04:56:00.003+03:002021-01-16T04:57:23.333+03:00The Iraqi Predicament <p> </p><p class="MsoNormal"><span lang="EN-US" style="font-family: "Palatino Linotype","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-US;">What would
people do in a country, where the private economy is stagnant, millions are
unemployed, millions work in a bloated public sector, currency devalued, twin
deficits (fiscal and current account), and a mounting external debt? The
unemployed are credit-constrained, and have no assets. The government is unable
to solve any of these problems. They are not easy problems, however. I am
talking about Iraq in particular. A similar story is in Lebanon. Syria, Yemen, and
Libya, which have been in a state of war since 2011, face a more uncertain
future.<o:p></o:p></span></p>
<p class="MsoNormal"><span lang="EN-US" style="font-family: "Palatino Linotype","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-US;">Iraq is a big
oil producer. It has about 145 billion barrels of proved oil reserves (twenty
percent of the Middle East total proved reserves), and 3.5 trillion cubic
meters proved natural gas (4.75 percent of the Middle East total proved gas
reserves). Iraq has a vast agricultural land in between the Tigers and the
Euphrates from the north to the south and from the far West to its east border
with Iran. The total area of agricultural land is 93,000 square kilometers, which
is 21 percent of the total land area. The population of Iraq is just short of
40 million; where people aged 15-64 (working age population) are a little more
than 22 millions.<a href="file:///D:/Weshah%20work/MYData/Weshah%20Documents/Personal%20documents/Photos/Desktop/weshah%20current%20work-%202019-2020-2021/X.docx#_ftn1" name="_ftnref1" style="mso-footnote-id: ftn1;" title=""><span class="MsoFootnoteReference"><span style="mso-special-character: footnote;"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span lang="EN-US" style="font-family: "Palatino Linotype","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-US; mso-bidi-font-family: Arial; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[1]</span></span><!--[endif]--></span></span></a> The
oil price crash in 2014, followed by civil unrest, and COVID have paralyzed the
country, more so the government. Lebanon, which is not a state of war, now, has
similar economic problems, without the oil and smaller population and land,
however. Nonetheless, Lebanon has a relatively highly educated population.<o:p></o:p></span></p>
<p class="MsoNormal"><span lang="EN-US" style="font-family: "Palatino Linotype","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-US;">The average
Iraqi and Lebanese person is in despair. There is no other way to describe it. Those
who have saved something will spend it soon. Those who have an asset they sell
it for cheap. The few rich people – mainly the politicians and their clients –
will buy assets at cheaper prices, get richer, or leave the country when all comes
to a grind. Most of the politicians have foreign citizenships and foreign bank
accounts. <o:p></o:p></span></p>
<p class="MsoNormal"><span lang="EN-US" style="font-family: "Palatino Linotype","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-US;">What could be
done?<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></p>
<p class="MsoNormal"><span lang="EN-US" style="font-family: "Palatino Linotype","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-US;">An immediate
transfer of ownership of land and resources from the government to the people will
solve most of the problems. The politicians will not like this idea because it
reduces their power. Their clients will not like it either because it will
reduce their rent. What is needed now is a law along the lines of the Homestead
Act(s) of the 19<sup>th</sup> century, whereby people in many countries (including
the United States) were given <i>free</i> land (with a title). People could use
the land for agriculture, sell it in an organized market, or rent it. Such
arrangements will generate income and ensure survival of families. In Iraq, oil
and gas wealth must also be transferred to citizens in an equal share just like
Russia and other Eastern European countries did after the fall of the Soviet
Union; a share per citizen. Each share is tradable (sold and purchased) in an <i>organized
regulated</i> market. This arrangement will create a market and an immediate
income. <o:p></o:p></span></p>
<p class="MsoNormal"><span lang="EN-US" style="font-family: "Palatino Linotype","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-US;">For Iraq, such
private wealth transfer reduces the dependence of the budget on oil. It would
also reduce the people’s dependence on public sector <i>unproductive</i> jobs.
Private consumption and aggregate demand will increase over time. A
modernization of the existing tax system will be helpful. The wage bill will be
reduced significantly. Total government expenditures could be rationalized, and
the budget could be balanced.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span><o:p></o:p></span></p>
<div style="mso-element: footnote-list;"><!--[if !supportFootnotes]--><br clear="all" />
<hr align="left" size="1" width="33%" />
<!--[endif]-->
<div id="ftn1" style="mso-element: footnote;">
<p class="MsoFootnoteText"><a href="file:///D:/Weshah%20work/MYData/Weshah%20Documents/Personal%20documents/Photos/Desktop/weshah%20current%20work-%202019-2020-2021/X.docx#_ftnref1" name="_ftn1" style="mso-footnote-id: ftn1;" title=""><span class="MsoFootnoteReference"><span style="font-family: "Palatino Linotype","serif";"><span style="mso-special-character: footnote;"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-family: "Palatino Linotype","serif"; font-size: 10.0pt; line-height: 115%; mso-ansi-language: EN-NZ; mso-bidi-font-family: Arial; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[1]</span></span><!--[endif]--></span></span></span></a><span style="font-family: "Palatino Linotype","serif";"> See the World Development
Indicators, World Bank and the BP Annual Statistical Review.<o:p></o:p></span></p>
</div>
</div>razzakwhttp://www.blogger.com/profile/04087757393890499853noreply@blogger.com0tag:blogger.com,1999:blog-2680978804801859885.post-29052706264977949462020-09-27T04:07:00.000+03:002020-09-27T04:07:40.392+03:00Reinventing the Bazaar a book by John McMillan<p><span style="font-size: medium;">John was a Kiwi economist (22 Jan 1951 - 13 Mar 2007) </span></p><p><span style="font-size: medium;">https://en.wikipedia.org/wiki/John_McMillan_(economist)</span></p><p><span style="font-size: medium;">I recommend McMillan's book. I read this book a very long time ago. Today, the book is even more relevant than it was in 2002. It is a lucid, full of meaningful stories, and an overall enjoyable read. It could help many young people, especially economists, think about the role of the government? Should the government intervene in the economy? How much? How? When? </span></p><p><span style="font-size: medium;">McMillan had an interesting view about the market and the role of the government. He did not advocate more government intervention, socialism, or liberalism. He was neither for a free market nor for social policies. He wrote, "the market system is not an end in itself but an imperfect means to raise living standards. Markets are not magic, nor are they immoral. They have impressive achievements; they can also work badly." He thought that the "design of the market" matters the most. He believed that the evidence is that economic growth is good for everyone, including the poor, but he also believed that equity matters too. He cited evidence that countries with more equal income distributions grow faster. </span></p><p><span style="font-size: medium;">I am not totally sure about that kind of thinking because McMillan must have had an implicit assumption that there is "a government" out there, a "designer" that can actually make a better market via rules and regulations. Where do we find such a government, I wonder? </span></p><p><span style="font-size: large;">In my view, the government may, and can, intervene in the market, but that intervention depends on the size and the scope of market failure. There must be robust, careful, and verifiable evidence of free market failure before the government is allowed to step in.</span></p><p><span style="font-size: medium;">Here are some excerpts that I found interesting.</span></p><p style="text-align: center;"><i><span style="font-size: medium;">Chapter one, "On November 9, 1989, the people of Berlin joyously tore down the wall that for thirty years had divided their city. As the wall fell, so did communism and planned economy. On April 30, 1995, the U.S. government ceased controlling the internet. As entrepreneurs devised procedures for online buying and selling, electronic commerce burgeoned. These two dates denote the beginning of what has become, for good or for ill, the age of the market." </span></i></p><p><span style="font-size: medium;">I think that the internet market could have been an amazing free market experiment. Unfortunately, we are getting more and more government interventions by the day. Be careful please when you blame the free market. We do not have a free market anywhere in this world. In fact we had more free markets in the past centuries than today. Is it funny (or not) that a Republican like Trump is against free market and a Chinese communist like Xi Jinping is for free trade?</span></p><p style="text-align: center;"><span style="font-size: medium;"><i>Chapter Twelve, How did so many countries come to be centrally planned? [after WWII] . </i>You might find this paragraph interesting. He writes<i>,"Albert Einstein wrote an article in 1949 called "Why Socialism?" His answer: "the market economy brings crisis, instability, and impoverishment. The economic anarchy of capitalist society as it exists today is, in my opinion, the real source of evil." The only way to eliminate this evil, he concluded, was by establishing socialism, with the means of production "owned by society itself." He advocated a planned economy, which adjusts production to the needs of the community, would distribute the work to be done among all those able to work and would guarantee a livelihood to every man, woman, and child." </i></span></p><p style="text-align: left;"><span style="font-size: medium;">There are more stories like those in the book. </span></p><p style="text-align: left;"><span style="font-size: medium;"><span>Einstein's view was shaped by the horrors of the Great Depression, no doubt. I cannot blame him. I hope that he lived to see</span><span> </span><span>the whole socialist tragedy. Socialism collapsed spectacularly in 1990 for good reasons. Does the free market make people poor? How do we answer this question? McMillan says, no it does not. We do not even have a free market experiment anywhere to examine. Instead, we have crony capitalism, </span></span><span style="font-size: medium;">nepotism, racial and social discrimination, subsidies, bailouts, tariffs and trade restrictive laws and regulations, etc.</span></p><p style="text-align: center;"><span style="font-size: medium;"><i>PP. 25, John writes, "Rembrandt was an innovator not only in painting but also in commerce. He helped establish a full-fledged art market in the seventeenth-century Amsterdam." "Composers in Germany or so later switched from being long-term employees of aristocrats to producing for the open market. Handel and Telemann were vocal in their dislike of being subject to their employer's whims, and they paved the way for Mozart and subsequent composers to work freelance. In a 1781 letter to his father, Mozart said, doubtless exaggerating somewhat, believe me, my sole purpose is to make as much money as possible; for after good health it is the best thing to have."...Mozart saw the market as offering him creative freedom." </i></span></p><p style="text-align: left;"><span style="font-size: medium;">There will always be business cycles and depressions in the future just like in the past. Although many economists believe that government intervention gets us out of prolonged recessions. I highly doubt that we have evidence to support such an assertion. To the contrary, we have examples of policy error. These errors are persistent. They are costly to undo. There are many examples, but most known is that the Great Depression was a monetary policy error, Friedman and Schwartz wrote extensively on this. </span></p><p style="text-align: left;"><span style="font-size: medium;">McMillan tells some interesting stories about New Zealand's reforms in chapter 15. Imagine that the NZ government made rules and regulations for every bit in the economy including the color of Margarine, which had to be white not yellow so it couldn't compete with Butter!</span></p><p style="text-align: center;"><span style="font-size: medium;">Here is another story, he says, <i>"The bizarre nature of the old New Zealand economy is illustrated by an anecdote from the industrialist Alan Gibbs. For the sake of employment, the government required television sets be assembled locally. When Gibbs went to Japan to negotiate a price for the components, he was greeted with disbelief. Because of the way the production lines were set up, the Japanese television makers could supply the separate components by placing workers at the end of the assembly line to take apart the completed televisions. Gibbs firm has to pay 5 percent more for the pieces..." </i> </span></p><p style="text-align: left;"><span style="font-size: medium;"> Many young Kiwis do not even know what New Zealand looked like before 1984. </span></p><p><span style="font-size: medium;">https://www.amazon.com/Reinventing-Bazaar-Natural-History-Markets/dp/0393323714</span></p><p><span style="font-size: medium;"><br /></span></p><p><br /></p>razzakwhttp://www.blogger.com/profile/04087757393890499853noreply@blogger.com0tag:blogger.com,1999:blog-2680978804801859885.post-5756132443257542642020-08-17T01:32:00.000+03:002020-08-17T01:32:00.464+03:00Income inequality, politics, and economics <p>Many people, including a number of economists, are concerned with income inequality. They are concerned that a small number of people have more money, wealth... than the vast majority of citizens have. The precise measurement of such inequality is tricky.</p><p>To reduce or eliminate income inequality, many politicians and economists advocate taxing the wealthy people hard, e.g., a 70 percent tax was suggested by the American congresswoman Alexandria Ocasio-Cortez. The famous French economist Thomas Piketty suggested something like 90 percent tax on wealth. Tax the rich is a 2020 election policy for the Greens in New Zealand. </p><p>There is an ideological aspect to this issue, but I am not concerned with it. </p><p>However, I want to show you some data, which reveal that some countries have relatively low-income inequality and at the same time they are richer in terms of income per person, have low public spending, and low taxes. The data suggest that income inequality could be reduced without spending more, taxing more, or reducing anyone income. Instead of reducing somebody's income simply try to increase everybody's income. </p><p><span>To think in terms of economic theory, we should think about </span><i>Pareto improvement</i>, which<i> </i><span>is an efficiency condition whereby</span><i> </i><span><b>at least one person can be made better off without making anyone worse off.</b> </span></p><p>Measurement is tricky as I said, however, for comparison, I use the UN measure of income inequality, which is the <b>ratio of average income of the richest 10% of the population / the average income of the poorest 10%.</b>..Here is the table. I list the English-Speaking nations first, followed by the Europeans, the Scandinavians, and finally the Asians countries.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvkv3LtRzABPwY02WUhoxHcAsWYy7ONDrqlqkob8fe5iNGRyESiQD_KI4ZjzgIu_AzpQ_IwH4Dvh9J112c_6AQdhx0oBskmihr7eyXWVVe7nNhRdWAptoNTmlUo009_uMJXjw05_p-KFC3/s483/Table.jpg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="319" data-original-width="483" height="399" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvkv3LtRzABPwY02WUhoxHcAsWYy7ONDrqlqkob8fe5iNGRyESiQD_KI4ZjzgIu_AzpQ_IwH4Dvh9J112c_6AQdhx0oBskmihr7eyXWVVe7nNhRdWAptoNTmlUo009_uMJXjw05_p-KFC3/w604-h399/Table.jpg" width="604" /></a></div><div class="separator" style="clear: both; text-align: center;"><br /></div><p>Australia, NZ, and the U.K. have the same level of income inequality. The U.S. has the highest level of income inequality in OECD. Canada is more comparable to the Europeans with medium level inequality. The Scandinavians have the lowest income inequality in the West, but the Asian countries have low-income inequality too. Japan's is the lowest in the world perhaps, followed by South Korea. Singapore and Hong Kong have lower income inequality than the U.S. </p><p>Given these figures, one might think that the Asian countries, Japan and South Korea in particular, must have high public spending on social welfare programs, high taxes to finance such programs, and an income per capita growth similar to the Scandinavians! </p><p>No, they don't.</p><p>In the Asians countries, particularly in Korea, however, public spending and taxes are significantly lower than the rest of OECD, and income per person growth is significantly higher than all other OECD countries. </p><p>This figure plots real income per person growth rate (data source:IMF-WEO) and government spending to GDP ratio. The Asian countries spend less as a percent of GDP and have higher income per person growth than the rest of the OECD. The English-speaking countries spend less and have higher income per person than the Europeans' have, and the Scandinavians have more spending the least income per person growth. Japan is somewhere in the middle. Still, Japan public spending is much lower than the Europeans' are.</p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjDfoZpJ4bgpiJFz57ZJxQpgNirlKzNRbDO7hghrY_0QTpWXduHHrEOVtsoRosnldvykwwrGfkWv7EwK1Juu0c_PCTykcYQ6hNim7GMQdKiJw9N_7o1fLDXoDzLUCce2nVKCuIWulsnCFRJ/s484/GDP+and+G+%2528New%2529.jpg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="291" data-original-width="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjDfoZpJ4bgpiJFz57ZJxQpgNirlKzNRbDO7hghrY_0QTpWXduHHrEOVtsoRosnldvykwwrGfkWv7EwK1Juu0c_PCTykcYQ6hNim7GMQdKiJw9N_7o1fLDXoDzLUCce2nVKCuIWulsnCFRJ/s0/GDP+and+G+%2528New%2529.jpg" /></a></div><p>This figure plots the real income per person and the tax-GDP ratio (OECD data). The Asian countries tax their people less because they spend less on social welfare programs, and have higher income per person than the rest. </p><p></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjQNGXsVopuyDfHc-YzIJtnRsDeg4tU3ZmSuwmsE2AFCbMbVFozINuEQFQX38hyphenhyphenH84cgoBsyin4JhGQFjUhJABMTWFGWvLX9PtIgZkMvZyod7JKZuIBRHNMfr7Fw9aD_JCs4RjpfQ7p_Tcc/s483/GDP+and+Tax.jpg" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="291" data-original-width="483" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjQNGXsVopuyDfHc-YzIJtnRsDeg4tU3ZmSuwmsE2AFCbMbVFozINuEQFQX38hyphenhyphenH84cgoBsyin4JhGQFjUhJABMTWFGWvLX9PtIgZkMvZyod7JKZuIBRHNMfr7Fw9aD_JCs4RjpfQ7p_Tcc/s0/GDP+and+Tax.jpg" /></a></div> <p></p><p>The correlation between government spending - GDP, tax-GDP ratio and income per person growth is strongly negative across the OECD. </p><p>These significant differences in objectives and policies across OECD countries reflect the voters' demands for social welfare programs and the politicians' competition for votes.</p><p>Korea achieved a better income inequality outcome than the European countries and comparable to the Scandinavian countries, and much lower than Australia and New Zealand with less public spending, and a higher income per person growth rate. Similarly, Singapore and Hong Kong have much better outcomes than the U.S. Even Japan, which has the lowest income inequality in the world, has less public spending and lower taxes than all European and Scandinavian countries. So why can't we do that? </p><p>Nevertheless, I think that as long as the voters continue to demand forceful government actions against wealth accumulation, politicians will compete for votes and promise more. This pattern will not change soon.</p>razzakwhttp://www.blogger.com/profile/04087757393890499853noreply@blogger.com0tag:blogger.com,1999:blog-2680978804801859885.post-88356657314998538782020-06-01T02:30:00.001+03:002020-06-01T02:30:21.525+03:00Financing the Budget Deficit and the Wealth Effect<div>People are already thinking about the bill of COVID-19, and how would it be paid. Just look up the Google mail and see the flood of articles. The New Zealand Minister said that the government will borrow to finance the deficit, but it is not as simple as this. At some point in time, a government, which may not be this government would have to raise taxes. The borrowing matters whether the public holds an interest-bearing government bonds or non-interest bearing bonds. The latter type is like the US Treasury Bills. They are non-interest bearing bonds or zero-coupons, which are bought at a discount price of their face value i.e., they pay no interest, but eventually sell at the par value, therefore, they bring about a positive yield to holders. </div><div><br /></div><div>What's the difference between these bonds and what is the effect on the economy?</div><div><br /></div>On this issue, I remember a paper that I read when I was a graduate student preparing for my PhD exams, Robert Barro (1974) wrote in the Journal of Political Economy "Are Government Bonds Net Wealth?" This issue is pertinent to the situation we and others are facing.<div><br /></div><div>Barro argued that government debt, which is held by the public could increase or decrease in <b>real terms</b> when the price level changes. So if the price level falls for whatever reason (the situation now with a near zero interest rate means that people are indifferent between holding money or bonds), the real value of government debt increases, and economy's level of wealth increases too. However, if the government finances the budget deficit with interest-bearing bonds, and people anticipate an increase in future taxes to finance the deficit, an increase in the real value of government debt outstanding will also imply an increase in the present value of future tax liabilities. Therefore, government debt cannot be considered a <b>net wealth</b> increase for New Zealanders.This bond buying business may not stimulate the economy as much as the government thinks. </div><div><div><br /></div><div><div>The NZ government bonds are low interest bearing bonds as shown in the <a href="https://www.rbnz.govt.nz/news/2020/03/rbnz-to-implement-30bn-large-scale-asset-purchase-programme-of-nz-govt-bonds"><font color="#d52c1f">this statement</font></a>, but not a zero-coupon. Therefore, holding these bonds cannot be <b>net wealth</b>.</div><div><br /></div><div>Financing the budget deficit with a non-interest bearing bonds (zero coupon bonds), on the other hand, could be a <b>net wealth</b> to New Zealanders. The reason is that the increase in the real value of the debt outstanding is not associated with an expected increase in tax liabilities. </div><div><br /></div><div>I seems like a great idea to buy government bonds while working and cash them to finance retirement, if they were zero-coupon type of bonds. In this case government debt is <b>net wealth</b> to Kiwis, and the government can finance its deficit and lower income tax on people's labor income. One can see how such fiscal policy can increase labor productivity. </div><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div> </div><div><br /></div><div> </div></div></div>razzakwhttp://www.blogger.com/profile/04087757393890499853noreply@blogger.com0tag:blogger.com,1999:blog-2680978804801859885.post-78145939547956093432020-05-22T08:17:00.001+03:002020-05-24T06:59:35.032+03:00What Have I Learned from COVID-19 Data So Far...<div dir="ltr" style="text-align: left;" trbidi="on">
Everyone knows that there is an argument about the data of the number of confirmed cases. Many papers were written about understating the number of infections. The typical story is that, with the absence of reliable and timely tests, we may have understated the infections by a factor of 10. Because the US government pays hospitals for treating infected patients, and also pay them more if the patients need to be on ventilators, some hospitals were overstating the number of COVID-19 deaths related cases. Minnesota was one state circulating in the news. So, if the numbers of confirmed cases, which we are using from Oxford University, the Johns Hopkins, or else in our research, are understated, researchers must deal with these measurement errors. Ordinary Least Squared regressions estimates are biased and inconsistent. IV estimators should be used. Testing for COVID 19 matters for reducing the number of deaths even though millions remained untested. See my <a href="https://www.massey.ac.nz/massey/fms/Colleges/College%20of%20Business/School%20of%20Economics%20&%20Finance/research-outputs/discussion-papers/DP2005.pdf?35B818AE46E79C0DB3FAA631DC0139B4"><span style="color: red;">paper</span></a><br />
<br />
The second thing I learned from COVID-19 data is that the modelling of the infection using the Gompertz (1825) function overestimates the peak infection. Usually, we try to model the data as they arrive. The data have a steep upward slope. The Gompertz function is a very suitable model for this kind of events. However, it is a statistical function, which has a couple of fixed parameters. It does not account for policy. So if we have data from time t to t+k and we fit the function up to time t+k+1 without having accounted for policy, we will overestimate the peak infection. Policy (stringent) reduces the number of infections, but the Gompertz function does not take this into account.<br />
<br />
Figure (1) plots my estimates of the New Zealand curve, see my <a href="https://www.massey.ac.nz/massey/fms/Colleges/College%20of%20Business/School%20of%20Economics%20&%20Finance/research-outputs/discussion-papers/DP2004.pdf?483D081C9600FC951C7322082C8F9030"><span style="color: red;">paper</span></a> ...The data that I used in this paper were from Feb 28 to Mar 27. Figure (2) use the same graph but add the actual data up to Apr 23. As you can see in figure (1), I predicted the peak infection to be 2630 cases on April 3. Then we learned when the actual data arrived that the number of infections on April 3 was 772, see figure (2). The peak, probably did not occur until April 22...and much lower than my estimate.<br />
<br />
<div style="text-align: center;">
Figure (1)</div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjyQrA3Rl8y_S0H-gQEc-EPQJ5cpf4Tb-9DO_-f7_esVFicKiuaKHABKVvfmo4Vst9EXeP2LOCqDLeimhsLJzdTcXT_2K1bQg0-cWmfJJ3f6oTldKO_toUDR1WIExWAF7ahHWxiy5vfEipt/s1600/Figure+3.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="291" data-original-width="483" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjyQrA3Rl8y_S0H-gQEc-EPQJ5cpf4Tb-9DO_-f7_esVFicKiuaKHABKVvfmo4Vst9EXeP2LOCqDLeimhsLJzdTcXT_2K1bQg0-cWmfJJ3f6oTldKO_toUDR1WIExWAF7ahHWxiy5vfEipt/s400/Figure+3.jpg" width="400" /></a></div>
<div style="text-align: center;">
Figure (2)</div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhI4B1cfgQi38cbCEDWwdSK4xy3u6zZLBN9hx8P5JurstXex3bS8yAVhz-SRDaV3nS5HkXxspDnvh1gR79lhRN81QDOH8Shd1a3kddoSys4ki9ADYF75oUl_qe-mxDKnm0Di5t3ReHkDDVo/s1600/Figure+%25283%2529+Updated.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="291" data-original-width="483" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhI4B1cfgQi38cbCEDWwdSK4xy3u6zZLBN9hx8P5JurstXex3bS8yAVhz-SRDaV3nS5HkXxspDnvh1gR79lhRN81QDOH8Shd1a3kddoSys4ki9ADYF75oUl_qe-mxDKnm0Di5t3ReHkDDVo/s400/Figure+%25283%2529+Updated.jpg" width="400" /></a></div>
<div class="separator" style="clear: both; text-align: center;">
<br /></div>
<div class="separator" style="clear: both; text-align: left;">
I also learned that policy responds to the number of infections positively, and the latter responds to the former negatively. Policy response, however, is endogenous and country-specific. New Zealand and Australia responded quite differently to the infection, but the outcomes of the two countries are pretty much similar. I also learned that if country A adopts country B policy response, country A cannot achieve the same outcomes of country B. I tested whether, or not, the New Zealand policy response, which achieved zero infections, could reduce infection to zero if it is adopted by Denmark, Sweden, and the USA.I found that it is effective in reducing the infections significantly, but not to zero as it did in New Zealand. There are omitted factors that need to be taken into account in such analysis. Culture might be an important missing variable. Although the Swedes and the Danes are seemingly Scandinavians, they followed different polices and the people have been reacting differently. The outcomes are very different. See my <a href="https://www.massey.ac.nz/massey/fms/Colleges/College%20of%20Business/School%20of%20Economics%20&%20Finance/research-outputs/discussion-papers/DP2007.pdf?C88731B9610D864D41769BDDBF5C78D0"><span style="color: red;">paper</span></a>. </div>
<div class="separator" style="clear: both; text-align: left;">
<br /></div>
<div class="separator" style="clear: both; text-align: left;">
I am sure that we will learn more from doing more research.</div>
<div class="separator" style="clear: both; text-align: left;">
<br /></div>
<div style="text-align: center;">
<br /></div>
</div>
razzakwhttp://www.blogger.com/profile/04087757393890499853noreply@blogger.com0tag:blogger.com,1999:blog-2680978804801859885.post-55265528968226978222020-05-08T06:07:00.004+03:002020-05-08T06:07:53.790+03:00Future Prices and inflation <div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal">
<span style="font-size: large;">What happens to the future prices and inflation as a result of the expansionary polices in response to the pandemic? </span><br />
<br />
<span style="font-size: large;">As a result of the increases in the money supply and government spending in response to the pandemic, future prices of goods, services, and assets will increase for sure...not necessarily the inflation rate. </span><br />
<span style="font-size: large;"><br /></span>
<span style="font-size: large;"><b>U</b>nder a system of inflation targeting, bygones
are treated as bygones. It means that the increase in prices is not a concern, but the rate of growth of prices, i.e., inflation, is kept constant. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">The plot shows that currency per unit of real output and the CPI are positively correlated, thus in the short run the increase in the money supply increases prices under inflation targeting (it increases real output sooner, in the short run).</span><br />
<span style="font-size: large;"><br /></span>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_L2oFy7p_abYN01EXIsC0fhJAlpbVJArgnF-RxVne4mOjjvX0nilWfV7yW8qse-NUi36J24uBaLNxquUqNHOAkEC0Vnii-Ri-h_akRJZHtrM4ODu3GLpSZR3e21O282yJaRJ6H6ydj8kU/s1600/Plot+2.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="291" data-original-width="483" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_L2oFy7p_abYN01EXIsC0fhJAlpbVJArgnF-RxVne4mOjjvX0nilWfV7yW8qse-NUi36J24uBaLNxquUqNHOAkEC0Vnii-Ri-h_akRJZHtrM4ODu3GLpSZR3e21O282yJaRJ6H6ydj8kU/s400/Plot+2.jpg" width="400" /></a></div>
<span style="font-size: large;"><br /></span>
<span style="font-size: large;">The second plot shows that there is no correlation between the growth rate of money per unit of real output and the expected inflation rate in the long run (6 quarter moving average) under inflation targeting. </span></div>
<div class="MsoNormal">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgYY9zLo8yMHRuTx7umCmaf0Kx-Fj7L4Yiqfg9lC9PcxMYfdHksFSShI4v4vfu8hwCaa_OqBlXFLHd9Kp-m9EBYwzEnqHGGtAZkQqzivVkMpM0YwCCQ_tA5VfYpZ3bzd8_HPR-Ra-9HpvTu/s1600/PLot+1.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="291" data-original-width="483" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgYY9zLo8yMHRuTx7umCmaf0Kx-Fj7L4Yiqfg9lC9PcxMYfdHksFSShI4v4vfu8hwCaa_OqBlXFLHd9Kp-m9EBYwzEnqHGGtAZkQqzivVkMpM0YwCCQ_tA5VfYpZ3bzd8_HPR-Ra-9HpvTu/s400/PLot+1.jpg" width="400" /></a></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: large;">These are New Zealand data, but it is true in all inflation targeting countries.</span><br />
<span style="font-size: large;"><br /></span>
<span style="font-size: large;">That said, the pandemic might be an adverse supply shock. It knocks output production and increases the price.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
<br /></div>
razzakwhttp://www.blogger.com/profile/04087757393890499853noreply@blogger.com0tag:blogger.com,1999:blog-2680978804801859885.post-5490545210144098492020-04-26T01:40:00.001+03:002020-04-26T01:40:35.761+03:00New Zealand's Coronavirus Policies <div dir="ltr" style="text-align: left;" trbidi="on">
<div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; border: 0px; box-sizing: inherit; counter-reset: list-1 0 list-2 0 list-3 0 list-4 0 list-5 0 list-6 0 list-7 0 list-8 0 list-9 0; cursor: text; font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif; font-size: 18px; line-height: 1.5; padding: 0px; vertical-align: baseline; white-space: pre-wrap;">
<span style="background-color: black;"><span style="color: white;">The government's Coronavirus policy is driven by many factors, but R0 number (the reproduction rate) seems to be the PM (Jacinda Ardern) preferred indicator. The reproduction rate depends on total infections. There are more papers posted now arguing that total infections are understated especially when "testing" is lacking. So R0 is understated too. The official R0 is less than 0.5, maybe it is more than 1 or even higher. </span></span></div>
<div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; border: 0px; box-sizing: inherit; counter-reset: list-1 0 list-2 0 list-3 0 list-4 0 list-5 0 list-6 0 list-7 0 list-8 0 list-9 0; cursor: text; font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif; font-size: 18px; line-height: 1.5; padding: 0px; vertical-align: baseline; white-space: pre-wrap;">
<span style="background-color: black;"><span style="color: white;"><br style="box-sizing: inherit;" /></span></span></div>
<div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; border: 0px; box-sizing: inherit; counter-reset: list-1 0 list-2 0 list-3 0 list-4 0 list-5 0 list-6 0 list-7 0 list-8 0 list-9 0; cursor: text; font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif; font-size: 18px; line-height: 1.5; padding: 0px; vertical-align: baseline; white-space: pre-wrap;">
<span style="background-color: black;"><span style="color: white;">Conversely, the good news is that the death rate would be smaller than what we have, which is already relatively small. (death rate is number of deaths / infections). Should death rate be the guide for successful policy? I think so. </span></span></div>
<div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; border: 0px; box-sizing: inherit; counter-reset: list-1 0 list-2 0 list-3 0 list-4 0 list-5 0 list-6 0 list-7 0 list-8 0 list-9 0; cursor: text; font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif; font-size: 18px; line-height: 1.5; padding: 0px; vertical-align: baseline; white-space: pre-wrap;">
<span style="background-color: black;"><span style="color: white;"><br /></span></span></div>
<div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; border: 0px; box-sizing: inherit; counter-reset: list-1 0 list-2 0 list-3 0 list-4 0 list-5 0 list-6 0 list-7 0 list-8 0 list-9 0; cursor: text; font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif; font-size: 18px; line-height: 1.5; padding: 0px; vertical-align: baseline; white-space: pre-wrap;">
<span style="background-color: black;"><span style="color: white;">But what about those asymptomatic people who are infected? If indeed we have more infected people than we can tell, and we relax the lockdown to level 3 or 2, we could have a spike of infections and deaths next month. </span></span><span style="background-color: black;"><span style="color: white;">I think that effective testing can resolve the problem. Those who test positive get quarantined and treated and those who test negative go back to work. The question is about testing every person, and quickly. </span></span><span style="background-color: black; color: white;">Testing, however, requires money and resources. </span></div>
<div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; border: 0px; box-sizing: inherit; counter-reset: list-1 0 list-2 0 list-3 0 list-4 0 list-5 0 list-6 0 list-7 0 list-8 0 list-9 0; cursor: text; font-family: -apple-system, system-ui, BlinkMacSystemFont, "Segoe UI", Roboto, "Helvetica Neue", "Fira Sans", Ubuntu, Oxygen, "Oxygen Sans", Cantarell, "Droid Sans", "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Lucida Grande", Helvetica, Arial, sans-serif; font-size: 18px; line-height: 1.5; padding: 0px; vertical-align: baseline; white-space: pre-wrap;">
<span style="background-color: black;"><span style="color: white;"><br /></span></span>
<span style="background-color: black;"><span style="color: white;">It was reported that the government is looking into the proposal of the Chief Economist of the Kiwibank Mr. Kerr to give people cash, maybe 6 billion dollars. Cash gift is an ineffective stimulus. The theory of consumption predicts that people do not spend windfalls. A few desperate people might, but there will be no significant increase in consumption. Deposits in Kiwibank might go up a little :) A better way to spend the money, in my view, is that the PM Jacinda Ardern spends it on testing. Test every person, and do it before the end of the year. Hopefully a vaccine will be available early next year.</span></span></div>
</div>
razzakwhttp://www.blogger.com/profile/04087757393890499853noreply@blogger.com0tag:blogger.com,1999:blog-2680978804801859885.post-31600133061763091742020-04-14T05:09:00.001+03:002020-04-14T05:09:24.784+03:00Does Testing for Coronaviris Reduce Death? <div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-size: large;">The Nobel Laureate Paul Romer explained his plan to restart the U.S. economy. He argues that conducting 30 million tests a day and allowing those who test negative to resume working would restart the economy sooner. Certainly, this is a smart idea that I have not heard anyone in this entirely infected world think about. Although they have been thinking about it for sure, so far, no government has provided any plan on how to restart the economy. Trump in fact said that he might stop testing altogether! </span><br />
<span style="font-size: large;"><br /></span>
<span style="font-size: large;">Germans, on the other hand, have been testing people more efficiently. Say that there are five people in your bubble. They do a combined test for all five at once. If the result is negative then all five people are safe. If positive, they redo the test to each one in the bubble. So Germany could easily follow Romer's plan to restart the economy.</span><br />
<span style="font-size: large;"><br /></span>
<span style="font-size: large;">The population is very small in NZ so we have a very good chance that we can restart the economy in a week if the government follows these strategies. </span><br />
<span style="font-size: large;"><br /></span><span style="font-size: large;">Ten days ago I began working on examining the effect of testing for Coronavirus on death. Ten days ago I found two data sets. The first one is published by the EU (<a href="https://data.europa.eu/euodp/en/data/dataset/covid-19-coronavirus-data/resource/55e8f966-d5c8-%20%20%20%20438e-85bc-c7a5a26f4863"><span style="color: red;">here</span></a>) and the other is by Oxford University (<a href="https://www.oxfordmartin.ox.ac.uk/global-development"><span style="color: red;">here</span></a>). The EU data set is large and reports data for deaths and infections by more than 200 countries and territories. Oxford University data set is smaller and reports data on testing for Coronavirus. The data are daily. Some countries report fewer data than other, different dates, and many have missing data. I combined both data sets to arrive at a balanced panel of 8 countries only that have continuous data from March 1 to March 31 for all three variables, tests, death, and infections.</span><br />
<span style="font-size: large;"><br /></span>
<span style="font-size: large;">I found that, <i>on average</i>, a one percent increase in daily testing for the Coronavirus reduces death by about 4 a day. When I allowed the coefficients to vary across countries, I found that the U.S. and Italy could reduce death by about 13 and 68 respectively. At a lower significance level, the Belgium and the U.K. could reduce death by about 2 and 32 respectively. Japan could reduce death by 25. So there is reasonable evidence in this small panel that testing for the virus reduces death. You can read the paper on Massey University Website in a couple of days (<a href="https://www.massey.ac.nz/massey/learning/colleges/college-business/school-of-economics-and-finance/research/discussion-paper-series.cfm"><span style="color: red;">here</span></a>). </span><br />
<br /></div>
razzakwhttp://www.blogger.com/profile/04087757393890499853noreply@blogger.com0tag:blogger.com,1999:blog-2680978804801859885.post-36198541350444751362020-03-29T00:57:00.003+03:002020-06-22T05:47:19.477+03:00The Efficacy of Loackdown in New Zealand <div dir="ltr" style="text-align: left;" trbidi="on">
I thought that I write another short essay on COVID-19 to analyze the effectiveness of the lockdown - the so called social distancing.<br />
<br />
The idea of social distancing is perfectly logical. The virus is like a fire and people are like the wood, if people separate the fire dies down with minimum losses.<br />
<br />
To model the infection rate I use the Gompertz Curve <a href="https://en.wikipedia.org/wiki/Gompertz_function">https://en.wikipedia.org/wiki/Gompertz_function</a><br />
<br />
You can look it up. It is a Sigmoid function which has four parameters, (a), (e), (b), and (c). The parameter (a) is an asymptote, (e) is called the Euler's constant equal to 2.71828, (b) is a parameter that governs the displacement along the x-axis, and (c) is the growth rate.<br />
<br />
I take the data of the total infection cases in NZ from the World Health Organization (daily) Situation Report from the data we started reporting, which was Feb 28 up to Mar 27 to illustrate the fit of the data to the Gompertz Curve. For (a=0.1), (b=0.2) and (c=0.5) along with (e) fixed at 2.71828, the data seem to fit remarkably well.<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgCOOjNGuDhacnPJ8eNWl1Aj6n_EERgdUGrRwsjCO2dNPx7cms6B_IEaqAExEUDaRnWBFXFj3FtcLjPqAn5e9czFsAAc7SEmgOSas0oFMN24lS5r6pvOYU1KGU2sebQUcyXOm9hvSMeJRq0/s1600/Figure+1.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="291" data-original-width="483" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgCOOjNGuDhacnPJ8eNWl1Aj6n_EERgdUGrRwsjCO2dNPx7cms6B_IEaqAExEUDaRnWBFXFj3FtcLjPqAn5e9czFsAAc7SEmgOSas0oFMN24lS5r6pvOYU1KGU2sebQUcyXOm9hvSMeJRq0/s400/Figure+1.jpg" width="400" /></a></div>
<div class="separator" style="clear: both; text-align: center;">
<br /></div>
<div class="separator" style="clear: both; text-align: left;">
Then I have two scenarios. The first scenario is about an effective and enforced lockdown, i.e. an effective social distancing. Under such scenario, the infection growth rate (c) falls significantly, and sooner. The second scenario is a less effective lockdown, whereby the growth rate falls at a slower rate and takes more time. Here are the assumed growth rate scenarios.</div>
<div class="separator" style="clear: both; text-align: left;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjuob25COJ1hQXqPBmB190iJlqkYmSfJmROUHQ_8QBgl4Kg2VcmBc4-S1F3R6eg-Hjj7QdNZKuADreulrYnLD2fdkDS4-PP_aSg2di-6G_BCk_qLSC6VqpD1ptyjCa6Lixfn0AizxHXOZz5/s1600/Figure+2.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="291" data-original-width="483" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjuob25COJ1hQXqPBmB190iJlqkYmSfJmROUHQ_8QBgl4Kg2VcmBc4-S1F3R6eg-Hjj7QdNZKuADreulrYnLD2fdkDS4-PP_aSg2di-6G_BCk_qLSC6VqpD1ptyjCa6Lixfn0AizxHXOZz5/s400/Figure+2.jpg" width="400" /></a></div>
<div class="separator" style="clear: both; text-align: left;">
<br /></div>
<div class="separator" style="clear: both; text-align: left;">
Here is the projection of the infection rate under the effective lockdown scenario. The infection rate peaks at 2,630 cases on April 3, then takes a nosedive very similar to the Chinese case.</div>
<div class="separator" style="clear: both; text-align: left;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg9WYRgf1BGOifntIxKHOS0o22ZZ7tCtZCvAUt3xEv0anjNfJWf1XswWU3XQdDXwRxlS6Iyqz66DYzG7N3TiyB0LfT8qc2Yfyj6Y_9nApxNG9ovs77oUeqTpn6SnoM1nIc5U_Vst41rH8Fg/s1600/Figure+3.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="291" data-original-width="483" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg9WYRgf1BGOifntIxKHOS0o22ZZ7tCtZCvAUt3xEv0anjNfJWf1XswWU3XQdDXwRxlS6Iyqz66DYzG7N3TiyB0LfT8qc2Yfyj6Y_9nApxNG9ovs77oUeqTpn6SnoM1nIc5U_Vst41rH8Fg/s400/Figure+3.jpg" width="400" /></a></div>
<div class="separator" style="clear: both; text-align: left;">
<br /></div>
<div class="separator" style="clear: both; text-align: left;">
And here is the less effective lockdown (less effective social distancing), where the infection peaks at a staggering 78,203 cases on April 15.</div>
<div class="separator" style="clear: both; text-align: left;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgBKN3UxZyWPPK9un6L74FkU-5E-XSIfsBmyKUbMau92D3qzGIDi0kAgbQUJawUzBJbYSSGKCWLbEOqjJypVcoVL1mHsEcXvT3LgneBFEKklImsMjrnXEUoJb-lL_H4Hots1nXaWayTcB6S/s1600/Figure+4.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="291" data-original-width="483" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgBKN3UxZyWPPK9un6L74FkU-5E-XSIfsBmyKUbMau92D3qzGIDi0kAgbQUJawUzBJbYSSGKCWLbEOqjJypVcoVL1mHsEcXvT3LgneBFEKklImsMjrnXEUoJb-lL_H4Hots1nXaWayTcB6S/s400/Figure+4.jpg" width="400" /></a></div>
<div class="separator" style="clear: both; text-align: left;">
<br /></div>
<div class="separator" style="clear: both; text-align: left;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-NZ; mso-ascii-theme-font: major-bidi; mso-bidi-language: AR-SA; mso-bidi-theme-font: major-bidi; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-fareast; mso-hansi-theme-font: major-bidi;">This is quite a
significant increase in two weeks period,</span><span style="font-family: "Times New Roman", serif; font-size: 12pt; line-height: 115%;"> a
staggering 75,573 </span><span style="font-family: "Times New Roman", serif; font-size: 12pt; line-height: 115%;">more cases</span><span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-NZ; mso-ascii-theme-font: major-bidi; mso-bidi-language: AR-SA; mso-bidi-theme-font: major-bidi; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-fareast; mso-hansi-theme-font: major-bidi;">.
It emphasizes the importance and effectiveness of the lockdown and strict
social distancing, which seems to be crucial to defeat the virus. </span></div>
<div class="separator" style="clear: both; text-align: left;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-NZ; mso-ascii-theme-font: major-bidi; mso-bidi-language: AR-SA; mso-bidi-theme-font: major-bidi; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-fareast; mso-hansi-theme-font: major-bidi;"><br /></span></div>
<div class="separator" style="clear: both; text-align: left;">
<span style="font-family: "Times New Roman","serif"; font-size: 12.0pt; line-height: 115%; mso-ansi-language: EN-NZ; mso-ascii-theme-font: major-bidi; mso-bidi-language: AR-SA; mso-bidi-theme-font: major-bidi; mso-fareast-font-family: "Times New Roman"; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-fareast; mso-hansi-theme-font: major-bidi;">See
Greenstone and Nigam (2020).<a href="file:///D:/Weshah%20work/MYData/Weshah%20Documents/Personal%20documents/Photos/Desktop/Modelling%20New%20Zealand%20COVID%2019%20Infections%20and%20Projections.docx#_ftn1" name="_ftnref1" title=""><span class="MsoFootnoteReference"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-size: 12pt; line-height: 115%;">[1]</span></span><!--[endif]--></span></a> In a rather more elaborate model, they projected that moderate social distancing would save 1.7 million lives between March 1 and October 1 in the United States. </span></div>
<div>
<hr align="left" size="1" width="33%" />
<!--[endif]-->
<div id="ftn1">
<div class="MsoNormal" style="line-height: normal; margin-bottom: .0001pt; margin-bottom: 0cm;">
<a href="file:///D:/Weshah%20work/MYData/Weshah%20Documents/Personal%20documents/Photos/Desktop/Modelling%20New%20Zealand%20COVID%2019%20Infections%20and%20Projections.docx#_ftnref1" name="_ftn1" title=""><span class="MsoFootnoteReference"><span style="font-size: 10.0pt;"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-family: "Calibri","sans-serif"; font-size: 10.0pt; line-height: 115%; mso-ansi-language: EN-NZ; mso-ascii-theme-font: minor-latin; mso-bidi-font-family: Arial; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin; mso-hansi-theme-font: minor-latin;">[1]</span></span><!--[endif]--></span></span></a><span style="font-size: 10.0pt;"> </span><span style="font-family: "Times New Roman","serif"; font-size: 10.0pt; mso-ascii-theme-font: major-bidi; mso-bidi-theme-font: major-bidi; mso-hansi-theme-font: major-bidi;">Greenstone, M. and V. Nigam. (2020).
Does Social Distancing Matter? University of Chicago - Becker Friedman Institute for Economics WP No. 2020-26</span></div>
<div class="MsoFootnoteText">
<br /></div>
</div>
</div>
<div class="separator" style="clear: both; text-align: left;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
</div>
</div>
razzakwhttp://www.blogger.com/profile/04087757393890499853noreply@blogger.com0tag:blogger.com,1999:blog-2680978804801859885.post-49248869463773954152020-03-16T03:21:00.001+03:002020-03-16T03:21:53.869+03:00The Pandemic and Policy in New Zealand <div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal">
<span lang="EN-US"><span style="font-family: Courier New, Courier, monospace; font-size: large;">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. </span></span></div>
<div class="MsoNormal">
<span lang="EN-US"><span style="font-family: Courier New, Courier, monospace; font-size: large;"><br /></span></span></div>
<div class="MsoNormal">
<span lang="EN-US"><span style="font-family: Courier New, Courier, monospace; font-size: large;">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. </span></span></div>
<div class="MsoNormal">
<span lang="EN-US"><span style="font-family: Courier New, Courier, monospace; font-size: large;"><br /></span></span></div>
<div class="MsoNormal">
<span lang="EN-US"><span style="font-family: Courier New, Courier, monospace; font-size: large;">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. </span></span></div>
<div class="MsoNormal">
<span lang="EN-US"><span style="font-family: Courier New, Courier, monospace; font-size: large;"><br /></span></span></div>
<div class="MsoNormal">
<span lang="EN-US"><span style="font-family: Courier New, Courier, monospace; font-size: large;">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.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></span></div>
<div class="MsoNormal">
<span lang="EN-US"><span style="font-family: Courier New, Courier, monospace; font-size: large;"><br /></span></span></div>
<div class="MsoNormal">
<span lang="EN-US"><span style="font-family: Courier New, Courier, monospace; font-size: large;">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. <b><i>Everything
else remains unchanged</i></b>; 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</span>.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjBJiDRDFXQj2L4hnNlUh-5LbJ0DK4xREJtJd5qWfcHyOzVWbRU_BionHoA6tqWkuVE6P0bCQZdesRJWh82bULecez2ZNkDVj3AqNwk4n0d7DjvlvPu871MFofaBdTpJeKQSeqGrJyQqGk7/s1600/NZ+Lending+Rate.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="291" data-original-width="483" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjBJiDRDFXQj2L4hnNlUh-5LbJ0DK4xREJtJd5qWfcHyOzVWbRU_BionHoA6tqWkuVE6P0bCQZdesRJWh82bULecez2ZNkDVj3AqNwk4n0d7DjvlvPu871MFofaBdTpJeKQSeqGrJyQqGk7/s400/NZ+Lending+Rate.jpg" width="400" /></a></div>
<br />
<div class="MsoNormal">
<br /></div>
<br /></div>
razzakwhttp://www.blogger.com/profile/04087757393890499853noreply@blogger.com0tag:blogger.com,1999:blog-2680978804801859885.post-44330278703291438462020-02-24T09:06:00.001+03:002020-02-26T02:24:22.284+03:00New Zealand Government Spending and the Inflation Target <div dir="ltr" style="text-align: left;" trbidi="on">
<div style="text-align: center;">
<br /></div>
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;">The RBNZ would be happy when inflation is at target. The nominal interest rate has been close to zero for a long time. This is called the Zero Lower Bound, where monetary policy cannot lower the interest to stimulate the economy and push inflation up to the target unless going negative. </span><br />
<span style="font-size: large;"><span style="font-family: "courier new" , "courier" , monospace;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace;">The Governor of the RBNZ called upon the government to spend more money. Since the interest rate is low, the RB is obviously encouraging spending. The government responded later by an investment package. </span></span><br />
<span style="font-size: large;"><span style="font-family: "courier new" , "courier" , monospace;"><br /></span><span style="font-family: "courier new" , "courier" , monospace;">Spending will stimulate aggregate demand and buy votes. However, If the government wants to expand demand and increase inflation to meet the inflation target of 2 percent, then the question is how much money it has to spend to achieve that?</span></span><br />
<span style="font-size: large;"><span style="font-family: "courier new" , "courier" , monospace;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace;">I will show here that the government must spend a huge amount of money to achieve a 2 percent inflation.</span></span><br />
<span style="font-size: large;"><span style="font-family: "courier new" , "courier" , monospace;"><br /></span><span style="font-family: "courier new" , "courier" , monospace;">We know from John Taylor and Valerie Ramey research that the government spending multiplier is small in the U.S. and the Obama fiscal package did not have a significant impact.</span></span><br />
<span style="font-size: large;"><span style="font-family: "courier new" , "courier" , monospace;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace;">Today, I answer a more specific question. Suppose that the Zero Lower Bound constraint is binding so the nominal interest rate is zero. Hence, monetary policy is ineffective. The inflation target is 2 percent. How much the government have to spend in order to restore the inflation target?</span></span><br />
<span style="font-size: large;"><span style="font-family: "courier new" , "courier" , monospace;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace;">To answer this question we have to have a theory for the <u>natural rate of interest</u>. I am working on this now and I thought it would be a good idea if I do the calculations for NZ and share it with you. This is not the place to do all the math, and there is a lot of it in this research, but I will explain and hope that it would be clear.</span></span><br />
<span style="font-size: large;"><span style="font-family: "courier new" , "courier" , monospace;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace;">The natural rate is an unobservable variable, Wicksell (1898. Here is a translation of the main point regarding price change</span><span style="font-family: "courier new" , "courier" , monospace; text-align: center;">[Boldface and italic is my emphasis].</span></span><br />
<div class="MsoNormal">
<span lang="EN-US" style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span></div>
<div class="MsoNormal" style="text-align: center;">
<span lang="EN-US" style="font-family: "courier new" , "courier" , monospace; font-size: large;">“… <b><i>These
two rates of interest, the natural rate and the money rate, which is quoted on
the market, tend of course, to coincide. If the former differs from the latter,
money can no longer be said to be “neutral,” and monetary consequences in the
shape of change in prices are bound to ensue. If the money rate were kept below
the natural rate prices would rise, if above they would fall.</i></b><i>”</i></span></div>
<div class="MsoNormal" style="text-align: center;">
<span lang="EN-US" style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span></div>
<div class="MsoNormal" style="text-align: left;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;">So that means if r* is the natural rate of interest, and i is the nominal rate, r* - i = inflation.</span><br />
<span style="font-size: large;"><span style="font-family: "courier new" , "courier" , monospace;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace;">The story goes like this. Let the economy be made of three optimizing agents, a household, a firm, and a government. The household maximizes a utility function subject to a budget constraint. The utility function has two arguments: a consumption good and leisure. The household makes a decision about saving-consumption, and consumption-leisure. The household holds bonds and stocks, and owns the capital stock, which is rented out to a firm that uses it along with labor to produce output. The household pays taxes on consumption, on investments, on income from capital, and on labor income. All tax revenues, except those used to finance pure public consumption good (e.g., education, defense, etc.) are given back to the household in the form of lump sum transfers from the government. This is a simple model that covers the basics.</span></span></div>
<div class="MsoNormal" style="text-align: left;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><span lang="EN-US"><br /></span>
<span lang="EN-US">The solution of this simple model results in a parsimonious equation for the natural rate of interest, which could be easily computed (no estimation) using observable raw data. </span><span lang="EN-US">The natural rate r* would be zero when consumption grows at the same rate of leisure and capital grows at the same rate of labor. Once these gaps open up, r* changes. The natural rate depends positively on the growth rate of consumption, </span> negatively on the growth rate of leisure, negatively on the growth rate of the stock of capital, and positively on the growth rate of labor.</span><br />
<span style="font-size: large;"><span style="font-family: "courier new" , "courier" , monospace;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace;">Note that there is a great degree of uncertainty about the value of r* because people have different ways of modelling Wicksell's idea. Thus, r* is model-dependent. Therefore, what I have may well be very different from what the RB has in mind, and both of us are different from what Wicksell had in mind.</span></span></div>
<div class="MsoNormal" style="text-align: left;">
<span style="font-family: "courier new" , "courier" , monospace;"><span lang="EN-US" style="font-size: large;"><br /></span></span></div>
<div class="MsoNormal" style="text-align: left;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;">Here are Some measurements.</span></div>
<div class="MsoNormal" style="text-align: left;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span></div>
<div class="MsoNormal" style="text-align: left;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;">Consumption is private consumption plus government consumption less military spending less indirect taxes on consumption. Military spending is trivial in NZ. </span><br />
<span style="font-size: large;"><span style="font-family: "courier new" , "courier" , monospace;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace;">Labor is measured by working age population (15-64 years). I assume that the household has 100 hours a week available for work in the market to make money and pay taxes. Therefore, leisure is 100 minus the average weekly hours worked. For example, if a household average weekly hours worked are 30 hours, leisure time would be 70 hours. That is all we need to measure r*, but I am asking about the projection of r*, the future.</span></span></div>
<div class="MsoNormal" style="text-align: left;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span></div>
<div class="MsoNormal" style="text-align: left;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;">I look at the period 2018 to 2024 as the projection horizon because the IMF has this horizon and some data are taken from the IMF - World Economic Outlook. I assume that consumption follows a random walk(Robert Hall). </span><br />
<span style="font-size: large;"><span style="font-family: "courier new" , "courier" , monospace;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace;">I assume that military spending and the indirect taxes on consumption are unchanged from 2018 to 2024, which is also reasonable. </span></span><br />
<span style="font-size: large;"><span style="font-family: "courier new" , "courier" , monospace;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace;">Capital stock evolves according to a typical Perpetual Inventory equation, (1-depreciation rate)*last period capital stock plus investment. The stock of capital and the depreciation rate are published by the World Penn Table 9.1. The investment forecasts are reported by the IMF, except that they are nominal percentages of current GDP. Given current GDP, we compute the level and deflate it by the GDP implicit price deflator to obtain real investments.</span></span><br />
<span style="font-size: large;"><span style="font-family: "courier new" , "courier" , monospace;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace;">Working age population is from the OECD population projections. Leisure requires measuring average weekly hours worked. This is hours worked by employed people from the OECD statistics times (multiplied by) employment/working age population ratio. Then we compute 100- average weekly hours worked. </span></span></div>
<div class="MsoNormal" style="text-align: left;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span></div>
<div class="MsoNormal" style="text-align: left;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;">I solve the model for the level of government sending needed to make r*=2, which is needed to achieve the 2 percent inflation target when nominal interest rate is zero. </span><br />
<span style="font-size: large;"><span style="font-family: "courier new" , "courier" , monospace;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace;">The average growth rate of consumption over the period 2018 - 2019 is projected to be 9 percent. It is high because it includes the increase in government spending that we need to achieve the inflation target. The stock of capital average growth rate is projected to be 7.8 percent, also high. Working age population growth rate average is 0.8, and leisure average growth rate is zero because there is no change in future average weekly hours worked. </span><span style="font-family: "courier new" , "courier" , monospace;">Hence,</span><span style="font-family: "courier new" , "courier" , monospace;">r* is 2. To get to this, government spending must increase by 20% <u>on average</u> over the period 2018 t 2024. This is a relatively very high growth rate knowing that the average growth rate between 2000 and 2017 was 3% only. I conclude that it is very costly to use fiscal policy to achieve the inflation target.</span></span></div>
<div class="MsoNormal" style="text-align: left;">
<span style="font-size: large;"><span style="font-family: "courier new" , "courier" , monospace;"><br /></span>
</span><br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhA9AM8RUINQcebwDhp_TdPiZsBW5TJPTIQkzB3f0PwFPywRBg8E090CZLoGzTTJxyk4IPCu-QY09bLV3vdNJ7JruXEd5sDwsgAu4i0vDU_W9_nysdVpELUsgMJL6zCZNhBsoe_gDFzRa6z/s1600/NZ+G+growth.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-size: large;"><img border="0" data-original-height="291" data-original-width="483" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhA9AM8RUINQcebwDhp_TdPiZsBW5TJPTIQkzB3f0PwFPywRBg8E090CZLoGzTTJxyk4IPCu-QY09bLV3vdNJ7JruXEd5sDwsgAu4i0vDU_W9_nysdVpELUsgMJL6zCZNhBsoe_gDFzRa6z/s400/NZ+G+growth.jpg" width="400" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"> </span><br />
<div class="separator" style="clear: both; text-align: center;">
</div>
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjtj1kfR7sc8TzwZ7Qs2uQ0l7pxcpn5qsjIBsFf4hVFKogIucGMGKrGnaqHXwIAYv2zy5dQwpyuDh2qHfn5SuGKArzRvdWMf2X2Zkau1mofd_SekkYHsAYRencSZbwBQNwUXMAaqu-fcyxk/s1600/NZ+G+growth.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: "courier new" , "courier" , monospace; font-size: large;"></span></a></div>
<div class="MsoNormal" style="text-align: left;">
<span style="font-size: large;"><span lang="EN-US" style="font-family: "courier new" , "courier" , monospace;"><br /></span>
</span></div>
<div class="MsoNormal" style="text-align: left;">
<span lang="EN-US" style="font-family: "courier new" , "courier" , monospace; font-size: large;"> </span></div>
</div>
razzakwhttp://www.blogger.com/profile/04087757393890499853noreply@blogger.com0tag:blogger.com,1999:blog-2680978804801859885.post-89617599198844460652019-10-28T05:42:00.000+03:002019-10-28T05:42:01.970+03:00Is The Unemployment Rate in New Zealand Really Low?<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;">Statistics NZ published the latest unemployment rate; it is 3.9 percent (June 2019). Excellent. </span><br />
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;">However, higher for females, 4.2 percent. Male unemployment rate is 3.6 percent.</span><br />
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;">So even in New Zealand, which is a very progressive liberal country, the unemployment rate is higher for women; it always has been.</span><br />
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;">Female wage rate is also lower than males. Male and female get paid the same, on average, up to age 30 or so, then males get paid more. Pay equalized again later in life. I have not seen much research on this in NZ. It could be the effect of child-rearing or something else, i.e., some might say discrimination. </span><br />
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;">That's not the whole story.</span><br />
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;">Minorities such as Maori, Pacific People, and Asians have higher unemployment rates than Europeans. Here is the full picture.</span><br />
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;"><br /></span>
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhnKjbxdax7eAqJ7TZYI4-A_pfrXBR7UxxhZZWdTpPImlQ-Ee2VM5b6wGjs6_gVN-stZtsFoTQKRVBuEJEmCksps2ZR8gBSZya3SYAundgPMT-QCsmYgvMS66TfanxYf3Ns8UU_kvM0YF08/s1600/unemployment+rate.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: "courier new" , "courier" , monospace; font-size: medium;"><img border="0" data-original-height="291" data-original-width="483" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhnKjbxdax7eAqJ7TZYI4-A_pfrXBR7UxxhZZWdTpPImlQ-Ee2VM5b6wGjs6_gVN-stZtsFoTQKRVBuEJEmCksps2ZR8gBSZya3SYAundgPMT-QCsmYgvMS66TfanxYf3Ns8UU_kvM0YF08/s400/unemployment+rate.jpg" width="400" /></span></a></div>
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;">The rates in 2019 are 3.4, 8.7, 8.2 and 4.2 percent for Europeans, Maori, Pacific People, and Asians respectively. Much higher than 3.9 percent! Maori and Pacific People unemployment rates are more than double the rate of the Europeans?</span><br />
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;">The averages over the past 10 years, are worse: 4.2, 11.6, 11.4 and 6.3 percent for Europeans, Maori, Pacific People, and Asians respectively.</span><br />
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;"><br /></span><span style="font-family: "courier new" , "courier" , monospace; font-size: medium;">Maoris and Pacific People participation rate is not significantly different from the rest.</span><br />
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;">The participation rate <i><b>trend</b></i> for these groups is constant. However, participation rates have been always, slightly, lower for the minorities than the Europeans. Really, if Maori and Pacific People are not looking for jobs, their unemployment rate might even be higher than the posted numbers.</span><br />
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;"><br /></span><span style="font-family: "courier new" , "courier" , monospace; font-size: medium;">So they look for jobs and don't get any, how do they live?</span><br />
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;">The Ministry of Social Development's Benefit Fact Sheet for 2019 shows that the total recipients of benefits, as a percent of working age population, are 37.9 percent Europeans, 36.9 percent are Maori, and 8.2 percent are Pacific People!</span><br />
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;">On average over the past 5 years, Europeans are 39.9 and Maori and 35.5 percent. Pacific Islanders are receiving much less benefits. Puzzling. Again, how do they get by?</span><br />
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;">Remember that Maoris make up less than 17 percent of the total population but they receive just as much benefit as the Europeans!</span><span style="font-family: "courier new" , "courier" , monospace; font-size: medium;">Pacific People make up about 7.5 percent of the population. Problem.</span><br />
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;">Maori and Pacific People unemployment rates have been higher than 8 percent for decades. These are problems?</span><br />
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;">New Zealand is not a high-tech country really. We are a farming, commodity-exporting, and services economy. Does it make sense that Maori and Pacific People cannot find jobs in such economy? How come their unemployment rates are persistently high?</span><br />
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;">On the other hand, work is a European concept, hence the importance of the statistics about the labor market such as unemployment and participation rates. The Polynesian culture has been a hunting and fishing then an agricultural culture. Maybe Polynesians do not enjoy a 9-5 type of work in an office, a warehouse, bank, factory or hospital...etc.Could that be part of the story? I don't know. Is there research on these issue? I could not find any.</span><br />
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;">Using a European yard-stick to measure their labor market performance might be useless. Of course I am not talking about all people of such heritage; I am talking in general. Either way one need to know what is going on with the high unemployment rate. </span><br />
<span style="font-family: "courier new" , "courier" , monospace; font-size: medium;"><br /></span>
<span style="font-family: "courier new", courier, monospace; font-size: medium;"> </span><br />
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span>
<br />
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span>
<br />
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span>
</div>
razzakwhttp://www.blogger.com/profile/04087757393890499853noreply@blogger.com0tag:blogger.com,1999:blog-2680978804801859885.post-48797596732945803782019-10-20T00:16:00.000+03:002019-10-20T00:16:10.176+03:00RBNZ Bank Capital Story <div dir="ltr" style="text-align: left;" trbidi="on">
The RBNZ "<i>bank capital requirement</i>" review has become contentious. Yesterday, Michael Reddell (<a href="https://croakingcassandra.com/"><span style="color: red;">https://croakingcassandra.com/</span></a>) showed three convincing graphs to debunk the RBNZ claim that the main reason for wanting to raise bank capital requirements is that our macro volatility is high.<br />
<br />
Grant Spencer spoke about the process to review bank capital in October 2017. You could find his speech online. It is a nice speech. Thus, this is not something the new Governor invented for sure. The RBNZ thought about it earlier.<br />
<br />
Here, I want to add one more graph to Reddell's three graphs to show that New Zealand's macro volatility is not significantly different from Australia's, not at all.<br />
<br />
I decompose the real interest rate differentials <i>r-r*, </i>where <i>r </i>is New Zealand's real interest rate and <i>r*</i>is the U.S. real interest rate to Country Risk and a Currency Risk.<br />
<br />
<div style="text-align: center;">
<i>r-r* = (i - i*-f) + [(f-ds) + dq]</i></div>
<div style="text-align: left;">
<i><br /></i></div>
<div style="text-align: left;">
The first term is the Country Risk; the second and the third are the Currency Risk.</div>
<div style="text-align: left;">
<i><br /></i></div>
<div style="text-align: left;">
<i>i </i>is New Zealand's 3-month nominal interest rate;<i> i* </i>is the U.S. 3-month T-Bill interest rate; and<i> f </i>is the forward exchange rate of the NZD-USD. <i>ds </i>is the nominal exchange rate depreciation rate, which is zero under perfect foresight. <i>dq </i>is the expected real exchange rate depreciation rate. I do not have actual data for <i>f</i> so I proxy it by <i>s(t) - s(t-12). </i>I do the same for Australia and focus on the Country Risk - the first term in the equation because the currency risk is almost the same for both the Kiwi dollar and the AUD.</div>
<div style="text-align: left;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgITumt5G_VAJEwkWu8hpnvw3SCc8Ydj0izMTAYuMaEB0-LtMGU7kEqxt18l_Syj5Jt8SDKpxjIpZFuKrKjlFNhYp56kk_2q0O9nDLM7EI5QysdYrSQgfWtWT5nwNIUnxarcAoIu11s8lZx/s1600/Country+Risk.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="291" data-original-width="481" height="241" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgITumt5G_VAJEwkWu8hpnvw3SCc8Ydj0izMTAYuMaEB0-LtMGU7kEqxt18l_Syj5Jt8SDKpxjIpZFuKrKjlFNhYp56kk_2q0O9nDLM7EI5QysdYrSQgfWtWT5nwNIUnxarcAoIu11s8lZx/s400/Country+Risk.jpg" width="400" /></a></div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<div style="text-align: left;">
<br /></div>
<div style="text-align: left;">
The country risk for Australia and New Zealand are almost identical. The Standard Deviations are 11.4 for Australia and 11.9 for New Zealand.</div>
<div style="text-align: left;">
<br /></div>
<div style="text-align: left;">
There is no convincing macro indicator to use as a reason to raise bank capital. </div>
<div style="text-align: left;">
<br /></div>
<div style="text-align: left;">
Maybe the RBNZ has other reasons, not macro ones.</div>
<div style="text-align: left;">
<br /></div>
<div style="text-align: left;">
The IMF newly published World Economic Outlook increased our growth rate forecast. Our banks withstood the massive Global Financial Crisis. Reddell also mentioned that we do not even have data for banking crisis that occurred once in 200 years.</div>
<div style="text-align: left;">
<br /></div>
<div style="text-align: left;">
The RBNZ must come up with a more reasonable story for its capital level review.</div>
<div style="text-align: left;">
<br /></div>
<div style="text-align: left;">
<br /></div>
<div style="text-align: left;">
<br /></div>
</div>
razzakwhttp://www.blogger.com/profile/04087757393890499853noreply@blogger.com0tag:blogger.com,1999:blog-2680978804801859885.post-26051195885892235582019-08-17T04:14:00.000+03:002019-08-17T04:14:08.260+03:00The RBNZ's OCR Cut<div dir="ltr" style="text-align: left;" trbidi="on">
Business NZ criticized the RBNZ for cutting the OCR by 50 basis point recently. It said that the <i><b>current </b></i>economic conditions do not warrant such a large cut.<br />
<br />
The governor of the RBNZ issues a statement saying that the RB makes<b><i> forward looking </i></b>policy decisions, i.e., it is based on forecasts of domestic and global economic conditions, and not on current conditions.<br />
<br />
Makes sense to me. Obviously, monetary policy affects the economy with "variable and long lags," i.e., it takes time for the OCR cut to work through.<br />
<br />
That being said, there is an issue with the RBNZ OCR cut. It assumes that its forecast is reliable. No forecast is reliable. A forecast error could translate into a policy error. Policy errors are persistent. They are costly to undo. In this case, large policy move is riskier than small moves.<br />
<br />
Economists usually argued for interest rate smoothing. A <b><i>large</i></b> shock, if indeed it is large, which requires a 50 basis points cut in OCR could have been smoothed out, 25 followed by 25.<br />
<br />
Shocks are hard to identify ex-post let alone predict ex-ante.<br />
<br />
But let's examine the RBNZ forecasts, which is posted in the MPS, chapter 4, pp. 26 - 35.<br />
<br />
They do not indicate, to me at least, that there are problems that warrant a 50 basis point, surprise, cut in OCR!<br />
<br />
Begin from the bottom page, forecasts up to 2020 show that, tradeables inflation is low - near zero; CPI inflation returning to the target; non-tradebales inflation is forecast to "dip" slightly. It looks like it increasing before dipping. This is basically house price inflation, asset price inflation. With lower OCR, house price inflation should increase!<br />
<br />
Wage inflation is expected to increase!<br />
<br />
<br />
The output gap is positive but they have a small decline in 2019!<br />
<br />
These forecasts do not indicate a need for this large cut in OCR.<br />
<br />
Employment does not look like falling. They say it is near maximum.<br />
<br />
Unemployment increases very little over the forecasting horizon. These forecasts do not seem to warrant a 50 basis points cut in interest rate either.<br />
<br />
Business investments up over the forecasting horizon, but the forecast is revised downward relative to last MPS forecast.<br />
<br />
Fiscal stimulus supports a lift in GDP growth. Government consumption is up over the forecasting period and higher than that made in May MPS.<br />
<br />
Households consumption is higher than the previous forecast, albeit weak, they said, 2 percent growth on average perhaps!<br />
<br />
Residential investments do not indicate weakness, rather strong. House price inflation is up.<br />
<br />
Overall, real GDP is projected to be "subdued" .<br />
<br />
Net immigration remains elevated but is expected to
decline.<br />
<br />
Demand for New Zealand’s exports is slowing.<br />
<br />
Import price expected to be lower.<br />
<br />
Net immigration remains elevated but is expected to
decline<br />
<br />
They say that global conditions have continued to weaken, but I wonder how good is the RB forecast of global conditions.<br />
<br />
I do not see anything alarming in these projections really. Therefore, the 50 basis point cut remains controversial.<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br /></div>
razzakwhttp://www.blogger.com/profile/04087757393890499853noreply@blogger.com0tag:blogger.com,1999:blog-2680978804801859885.post-21834500023189550222019-06-28T05:29:00.001+03:002019-06-28T05:29:30.496+03:00Price Stability and Inflation in New Zealand<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;">Many people ask why prices increase year after year while
the Reserve Bank says the inflation rate is low. I have heard economists who cast doubt about
the merit of inflation targeting citing rising prices as a reason! </span></div>
<div class="MsoNormal">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;">I bet that if we conduct a survey we would be surprised to
know that most people think the same way.</span></div>
<div class="MsoNormal">
<i><span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span></i></div>
<div class="MsoNormal">
<i><span style="font-family: "courier new" , "courier" , monospace; font-size: large;">A layman’s explanation first<o:p></o:p></span></i></div>
<div class="MsoNormal">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;">This is just an example using arbitrary numbers. Table (1)
has four columns. Column 1 has four years, 1 to 4. There is a price level in
the second column and the <i>percentage change of the price level</i>, i.e. the
inflation rate in the last column.</span></div>
<div class="MsoNormal">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span></div>
<div class="MsoNormal" style="text-align: center;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;">Table 1</span></div>
<div class="MsoNormal" style="text-align: center;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhD9J8zUzNxfOZmet1XEgTggJ90NA2aYIwOsg1T08w-d-ewaRbOyk6miDeZWpCDmVdc-b2yAGqFsSnITErOs8b5UYM_b0vksbUsd-vGdcsnfR7I0TPw6omvvpc_A8vyhIkN3Y1Vap5b_0la/s1600/Table+1.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><img border="0" data-original-height="106" data-original-width="481" height="87" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhD9J8zUzNxfOZmet1XEgTggJ90NA2aYIwOsg1T08w-d-ewaRbOyk6miDeZWpCDmVdc-b2yAGqFsSnITErOs8b5UYM_b0vksbUsd-vGdcsnfR7I0TPw6omvvpc_A8vyhIkN3Y1Vap5b_0la/s400/Table+1.jpg" width="400" /></span></a></div>
<div class="MsoNormal" style="text-align: center;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span></div>
<div class="MsoNormal" style="text-align: left;">
<br /></div>
<div class="MsoNormal">
<span style="font-family: Courier New, Courier, monospace; font-size: large;"></span><br />
<div style="margin-bottom: .0001pt; margin: 0cm;">
<span style="font-family: Courier New, Courier, monospace; font-size: large;">So in this example the price increased
every year from 100 to 102 to 104... The inflation rate, however, remained
stable, 2 percent every year. This is what an inflation-targeting central bank
desires to achieve. <o:p></o:p></span></div>
</div>
<div class="MsoNormal">
<div class="MsoNormal" style="text-align: left;">
<span style="font-family: Courier New, Courier, monospace; font-size: large;"><br /></span></div>
<div class="MsoNormal" style="text-align: left;">
<span style="line-height: 18.4px;"><span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span></span></div>
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;">Inflation-targeting central banks treat <i>bygones as bygones</i>. Essentially, the central bank ignores the effects of the various shocks that increase the price level and focuses on maintaining the inflation rate target period by period. The price level is not the concern of the inflation-targeting central bank.Under inflation targeting, the price level will <i>drift</i>
up forever. That is why prices keep increasing every year and the inflation
rate does not.</span></div>
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><span style="font-size: medium;"><br /></span>
</span><br />
<div class="MsoNormal">
<span style="line-height: 115%;"><span style="font-family: "courier new" , "courier" , monospace; font-size: large;">
</span></span></div>
<div class="MsoNormal">
<span style="font-family: "courier new" , "courier" , monospace;"><span style="font-family: "courier new" , "courier" , monospace; font-size: large;">The sketch below describes it in a different way. A shock at
period 1 increases the price from p0 to p1. The price stays there, but the
inflation rate, which is the slope (i.e. the change in the price over time),
remained unchanged.</span></span></div>
<div class="MsoNormal">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEitl-F0Ir2XF2WQ_ftpzORZqa78DhNhUfGgkBjt3-FvUF3-AvxdNpePAZebZB71RcVrYtxqQlgQj-_ktXrjFC1KXsbP7gxT64xBHSAjDDcn0IiFFmX6rZXE6X8kTKsZPVFOQ9hrsD-ehsJZ/s1600/Sketch.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><img border="0" data-original-height="332" data-original-width="604" height="218" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEitl-F0Ir2XF2WQ_ftpzORZqa78DhNhUfGgkBjt3-FvUF3-AvxdNpePAZebZB71RcVrYtxqQlgQj-_ktXrjFC1KXsbP7gxT64xBHSAjDDcn0IiFFmX6rZXE6X8kTKsZPVFOQ9hrsD-ehsJZ/s400/Sketch.jpg" width="400" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span></div>
<div class="separator" style="clear: both; text-align: left;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><i>Academic talk</i> - not for the average reader </span></div>
<div class="separator" style="clear: both; text-align: left;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span></div>
<div class="separator" style="clear: both; text-align: left;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;">We could go further and use academic language for those who are interested. I tested the data for NZ as everyone in this field does routinely. The price level measured by the CPI has a unit root; inflation does not.</span></div>
<div class="separator" style="clear: both; text-align: left;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span></div>
<div class="separator" style="clear: both; text-align: center;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;">Figure (2) </span></div>
<div class="separator" style="clear: both; text-align: center;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgc2uSWL0wSdr4FJ2z_R1E2ueHWQXWYj6Aq3dzQN4Vt8lTdGuiMHf8xUl6cgaSjSvpKzq-LB_hvY5V9x_HO0PYFQG38PqzVYwSazWyqDZ72xS5oys_ys652xFXP_X9jPz7BUOtEtVmQpclh/s1600/Figure+1.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><img border="0" data-original-height="291" data-original-width="483" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgc2uSWL0wSdr4FJ2z_R1E2ueHWQXWYj6Aq3dzQN4Vt8lTdGuiMHf8xUl6cgaSjSvpKzq-LB_hvY5V9x_HO0PYFQG38PqzVYwSazWyqDZ72xS5oys_ys652xFXP_X9jPz7BUOtEtVmQpclh/s400/Figure+1.jpg" width="400" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span></div>
<div class="separator" style="clear: both; text-align: left;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;">Thus, the forecast of the price level is meaningless because the forecast error variance grows to infinity as the forecast horizon increases. The mean, variance...of the price level are all functions of time.These are the results of targeting the inflation rate. The RB could target the price level if they want to. I have shown that (with Eric Hansen) in 1995 in an RB conference. No takers. Many scholars have written about price level targeting. Still No takers.</span></div>
<div class="separator" style="clear: both; text-align: left;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span></div>
<div class="separator" style="clear: both; text-align: left;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;">As long as the public demand for money (the stock of money, e.g., M1)keeps increasing, which is the case in NZ, the price level will increase in proportion because people spend the money (could be spent on assets and housing too and increase asset prices). Money and prices are highly correlated. Inflation and money growth, however, are not correlated at all because the RBNZ rendered inflation stationary, but not money.I studied this issue in 2001 when I was in the RB <a href="https://www.rbnz.govt.nz/research-and-publications/discussion-papers/2001/dp2001-02-2"><span style="color: red;"><b>https://www.rbnz.govt.nz/research-and-publications/discussion-papers/2001/dp2001-02-2</b></span></a> and I don't think anything has changed since. </span></div>
<div class="separator" style="clear: both; text-align: left;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span></div>
<div class="separator" style="clear: both; text-align: left;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;">If the CPI inflation is under control then What kind of inflation do we have? </span></div>
<div class="separator" style="clear: both; text-align: left;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span></div>
<div class="separator" style="clear: both; text-align: left;">
<span style="font-family: Courier New, Courier, monospace; font-size: large;"><span style="font-family: Courier New, Courier, monospace;">Average annual money growth over the past since 1989 is about 7 percent. Lending to housing plus personal lending average growth rate over the period from Dec 1990 is 9.6 percent. </span><span style="font-family: courier new, courier, monospace;">People spend the money. They buy things, but they also buy assets and housing. The CPI inflation does not measure that. Hence, inflation is absent. </span></span></div>
<div class="separator" style="clear: both; text-align: left;">
<span style="font-family: Courier New, Courier, monospace; font-size: large;"><span style="font-family: courier new, courier, monospace;"><br /></span></span></div>
<div class="separator" style="clear: both; text-align: left;">
<span style="font-family: Courier New, Courier, monospace; font-size: large;"><span style="font-family: courier new, courier, monospace;">We have much higher housing price inflation than CPI inflation. Figure (3) plots the two inflation rates. Over the same period from Dec 1990 to Dec 2018, the average CPI inflation was 2 percent while housing price inflation, HPI, was 6.2 percent! </span></span></div>
<div class="separator" style="clear: both; text-align: left;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span></div>
<div class="separator" style="clear: both; text-align: center;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;">Figure (3)</span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiF6qjWOEzZrT7kh3xzHBcZikb111hvPs8OecuW9SLptMwyOLQcRm6ERfPVj9eaUTvHvj5zBZhNkocnTlZiYJ0mocIE_6gLDjEGA9V-6xI9AXdqz5o_ms1V1WIjbaRoPikuJ0A53kUD78zp/s1600/Housing.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><img border="0" data-original-height="291" data-original-width="483" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiF6qjWOEzZrT7kh3xzHBcZikb111hvPs8OecuW9SLptMwyOLQcRm6ERfPVj9eaUTvHvj5zBZhNkocnTlZiYJ0mocIE_6gLDjEGA9V-6xI9AXdqz5o_ms1V1WIjbaRoPikuJ0A53kUD78zp/s400/Housing.jpg" width="400" /></span></a></div>
<div class="separator" style="clear: both; text-align: left;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span></div>
<div class="separator" style="clear: both; text-align: center;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span></div>
<div class="separator" style="clear: both; text-align: center;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span></div>
<div class="MsoNormal">
<div style="text-align: center;">
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span></div>
</div>
<span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span>
<br />
<div class="MsoNormal" style="text-align: left;">
<span style="line-height: 115%;"><span style="font-family: "courier new" , "courier" , monospace; font-size: large;"><br /></span></span></div>
<span style="font-family: "courier new" , "courier" , monospace;"><br /></span>
</div>
razzakwhttp://www.blogger.com/profile/04087757393890499853noreply@blogger.com0tag:blogger.com,1999:blog-2680978804801859885.post-23652907000989714242019-06-13T07:22:00.000+03:002019-06-13T07:22:30.399+03:00Low interest rate and the next recession <div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div style="margin-bottom: .0001pt; margin: 0cm;">
Recently, more people wonder how
the central banks would deal with the next recession given that the interest
rate is too low.</div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
Central bankers, and many
economists, believe that the short-term nominal interest rate is the main or
only policy instrument. However, this may not be entirely true. Central banks
could use the money supply, by they never did.</div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
Not many central bankers care about
money anymore when setting up policy. Certainly, money does not even play a
role in their models. I remember Stanley Fischer giving a lecture in Wellington
about 20 years ago on the Russian monetary policy after the collapse of the
USSR. I wrote in my notes that he said that the central bank brought down
inflation by "controlling money and credit."</div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
People may worry about recessions,
but they are impossible to predict. Shocks are random. The propagation
mechanism of these shocks - the <i>data generating process</i> - is unknown.
Even identifying the shocks ex-post is very hard.</div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
The question though is, what
happens to real GDP growth (or the output gap) if the short-term nominal
interest rate is literally zero? (In fact Milton Friedman argued that the
short-term nominal interest rate should be set to zero such that the marginal
cost of producing money is equal to the price.)</div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
Consider this simple
counterfactual.</div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
In an open-economy - Keynesian - IS
curve (i.e., the good market schedule), real GDP growth could depend on its own
past (persistence), <b>real </b>interest rate, real exchange rate, and
foreign real GDP growth. To carry out the counterfactual, replace the <b>real</b>
interest rate with the <b>negative</b> of expected inflation (lag
inflation for simplicity) if the nominal interest rate is zero (the Fisher
equation). One could choose / estimate the coefficients and calibrate this IS
equation with a random normal errors. One could even use a more elaborate
Dynamic Stochastic General Equilibrium model to do this counterfactual
experiment. Here is one simple counterfactual for New Zealand under such
scenario.</div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<o:p><br /></o:p></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhRFXRN43AWmWbD9_dfWJjaUKBxIkx5Tz7h7Uxc-b9B2PpK2L4-NHdKWM6T0RnbZz5bCRHy1UIk8C7xvNAPC49i_WV1fdO7l5kRt4DsDglPm8dgomXWbF75ETDccKI7vKXlMCO_abe21veE/s1600/NZ.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="291" data-original-width="489" height="237" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhRFXRN43AWmWbD9_dfWJjaUKBxIkx5Tz7h7Uxc-b9B2PpK2L4-NHdKWM6T0RnbZz5bCRHy1UIk8C7xvNAPC49i_WV1fdO7l5kRt4DsDglPm8dgomXWbF75ETDccKI7vKXlMCO_abe21veE/s400/NZ.jpg" width="400" /></a></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<o:p><br /></o:p></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
The counterfactual suggests that:</div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
- Real GDP growth could have
been higher the actual on average, 4.1 percent compared to 2.6 percent.</div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
- Real GDP growth could have
been less volatile than actual. The variance is 3.1 compared to 4.5</div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
- The peaks could have been
higher and the troughs could have been
lower.</div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0cm;">
- No recessions detected in
the counterfactual.</div>
<br /></div>
razzakwhttp://www.blogger.com/profile/04087757393890499853noreply@blogger.com0tag:blogger.com,1999:blog-2680978804801859885.post-41239544049561328712019-05-24T04:39:00.000+03:002019-05-24T04:39:12.295+03:00Genes, and early childhood interventions <div dir="ltr" style="text-align: left;" trbidi="on">
A long time ago I wrote several technical notes about early childhood intervention to the deputy and the secretary of labour when there was still "a Department of Labour" . I am almost certain they did not read any of these notes. James Heckman, Nobel Laureate, econometricain at Chicago wrote extensively on this subject and showed the efficacy of early childhood intervention. Intervention would save the country a lot, and reduce private and social cost over time. I argued that it is the right way to go for New Zealand.<br />
<br />
I have been reading a very informative book, which I highly recommend because it has very well written interesting stories. The book is The <u>Gene, An Intimate History,</u> by Siddhartha Mukherjee who is an American cancer physician and researcher at Columbia University. My daughter, who is a University of Cambridge PhD in Chemistry and a Chief Editor at <i>Nature Science</i> in the UK, and I had an argument on the dinner table about the gene and gene-environment effects on student's <i>ability </i>(ability is an unobservable variable) so she recommended that I read this book.<br />
<br />
Here is something from page 459, which reminded my of the notes that I wrote back then at the DoL.<br />
<br />
He says, "In 2010, a team of researchers launched a research study, called the Strong African American Families Project, or SAAF, in an impoverished rural belt n Georgia. It is a startlingly bleak place overrun by delinquency, alcoholism, violence, mental illness, and drug use. Abandoned clapboard houses with broken windows dot the landscape; crime abounds; vacant parking lots are strewn with hypodermic needles. Half of the adults lack high school education, and nearly half the families have single mothers.<br />
<br />
Six hundred African-American families were randomly assigned to two groups. In one group, the children and their parents received seven weeks of intensive education, counseling, emotional support, and structured social interventions focused on preventing alcoholism, binge behaviors, violence, impulsiveness, and drug use. In the control group, the families received minimal interventions. Children in the intervention group and in the control group had the 5HTTLPR gene sequenced (It encodes a molecule that modulated signaling between certain neurons in the brain.It was found that it is associated with response of psychic stress. The gene comes in two forms or alleles - a long variant and a short variant. The short variant called 5HTTLPR/short and it is carried by about 40 percent of the population and seems to produce significantly lower levels of the protein. The short variant has been repeatedly associated with anxious behavior, depression, trauma, alcoholism, and high-risk behaviors. The link is not strong, butbit is broad: the shorter allele has been associated with increased suicidal risk among German alcoholics, increased depression in American college students, and higher rate of PTSD among deployed soldiers).<br />
<br />
The first results of this randomized trail was predictable from prior studies: in the control group, children with short variant, i.e. the high risk form of the gene - were twice as likely to veer toward high-risk behaviors, including binge drinking, drug use, and sexual promiscuity as adolescences, confirming earlier studies that had suggested an increased risk within this genetic subgroup. The second result was more provocative: these very children were also the <i>most likely </i>to respond to the social interventions. In the intervention group , children with high-risk allele were most strongly and rapidly "normalized" - i.e., the most drastically affected subjects were also the best respondents. In a parallel study, orphaned infants with the short variant of 5HTTLRP appeared more impulsive and socially disturbed than their long-variant counterparts at baseline - but were also the most likely to benefit from placement in a more nurturing foster-care environment." <br />
<br />
Enjoy reading the book<br />
<br /></div>
razzakwhttp://www.blogger.com/profile/04087757393890499853noreply@blogger.com0tag:blogger.com,1999:blog-2680978804801859885.post-14251223022586716412019-04-30T01:18:00.001+03:002019-04-30T01:18:59.515+03:00Climate Change and the New Zealand Economy <div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal">
<span style="background-color: black; color: white;"><span style="font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;">Global warming is a fact. Figure (1) plots the average change in Global,
Northern hemisphere and Southern hemisphere temperatures from 1880 to 2018 (</span><a href="https://data.giss.nasa.gov/gistemp/"><span style="font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;"><span style="color: red;">reference</span></span></a><span style="font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;">). The temperature has been rising, more so in the Northern
Hemisphere.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></span></div>
<div class="MsoNormal">
<span style="color: white;"><br /></span></div>
<div class="MsoNormal" style="text-align: center;">
<span style="background-color: black; color: white; font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;"><o:p>Figure (1) </o:p></span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiOX8FwK9Q57-uanKX3wIX-_oQ0a4uQRph8Fo5R2EVkDShMfOOjkslxxn9m4YKX7_ZbeZ12bMUrUcpeWINDYyu4peHrS47UbYKqjzwV4DYDj58_6teRBSPueDBDvDZiVKttbI2HCYEFNuca/s1600/Figure+1.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="background-color: black; color: white;"><img border="0" data-original-height="291" data-original-width="483" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiOX8FwK9Q57-uanKX3wIX-_oQ0a4uQRph8Fo5R2EVkDShMfOOjkslxxn9m4YKX7_ZbeZ12bMUrUcpeWINDYyu4peHrS47UbYKqjzwV4DYDj58_6teRBSPueDBDvDZiVKttbI2HCYEFNuca/s400/Figure+1.jpg" width="400" /></span></a></div>
<div class="MsoNormal" style="text-align: center;">
<span style="background-color: black; color: white; font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;"><o:p><br /></o:p></span></div>
<div class="MsoNormal">
<span style="color: white;"><span style="background-color: black; font-family: "garamond" , "serif"; font-size: 12pt; line-height: 115%;">The standard economic story is that g</span><span style="font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;"><span style="background-color: black;">lobal warming
increases the cost of production of food and primary commodities, reduces the</span><b style="background-color: black;">ir
supplies</b><span style="background-color: black;">, and as demand keeps rising, the price of commodities increases
(excess demand).</span><span class="MsoFootnoteReference"><span style="mso-special-character: footnote;"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;"><a href="file:///D:/Weshah%20work/MYData/Weshah%20Documents/Personal%20documents/Photos/Desktop/weshah%20current%20work/Global%20Warming/Blog%202.docx#_ftn1" style="background-color: red;" title="">[1]</a></span></span><a href="file:///D:/Weshah%20work/MYData/Weshah%20Documents/Personal%20documents/Photos/Desktop/weshah%20current%20work/Global%20Warming/Blog%202.docx#_ftn1" style="background-color: black;" title=""><!--[endif]--></a></span></span><span style="background-color: black;"><o:p></o:p></span></span></span></div>
<div class="MsoNormal">
<span style="font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;"><span class="MsoFootnoteReference"><span style="mso-special-character: footnote;"><span class="MsoFootnoteReference" style="background-color: black; color: white;"><br /></span></span></span></span></div>
<div class="MsoNormal">
<span style="background-color: black; color: white; font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;">Figure (2) plots the ANZ bank, New Zealand’s commodity price index and
the World commodity price index (it includes meat, skins and wool; dairy;
horticulture, forestry, seafood and aluminium). <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="background-color: black; color: white; font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="background-color: black; color: white; font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;">Note that both prices increasing as predicted, but the New Zealand
commodity price is <i>often</i> lower than the world’s commodity prices. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="background-color: black; color: white; font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal" style="text-align: center;">
<span style="background-color: black; color: white; font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;">Figure (2) </span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjpkO5bYRwxhdA8lVvQ3Xxc1I_DI9I3s9hPJnUNedGWiQPmFwRl7M32L3Acne6BdYYU1HfNseL87ANayiJUkk24cO4BwEMN6wKVP90yvasAv3sanCssT96WAllz2TOgbsNVkgBdxCZrEsl7/s1600/Figure+2.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="background-color: black; color: white;"><img border="0" data-original-height="291" data-original-width="504" height="230" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjpkO5bYRwxhdA8lVvQ3Xxc1I_DI9I3s9hPJnUNedGWiQPmFwRl7M32L3Acne6BdYYU1HfNseL87ANayiJUkk24cO4BwEMN6wKVP90yvasAv3sanCssT96WAllz2TOgbsNVkgBdxCZrEsl7/s400/Figure+2.jpg" width="400" /></span></a></div>
<div class="MsoNormal" style="text-align: center;">
<span style="background-color: black; color: white; font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="background-color: black; color: white; font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="background-color: black; color: white;"><span style="font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;">Based on such information,</span> <a href="https://mail.google.com/mail/u/0/?shva=1&pli=1#inbox/KtbxLwgxBKZLfLvlpxPWSfWKzSfZpCPHvq?projector=1&messagePartId=0.1"><span style="font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;"><span style="color: red;">The New Zealand Agricultural
Greenhouse Gas Research Institute</span></span></a><span style="font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;"><span style="color: red;"> </span>concludes, “Climate changes could further
drive up international commodity prices. That in turn would benefit New Zealand
farmers and agricultural exports.”<o:p></o:p></span></span></div>
<div class="MsoNormal">
<span style="background-color: black; color: white; font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="background-color: black; color: white; font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;">Figures (1) and (2) clearly imply that the New Zealand commodity price
level (as measured by the commodity price index) is positively correlated with
global average change in temperature (both rising). This is also true for the price of every
commodity in the index (meat, dairy...etc.). However, the conclusion of the
Institute is misguided because the demand for New Zealand’s commodities
depends, <b>not</b> on the New Zealand commodity price alone, but on both, the New
Zealand price and the world’s price. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="background-color: black; color: white; font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="background-color: black; color: white; font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;">How is that?<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="background-color: black; color: white; font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="background-color: black; color: white; font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;">What matters for the demand on the New Zealand primary commodities is
not the New Zaland commodity price <i>per se</i>, but rather the <i>relative
price</i> that is the ratio of the New Zealand commodity price to the world’s
price of the same commodities.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="background-color: black; color: white; font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="background-color: black; color: white; font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;">Figure (3) plots the data from Jan 1986 to Mar 2019. The correlation is
negative.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="background-color: black; color: white; font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal" style="text-align: center;">
<span style="background-color: black; color: white; font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;">Figure (3) </span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhnn8K9eR3zWh6m1QyqYWoQIbceZP6Hy-lypMl8gqOCIIL1KmH3MK3UnsLmaLxkPjKX6GMLRB2iZpCXmG05fIDN-F32RNhT9FjBoGDAZGsuEycLUeUYR5wq4gHlXoiCRfAgMp-0H2Gp0sGG/s1600/Figure+3.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="background-color: black; color: white;"><img border="0" data-original-height="291" data-original-width="483" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhnn8K9eR3zWh6m1QyqYWoQIbceZP6Hy-lypMl8gqOCIIL1KmH3MK3UnsLmaLxkPjKX6GMLRB2iZpCXmG05fIDN-F32RNhT9FjBoGDAZGsuEycLUeUYR5wq4gHlXoiCRfAgMp-0H2Gp0sGG/s400/Figure+3.jpg" width="400" /></span></a></div>
<div class="MsoNormal" style="text-align: center;">
<span style="background-color: black; color: white; font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="background-color: black; color: white; font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;">In a global commodity market, a change in the nominal price of a NZ
commodity exerts two effects on the quantity demanded of New Zealand primary
commodities. First, it changes the <i>relative</i> price, which is a change in
the terms at which a global buyer can exchange a NZ commodity for another
non-NZ commodity (e.g., New Zealand’s dairy and the other countries dairy). The
change in the relative price leads to a <i>substitution effect</i>. A lower
relative price increases global demand for New Zealand’s commodities. Second,
there is an <i>income effect</i>. A change in the nominal price of New Zealand’s
commodity causes a change in <i>real</i> income of the buyers, or in the size
of the basket of primary goods, a global buyer can buy. If global warming
causes the price of a New Zealand commodity to fall, all other prices
remained unchanged, the consumer’s real income rises because more of such good,
or other goods, could be purchased.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="background-color: black; color: white; font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;"><br /></span></div>
<div class="MsoNormal">
<span style="background-color: black; color: white; font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;">Assuming that everything else remains unchanged, the patterns depicted
in figure (2) remain as such under global warming, the higher the New Zealand’s
productivity (in primary commodities sector) is, the lower our relative
commodity prices, and the higher the global demand on our commodities.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="background-color: black; color: white; font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;"><br /></span>
<br /></div>
<div class="MsoNormal">
<span style="background-color: black; color: white;"><span style="font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;">Furthermore, although commodity prices are highly volatile, they still
share significant cyclical fluctuations with nominal GDP. They are also
positively correlated with expected inflation. I showed that changes in relative
commodity prices fully explain the Kiwi dollar depreciation rate <b><a href="https://econpapers.repec.org/article/eeijournl/v_3a61_3ay_3a2018_3ai_3a2_3ap_3a77-104.htm"><span style="font-weight: normal;"><span style="color: red;">Razzak, 2018</span></span></a>. </b>Global warming is very
relevant to economic policy; see Rudebusch 2019 (</span><a href="https://www.frbsf.org/economic-research/publications/economic-letter/2019/march/climate-change-and-federal-reserve/"><span style="font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;"><span style="color: red;">here</span></span></a><span style="font-family: "garamond" , serif; font-size: 12pt; line-height: 115%;">). <span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span><o:p></o:p></span></span></div>
<div style="mso-element: footnote-list;">
<!--[if !supportFootnotes]--><span style="background-color: black; color: white;"><br clear="all" />
</span><br />
<span style="background-color: black; color: white;"><span style="font-family: "garamond" , serif; font-size: 16px;">Global warming is clearly a danger and a game changer. The economic analyses I have seen so far are thin. Policymakers need a more general equilibrium analysis to understand the costs and the benefits. There must be some benefits, I do not know what they might be. I can imagine that truism might benefit from warmer temperature. Farmers might be able to produce new varieties that they could not produce before, hence opening new markets. </span></span><br />
<hr align="left" size="1" width="33%" />
<!--[endif]-->
<br />
<div id="ftn1" style="mso-element: footnote;">
<div class="MsoFootnoteText">
<span style="background-color: black; color: white;"><a href="file:///D:/Weshah%20work/MYData/Weshah%20Documents/Personal%20documents/Photos/Desktop/weshah%20current%20work/Global%20Warming/Blog%202.docx#_ftnref1" name="_ftn1" style="mso-footnote-id: ftn1;" title=""><span class="MsoFootnoteReference"><span style="font-family: "garamond" , "serif";"><span style="mso-special-character: footnote;"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-family: "garamond" , "serif"; font-size: 10.0pt; line-height: 115%;">[1]</span></span><!--[endif]--></span></span></span></a><span style="font-family: "garamond" , "serif";"> Google for example, How Climate Change
Will Alter Our Food; How Climate Change May Affect Global Food Demand and
Supply In the Long Run; and Roundtable II: Economic Growth and Climate Change:
Long Run Implications for Commodity Prices and Trade.<o:p></o:p></span></span></div>
</div>
</div>
<br /></div>
razzakwhttp://www.blogger.com/profile/04087757393890499853noreply@blogger.com0tag:blogger.com,1999:blog-2680978804801859885.post-18173622739470574592019-04-05T05:14:00.000+03:002021-12-20T05:12:54.065+03:00Corruption and Economic Growth<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<span style="background-color: black;"><span style="font-size: large;"><span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; font-family: "garamond" , serif;">On
March 19, 2019, the well-known American political scientist, Stephen Walt,
wrote in FP (</span><a href="https://foreignpolicy.com/2019/03/19/americas-corruption-problem-is-a-national-security-threat/"><span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; font-family: "garamond" , serif;">here</span></a><span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; font-family: "garamond" , serif;">)
“corruption is inherently inefficient.” He explained, “Instead of resources
going where they are most needed, they get diverted into bribes, payoffs,
kickbacks, and other shady arrangements. And when the wealthy and powerful use
connections to get jobs or contracts (or to get their kids into college), that
means that more deserving and talented people get excluded and less qualified
people end up in positions of authority. The more common such practices become
the more honest and law-abiding people will be tempted to follow suit just to
keep up. And once corruption becomes endemic in a society, rooting it out
becomes difficult if not impossible.”<o:p></o:p></span></span></span><br />
<span style="background-color: black; font-family: "garamond" , serif;"><span style="font-size: large;"><br /></span></span>
<span style="background-color: black;"><span style="font-size: large;"><span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; font-family: "garamond" , serif;">Economic
research on the relationship between corruption and economic growth is relatively
thin. Exceptionally, </span><span style="font-family: "garamond" , "serif";">Isaac
Ehrlich and Francis T. Lui<span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"> (1999) paper in
the Journal of Political Economy (</span></span><a href="https://projects.iq.harvard.edu/files/gov2126/files/ehrlichlui_1999.pdf"><span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; font-family: "garamond" , serif;">here</span></a><span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; font-family: "garamond" , serif;">) explains the relationship rigorously and in a way, economists understand. They use endogenous
growth models. </span><span style="font-family: "garamond" , "serif";"><o:p></o:p></span></span></span><br />
<span style="background-color: black; font-family: "garamond" , serif;"><span style="font-size: large;"><br /></span></span>
<span style="background-color: black; font-family: "garamond" , serif;"><span style="font-size: large;">They arrive at a variety of
results. Here are a few interesting ones.<o:p></o:p></span></span><br />
<span style="background-color: black; font-family: "garamond" , serif;"><span style="font-size: large;"><br /></span></span>
<br />
<div style="margin-left: 36.0pt; mso-list: l0 level1 lfo1; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="background-color: black;"><span style="font-size: large;"><span style="font-family: "symbol";"><span style="mso-list: Ignore;">·<span style="font-family: "times new roman"; font-stretch: normal; font-variant: normal; font-weight: normal; line-height: normal;">
</span></span></span><!--[endif]--><span dir="LTR"></span><span style="font-family: "garamond" , "serif";">“Accumulation of some political capital, hence corruption,
is thus shown to be an inevitable aspect of government intervention in the
economy.” <i><o:p></o:p></i></span></span></span></div>
<div style="margin-left: 36.0pt;">
<br /></div>
<div style="margin-left: 36.0pt; mso-list: l0 level1 lfo1; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="background-color: black;"><span style="font-size: large;"><span style="font-family: "symbol";"><span style="mso-list: Ignore;">·<span style="font-family: "times new roman"; font-stretch: normal; font-variant: normal; font-weight: normal; line-height: normal;">
</span></span></span><!--[endif]--><span dir="LTR"></span><span style="font-family: "garamond" , "serif";">“… A given level of government intervention will be more
harmful to persistent growth prospects in human capital–poor countries than in
human capital–rich ones. The former can afford fewer ‘‘errors’’ in government
policies. This implication seems contrary to conventional theories of
development, which typically recommend more involvement of government in less
developed countries.” <i><o:p></o:p></i></span></span></span></div>
<span style="background-color: black; font-family: "garamond" , serif;"><span style="font-size: large;"><br /></span></span>
<span style="background-color: black; font-family: "garamond" , serif;"><span style="font-size: large;">I think that more government involvement
in less developed countries is, perhaps, needed in the <u>early stages of
development (building infrastructures, schools, hospitals etc)</u>.<i><o:p></o:p></i></span></span><br />
<div style="margin-left: 36.0pt;">
<br /></div>
<div style="margin-left: 36.0pt; mso-list: l0 level1 lfo1; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="background-color: black;"><span style="font-size: large;"><span style="font-family: "symbol";"><span style="mso-list: Ignore;">·<span style="font-family: "times new roman"; font-stretch: normal; font-variant: normal; font-weight: normal; line-height: normal;">
</span></span></span><!--[endif]--><span dir="LTR"></span><span style="font-family: "garamond" , "serif";">“Corruption and per capita income level are expected to be
negatively correlated across different stages of economic development. The
difference is that corruption depends on investment in political capital as a
ticket for entry to the bureaucratic rank, unlike entry to many criminal
activities, which requires little skill. Such an investment has repercussions
on the incentive of productive agents to invest in human capital. The
relationship between corruption and the economy is thus explained as an
endogenous outcome of competition between growth-enhancing and socially
unproductive investments and its reaction to exogenous factors, especially
government intervention in private economic activity.”<o:p></o:p></span></span></span></div>
<div style="margin-left: 36.0pt;">
<br /></div>
<div style="margin-left: 36.0pt; mso-list: l0 level1 lfo1; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="background-color: black;"><span style="font-size: large;"><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-bidi-font-style: italic; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font-family: "times new roman"; font-stretch: normal; font-variant: normal; font-weight: normal; line-height: normal;">
</span></span></span><!--[endif]--><span dir="LTR"></span><span style="font-family: "garamond" , "serif";">“The relationship between government, corruption, and the
economy’s growth is nonlinear. Government intervention in private economic
activity hurts most in the poorest countries and those at a critical takeoff
level. This may explain the prevalence of corruption in countries trapped in
poverty.”<o:p></o:p></span></span></span></div>
<div style="margin-left: 36.0pt;">
<br /></div>
<div style="margin-left: 36.0pt; mso-list: l0 level1 lfo1; text-indent: -18.0pt;">
<!--[if !supportLists]--><span style="background-color: black;"><span style="font-size: large;"><span style="font-family: "symbol"; mso-bidi-font-family: Symbol; mso-bidi-font-style: italic; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font-family: "times new roman"; font-stretch: normal; font-variant: normal; font-weight: normal; line-height: normal;">
</span></span></span><!--[endif]--><span dir="LTR"></span><span style="font-family: "garamond" , "serif";">“Perhaps the most intriguing result of the analysis
concerns the possibility that autocratic regimes, such as the command economies,
could in principle achieve a rate of growth equal to or higher than
decentralized democracies, albeit not a higher level of per capita income.
These economies can be successful as long as an informed leadership is
operating to maximize the long-term growth potential of productive agents and
constrains bureaucratic corruption to a degree commensurate with this
objective. This explains why economically successful autocratic regimes often
resort to forceful anticorruption campaigns and why corruption often
intensifies when the leadership loses its grip on power. At the same time, the
analysis also anticipates the potential failure of autocratic regimes because
of the leadership’s inability to focus on long term goals, its susceptibility
to ideologically induced policy errors, and the general deadweight costs
associated with protecting an autocratic regime by brute force.”<o:p></o:p></span></span></span></div>
<span style="background-color: black; font-family: "garamond" , serif;"><span style="font-size: large;"><br /></span></span>
<span style="background-color: black; font-family: "garamond" , serif;"><span style="font-size: large;">I wrote in the past about the
positive relationship between corruption and government regulation (<a href="https://razzakw.blogspot.com/2014/03/regulations-and-corruption-that_9410.html">here</a>).
<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></span><br />
<span style="background-color: black; font-family: "garamond" , serif;"><span style="font-size: large;"><span style="mso-spacerun: yes;"><br /></span></span></span>
<br />
<div class="MsoNormal">
<span style="background-color: black;"><span style="font-size: large;"><span style="font-family: "garamond" , serif; line-height: 115%;">I use the Corruption Perception Index (</span><a href="https://www.transparency.org/cpi2018?gclid=EAIaIQobChMIg8injoqc4QIVzY2PCh0HNQArEAAYASAAEgLFbfD_BwE"><span style="font-family: "garamond" , serif; line-height: 115%;">here</span></a><span style="font-family: "garamond" , serif; line-height: 115%;">). To
illustrate Walt’s point graphically I took the average of the percentage change
for the period from 2012 to 2018 for ten most advanced European countries and
the USA (USA, Austria, Belgium, Finland, France, Germany, Italy, the
Netherlands, Spain, Sweden, and the UK). <o:p></o:p></span></span></span></div>
<div class="MsoNormal">
<span style="background-color: black; font-family: "garamond" , serif; line-height: 115%;"><span style="font-size: large;"><br /></span></span></div>
<div class="MsoNormal">
<span style="background-color: black; font-family: "garamond" , serif; line-height: 115%;"><span style="font-size: large;">The percentage change in the corruption perception index
for 11 advanced countries for the years 2012-2013 compared with 2017-2018 has
declined in three countries (the US, UK, and Germany), more in the US and the
UK and less in Germany. Although Walt’s argument is valid, the available data
for the US do not show such increase in corruption. Maybe new data for 2019 and
more future data would show what Walt is describing. <o:p></o:p></span></span></div>
<div class="MsoNormal">
<span style="background-color: black; font-family: "garamond" , serif; line-height: 115%;"><span style="font-size: large;"><br /></span></span></div>
<div class="MsoNormal">
<span style="background-color: black; font-family: "garamond" , serif; line-height: 115%;"><span style="font-size: large;">The index has not changed significantly in Sweden and
Belgium; and increased in the rest of the countries (Spain, Italy, the
Netherlands, Finland, Austria, and France) with France exhibiting the most
significant increase. <o:p></o:p></span></span></div>
<div class="MsoNormal">
<span style="background-color: black; font-family: "garamond" , serif; line-height: 115%;"><span style="font-size: large;"><br /></span></span></div>
<div class="MsoNormal">
<span style="background-color: black; font-family: "garamond" , serif; line-height: 115%;"><span style="font-size: large;">Figure (1) plots the data.<o:p></o:p></span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="background-color: black; font-family: "garamond" , serif; line-height: 115%;"><o:p><span style="font-size: large;"><br /></span></o:p></span></div>
<div class="MsoNormal" style="text-align: center;">
<span style="background-color: black; font-family: "garamond" , serif; line-height: 115%;"><o:p><span style="font-size: large;">Figure (1) </span></o:p></span></div>
<div class="MsoNormal">
<span style="background-color: black; font-family: "garamond" , serif; line-height: 115%;"><o:p><span style="font-size: large;"><br /></span></o:p></span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgQlMrdKCLWnt0F_KJ21Yabmz5pzi8gwu7oKwKmArNDxsOvq-g3c7UOciR0uYsLOA3P5apAAWzqvnyKIMM56sDdi-fr8T-Svt8riBO-vSZYHEC48a_6QpkUMtDkhyphenhyphen0WvlrGnzs7NSD3giW8/s1600/Figure+1+corruption.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="291" data-original-width="480" height="242" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgQlMrdKCLWnt0F_KJ21Yabmz5pzi8gwu7oKwKmArNDxsOvq-g3c7UOciR0uYsLOA3P5apAAWzqvnyKIMM56sDdi-fr8T-Svt8riBO-vSZYHEC48a_6QpkUMtDkhyphenhyphen0WvlrGnzs7NSD3giW8/s400/Figure+1+corruption.jpg" width="400" /></a></div>
<div class="MsoNormal">
<span style="background-color: black; font-family: "garamond" , serif; line-height: 115%;"><o:p><span style="font-size: large;"><br /></span></o:p></span></div>
<div class="MsoNormal">
<span style="background-color: black;"><span style="font-size: large;"><span style="font-family: "garamond" , serif; line-height: 115%;">Then I computed the average productivity growth and the
average Total Factor Productivity growth (TFP) – a measure of economic
efficiency – from the EUKLEMS 2017 data set. Productivity is real value added
per hour worked. EUKLEMS publishes a TFP index. The samples are slightly
different across countries, but most data cover the period up to 2015. For all
data, I use the measure of what EUKLEMS refers to as the “market” instead of
“total economy” whereby the government and the services such as education,
health, etc. are excluded. Check (</span><a href="http://www.euklems.net/"><span style="font-family: "garamond" , serif; line-height: 115%;">here</span></a><span style="font-family: "garamond" , serif; line-height: 115%;">). <o:p></o:p></span></span></span></div>
<div class="MsoNormal">
<span style="background-color: black;"><span style="font-size: large;"><span style="font-family: "garamond" , serif; line-height: 115%;"><br /></span></span></span></div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="background-color: black; font-family: "garamond" , serif; line-height: 115%;"><span style="font-size: large;">Figures 2 and 3 plot the correlations of the percentage
changes in the corruption perception with productivity growth and TFP growth.<o:p></o:p></span></span></div>
<div class="MsoNormal">
<span style="background-color: black; font-family: "garamond" , serif; line-height: 115%;"><span style="font-size: large;"><br /></span></span></div>
<div class="MsoNormal">
<span style="background-color: black; font-family: "garamond" , serif; line-height: 115%;"><span style="font-size: large;"><br /></span></span></div>
<div class="MsoNormal" style="text-align: center;">
<span style="background-color: black; font-family: "garamond" , serif; line-height: 115%;"><span style="font-size: large;">Figure (2)</span></span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgHvCrMEprxmuHIJwopNx8sTw7-SB8UsT-4ihYSry4WqiEbACN1MvoafDUq7MXQVwpfaagk6JFcb-vHpDgtZGahg8uVN9WNVwEo9IHTItNEgDoWaFQEtu2pGcag9Tjv2toSEVajzMbkYR9I/s1600/Figure+2+corruption.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="290" data-original-width="478" height="242" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgHvCrMEprxmuHIJwopNx8sTw7-SB8UsT-4ihYSry4WqiEbACN1MvoafDUq7MXQVwpfaagk6JFcb-vHpDgtZGahg8uVN9WNVwEo9IHTItNEgDoWaFQEtu2pGcag9Tjv2toSEVajzMbkYR9I/s400/Figure+2+corruption.jpg" width="400" /></a></div>
<div class="separator" style="clear: both; text-align: center;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
Figure (3)</div>
<div class="MsoNormal">
<span style="background-color: black; font-family: "garamond" , serif; line-height: 115%;"><span style="font-size: large;"><br /></span></span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhQIH1M81bc5kq-SdCJDXgpu2PImzgNFaSEqR2fvrXwUJl6pT388w9E3Qex2qxRfIa3p8OT2J0hlAWT4mVTibzfrN_XTFuLtGEqy156Ek-N2JJ5BqV6h-RkcD9y2l_gPLswjIz_r50zu6oF/s1600/Figure+3+Corruption.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="292" data-original-width="481" height="242" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhQIH1M81bc5kq-SdCJDXgpu2PImzgNFaSEqR2fvrXwUJl6pT388w9E3Qex2qxRfIa3p8OT2J0hlAWT4mVTibzfrN_XTFuLtGEqy156Ek-N2JJ5BqV6h-RkcD9y2l_gPLswjIz_r50zu6oF/s400/Figure+3+Corruption.jpg" width="400" /></a></div>
<div class="MsoNormal">
<span style="background-color: black; font-family: "garamond" , serif; line-height: 115%;"><span style="font-size: large;"><br /></span></span></div>
<div class="MsoNormal">
<span style="background-color: black; font-family: "garamond" , serif; line-height: 115%;"><span style="font-size: large;"><br /></span></span></div>
<div class="MsoNormal">
<span style="background-color: black; font-family: "garamond" , serif; line-height: 115%;"><span style="font-size: large;">Surely, the correlation between corruption and productivity
growth is negative across the advanced countries. Thus, rising corruption is
associated with lower productivity.<a href="file:///D:/Weshah%20work/MYData/Weshah%20Documents/Personal%20documents/Photos/Desktop/weshah%20current%20work/Corruption.docx#_ftn1" name="_ftnref1" style="mso-footnote-id: ftn1;" title=""><span class="MsoFootnoteReference"><span style="mso-special-character: footnote;"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-family: "garamond" , serif; line-height: 115%;">[1]</span></span><!--[endif]--></span></span></a>
<o:p></o:p></span></span></div>
<div style="mso-element: footnote-list;">
<!--[if !supportFootnotes]--><span style="background-color: black;"><span style="font-size: large;"><br clear="all" />
</span></span><br />
<hr align="left" size="1" width="33%" />
<!--[endif]-->
<br />
<div id="ftn1" style="mso-element: footnote;">
<div class="MsoNormal">
<span style="background-color: black; font-size: large;"><a href="file:///D:/Weshah%20work/MYData/Weshah%20Documents/Personal%20documents/Photos/Desktop/weshah%20current%20work/Corruption.docx#_ftnref1" name="_ftn1" style="mso-footnote-id: ftn1;" title=""><span class="MsoFootnoteReference"><span style="mso-special-character: footnote;"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-family: "calibri" , sans-serif; line-height: 115%;">[1]</span></span><!--[endif]--></span></span></a> <span style="font-family: "garamond" , serif; line-height: 115%;">Corruption
is not the sole explanatory variable of low productivity. I have written on
this before. There are measurement issues (e.g., </span><span style="line-height: 115%;"><a href="https://www.aeaweb.org/articles?id=10.1257/jep.31.2.145"><span style="font-family: "garamond" , "serif"; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: major-bidi;">Feldstein</span></a></span><span style="font-family: "garamond" , serif; line-height: 115%;">, 2017)</span><span style="font-family: "times new roman" , serif; line-height: 115%;"> </span><span style="font-family: "garamond" , serif; line-height: 115%;">and a population effect. Population data show significant
decline in the growth rates of working age population, fertility rate, youth
population, etc. in advanced countries. Thus, there are fewer people working on
scientific research, which reduced global research output needed for economic
growth. This trend is quite alarming in advanced economies. </span><span style="line-height: 115%;"><a href="https://press.princeton.edu/titles/10544.html"><span style="font-family: "garamond" , "serif";">Robert Gordon</span></a></span><span style="font-family: "garamond" , serif; line-height: 115%;"> (2016) argued that the days
of high productivity in the US have gone for good. </span><span style="line-height: 115%;"><a href="https://www.aeaweb.org/articles?id=10.1257/aer.104.5.44"><span style="font-family: "garamond" , "serif"; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: major-bidi;">Fernald and Jones</span></a></span><span style="font-family: "garamond" , serif; line-height: 115%;"> (2014)
suggest that the U.S. future economic growth is likely to slow down because
educational attainment and population are likely to slowdown in the future.
They also argue that the shape of the idea production function introduces
uncertainty into the future growth. They also suggest that the rise of China
and India’s research growth, artificial intelligence, climate change, income
inequality, and health care are among the variables that explain future
productivity in the United States. </span><span style="line-height: 115%;"><a href="https://www.nber.org/papers/w23782"><span style="font-family: "garamond" , "serif"; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: major-bidi;">Bloom <i>et al.</i></span></a></span><span style="font-family: "garamond" , serif; line-height: 115%;"> (2017)
argue that evidence at the micro level US. data suggest that there has been an
increase in global research efforts (i.e., the number of people in research)
coupled with a sharp decline in research productivity. They say that it is
getting harder to find a new idea. </span><span style="font-family: "garamond" , serif; line-height: 115%;"><o:p></o:p></span></span></div>
<div class="MsoFootnoteText">
<br />
<div style="text-align: center;">
Excessive regulations ==> more corruption ==> lower productivity growth </div>
</div>
</div>
</div>
<br /></div>
razzakwhttp://www.blogger.com/profile/04087757393890499853noreply@blogger.com0tag:blogger.com,1999:blog-2680978804801859885.post-52800931820747617302019-03-16T09:00:00.000+03:002019-03-16T09:00:03.567+03:00On the future supremacy of the US dollar<div dir="ltr" style="text-align: left;" trbidi="on">
The “flight-to-safety” describes the tendency to hold a assets denominated in a robust currency. This has been true for the US dollar during the post-war period. Ilzetzki, Reinhart, and Rogoff (2018) studied the issue and found that the US dollar remains the preferred anchor and reference currency despite the introduction of the Euro and the rise of the Chinese currency.<a href="http://file///D:/Weshah%20work/MYData/Weshah%20Documents/Personal%20documents/Photos/Desktop/weshah%20current%20work/Al%20Jazeera/International%20Monetary%20Arrangements_2.docx#_ftn1">[1]</a><br /><br />Recently, a number of an online journalistic articles argued that there have been some underlying political-economy sort of events that might undermine the dominance of the US dollar.<br /><br />One of these events is the financial money-transfer system, e.g., SWIFT - the Society for Worldwide Interbank Financial Telecommunication. Clearly, this system is highly influenced, or even dominated, by the United States, is it not? The trouble might stem from the US decision, for whatever reason, maybe political, to cut off countries such as Russia or China, or Iran, etc. from that system. There has been a strong push against Russia and China in the US recently.<br /><br />That led Russia and China to creating an alternative system.<br /><br />Moreover, the EU decided, including the UK, to continue to trade with Iran in defiance of the US. The EU announced that it had created a new system, INSTEX - Instrument in Support of Trade Exchange - to bypass the international system, which is under the control of the US, in order to facilitate payments with Iran, and other countries that have bad relationships with the US. This must be an important development in the international monetary arrangement, and must have some implication for the US dollar domination, now and in the future.<br /><br />There is no doubt that there is a rising tension between the US and the EU regarding the latter's economic ties with Iran, Russia, and China. Trump has a very different stance on globalization and international trade from previous governments. INSTEX could be used in case the US decided to punish the EU for importing gas from Russia, for example, could it not.<br /><br />The market value of the US dollar, and a lot more currencies, are highly affected by trade, i.e. the price of a currency in terms of another (exchange rate) is a function of trade issues.<br /><br />The tariff war on China may not be benign, or a bluff. It does affect the exchange rates among other things. It increased uncertainty. Uncertainty is not something one could insure against; it would distort prices and affect the volume of trade. What if no deal is reached and tariffs increased by 25 percent? <br /><br />So the straightforward implication of the break of the US dollar dominated international monetary arrangement, which has been in place since 1945, may be at the end of the day only a declining global demand for the USD, thus, a depreciated currency.<br /><br />A depreciation of the USD itself is not a major cause of a concern for economists.<br /><br />Countries with fixed exchange rate such as China and Russia and most of the oil-producing rich countries hold a huge amount of US dollar debt and reserves. Although the interest rate paid on US debt is low, these countries would also lose a great deal if they undermine the US dollar, don’t they? In other words, dumping the US dollar is costly.<br /><br />However, something else could jeopardize the supremacy of the US dollar.<br /><br />Modern Monetary Theory, which is advocated by some Democrats in the U.S. today, proposes to use the Fed balance sheet to, permanently, finance social programs. The issuing of more debt would put upward pressure on interest rate. If the debt issuing is persistent or permanent, it might have some damaging effect to the US dollar.<br /><br />In my paper with Moosa (<a href="https://www.tandfonline.com/doi/abs/10.1080/00036846.2017.1418073">here</a>) “Monetary Policy, Corporate Profit, and House Prices,” we show, using US data, that there is a strong relationship between corporate profit and asset prices such as housing prices and stock prices. Monetary policy drives all these variables. The increase in interest rate and / or the reduction of the money stock reduce both corporate profits and asset prices (different magnitudes).<br /><br />A permanent change to monetary policy along the lines suggested by the Modern Monetary Theory would induce a secular decline in corporate profits, and asset and share prices that could cause a permanent decline in the demand for US dollars and setup the way to ending its dominance at some future point.<br /><br />That is a testable scenario.<br /><br /><br /><br /><br /><br /><a href="http://file///D:/Weshah%20work/MYData/Weshah%20Documents/Personal%20documents/Photos/Desktop/weshah%20current%20work/Al%20Jazeera/International%20Monetary%20Arrangements_2.docx#_ftnref1">[1]</a> <a href="https://www.nber.org/people/ethan_ilzetzki">Ethan Ilzetzki</a>, <a href="https://www.nber.org/people/carmen_reinhart">Carmen M. Reinhart</a>, <a href="https://www.nber.org/people/kenneth_rogoff">Kenneth S. Rogoff</a>, February 2017, Exchange Arrangements Entering the 21st Century: Which Anchor Will Hold? NBER Woking Paper No. 23134.</div>
razzakwhttp://www.blogger.com/profile/04087757393890499853noreply@blogger.com0tag:blogger.com,1999:blog-2680978804801859885.post-90457760788718032702018-12-06T03:37:00.001+03:002018-12-06T03:37:25.438+03:00The Economics Analysis of Wellbeing in New Zealand<div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal">
<span style="font-family: inherit; font-size: large;">I read about “wellbeing”
in 2014 when the Chief Economist of the Treasury sent me his paper on this
issue for comments. He had a economic model, which included a variables called <i>social
cohesion and environmental indicator, </i>as I recall. Wellbeing is something, probably, about higher employment rate, decent wages, better education and
health care, cleaner environment, and gender and race equality…etc. Essentially,
his key objective was to maximize GDP growth. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit; font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit; font-size: large;">The Treasury
still adopts the same wellbeing program, but this time without a macroeconomic
model, analysis, or anything formal. It is unclear <i>how</i> the Treasury
advises the government about this issue. I learned that the Treasury uses the
large <i>micro </i>data (100 variables), which are produced by Stat NZ to shed
light on these issues. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit; font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit; font-size: large;">It is unclear
how the Treasury advises the government using these data! <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit; font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit; font-size: large;">Undoubtedly, formal
macro analysis is required for the Treasury’s work to be credible. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit; font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit; font-size: large;">There is something
about utility maximization, perhaps. To begin with, it is very difficult to
design a <i>social welfare</i> function although some economists are still
trying.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit; font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit; font-size: large;">You can imagine
that many economists have been trying to understand how this works! I think
that it is still incomplete.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit; font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit; font-size: large;">A simple
approach most economists know well is to begin with a small general equilibrium
model, whereby the average household maximizes an expected utility function, which
is a function of a consumption bundle (all goods and services), and leisure
subject to a budget constraint. The budget constraint is where after-tax income
from work and other assets is equal to expenditures on consumption and
investment. The government budget constraint remains unchanged. Later, one
could vary the analysis with sex, age groups, race, etc., or find a way to deal
with heterogeneity. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit; font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit; font-size: large;">For
completeness, there must be also a production function of the goods and
services. Optimal growth is a key. Output is produced by choosing (and
substituting) inputs such as physical capital, labor and maybe human capital
and other inputs… This process is also subject to a resource and other
constraints, and needs optimization. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit; font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit; font-size: large;">Combining these
consumer / producer optimal solutions yield a consistent optimal outcome, say
for example, the consumption to output ratio. The ratio combines optimal
consumption and output, which may convey useful information about the wellbeing
of the average household. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit; font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit; font-size: large;">What could affect
the optimal the consumption – output ratio? <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit; font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit; font-size: large;">Actual hours –
worked is a key variable – the supply of labor. The share of capital (or labor) in the production of output matters too. Many policies affect these
decisions. A tax on capital and labor might reduce these shares because they
affect the prices of capital and labor, which induce substitutions. Savings matter
too because savings are capital, eventually investments, which determine the
output of goods and services, and eventually the consumption-output ratio.
Finally, within this simple structure, the relative value of leisure matters a
great deal for the optimal consumption – output ratio. Would this model explain
the <i>actual</i> consumption-output ratio?<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit; font-size: large;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit; font-size: large;">This simple
model can generate dynamic stochastic projections for the future of optimal
consumption and output. Such a humble beginning would lend some credibility to
this program. <o:p></o:p></span></div>
<br /></div>
razzakwhttp://www.blogger.com/profile/04087757393890499853noreply@blogger.com0tag:blogger.com,1999:blog-2680978804801859885.post-48668714906818674002018-10-18T08:50:00.000+03:002018-10-18T08:50:34.875+03:00The New Zealand Dollar <div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: "courier new" , "courier" , monospace;">In 1991 I was an intern at the IMF. Robert Flood asked what am I writing about and I said the exchange rate. He said, I advise you to look at something else because explaining the exchange rate is hopeless. That was 27 years ago and nothing has changed. </span><br />
<span style="font-family: "courier new" , "courier" , monospace;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace;">Since the Meese and Rogoff finding many decades ago that the no model's forecast could beat the forecast of the random walk model, nothing much has happened on that front. </span><br />
<span style="font-family: "courier new" , "courier" , monospace;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace;">A couple of years ago I wrote a paper where I showed that commodity prices for commodity-exporting countries (New Zealand, Australia, Canada) explain their exchange rates. Here is a graph of monthly data for NZ.</span><br />
<span style="font-family: "courier new" , "courier" , monospace;"><br /></span>
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhAi6Py7WuMXup8qUJlnurx7U4hgKeRnmy424I0Y0TiFyJ3T780hPCiBJdSXmq7gPhjQOuSoMKm1eiULO__ZfNeAGKBId0Lse7IbPJpezoUN31fnBEBAI289SulHt19qhJaPD-Kd8ecwjyY/s1600/NZ+USD.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="289" data-original-width="480" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhAi6Py7WuMXup8qUJlnurx7U4hgKeRnmy424I0Y0TiFyJ3T780hPCiBJdSXmq7gPhjQOuSoMKm1eiULO__ZfNeAGKBId0Lse7IbPJpezoUN31fnBEBAI289SulHt19qhJaPD-Kd8ecwjyY/s400/NZ+USD.jpg" width="400" /></a></div>
<span style="font-family: "courier new" , "courier" , monospace;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace;"><br /></span><span style="font-family: "courier new" , "courier" , monospace;">The high NZD/USD and low productivity might be puzzling. However, NZ might be a small country, but it is not small when we talk about milk. It is a major player in the global milk market. The higher the demand for milk the more the demand for the NZD. </span><br />
<span style="font-family: "courier new" , "courier" , monospace;"><br /></span><span style="font-family: "courier new" , "courier" , monospace;">The NZD/USD has been falling in the past few weeks, which motivated me to produce some dynamic stochastic projections.I use three models: a random walk model (i.e., the NZD / USD depends on its last period value only); an unrestricted VAR with the NZD/USD, the ANZ NZ commodity price index, and the ANZ world commodity price index; and an SVAR, whereby I have PPP imposed, and PPP is basically the commodity price indexes ratio. I estimate these VARs with and without, a constant term because the constant affects the forecasts as we know (The VARs have 12 lags). The sample is Jan 1999 to Sep 2018. Then for every month from October 2018 to June 2019, I report the <i>average</i> projection of 10,000 iterations (I use bootstrapping to generate the innovations). </span><br />
<span style="font-family: "courier new" , "courier" , monospace;"><br /></span>
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjvGXr27TF57ees_vlKRut1nYj7Iy-BsBjMPYn4V9sO9OP5tmoRTiyDrfxjznpCulcrpINoPiY_5ccmAop9RBuPy08nPh-JF3whkYZ7zPo6Xv250iYWyPVeMuXeoYKAt5FN6hUUmOzLwqYV/s1600/NZ+USD2.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="289" data-original-width="480" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjvGXr27TF57ees_vlKRut1nYj7Iy-BsBjMPYn4V9sO9OP5tmoRTiyDrfxjznpCulcrpINoPiY_5ccmAop9RBuPy08nPh-JF3whkYZ7zPo6Xv250iYWyPVeMuXeoYKAt5FN6hUUmOzLwqYV/s400/NZ+USD2.jpg" width="400" /></a></div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<span style="font-family: "courier new" , "courier" , monospace;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace;">There are small differences between the models' projections. VARs with a constant term have higher projections on average. The minimum across all five models over the projection periods, is 0.6483 (Nov 2018) and the maximum is 0.6742 (Jun 2019).</span><br />
<span style="font-family: "courier new" , "courier" , monospace;"><br /></span>
<span style="font-family: "courier new" , "courier" , monospace;">I could not tell which model is better because these are out-of-sample projections. We have to wait and see if they have better information than the Random Walk.</span><span style="font-family: "courier new" , "courier" , monospace;"> </span><br />
<span style="font-family: "courier new" , "courier" , monospace;"><br /></span>
<br />
<span style="font-family: "courier new" , "courier" , monospace;"><br /></span>
</div>
razzakwhttp://www.blogger.com/profile/04087757393890499853noreply@blogger.com0tag:blogger.com,1999:blog-2680978804801859885.post-65873517798020873892018-10-11T12:09:00.001+03:002018-10-11T12:09:59.654+03:00Petrol Prices in New Zealand <div dir="ltr" style="text-align: left;" trbidi="on">
There has been talk about the recent increase in petrol prices. The PM also spoke about it.<br />
<br />
I do not have access to all data from where I am, but I could access Stats NZ petrol prices from the Consumer Price Index (CPI). The plot shows the petrol price index in the CPI, the CPI, and two measures of crude prices: West Texas Intermediate (WTI), and European Brent (seasonally unadjusted). All indexes have base 2007 Q2 =1000. The second plot, which is more relevant to any analysis, is for the <i>inflation rates of petrol and crude prices.</i><br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgxgtTZd4FV1Byiktn6IdlbKhKt51-bos65jAyaCgLdHo7AFgFWTK22EG00-EDTXL6VVCqDLLcIbeqA7o-QAbPK1GP5HZxlv6FHEzV4SkGUbX1M7t3hnhDIcqbea7Pu6iRzl-0KDESC5eYW/s1600/NZ+Petrol.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="288" data-original-width="480" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgxgtTZd4FV1Byiktn6IdlbKhKt51-bos65jAyaCgLdHo7AFgFWTK22EG00-EDTXL6VVCqDLLcIbeqA7o-QAbPK1GP5HZxlv6FHEzV4SkGUbX1M7t3hnhDIcqbea7Pu6iRzl-0KDESC5eYW/s400/NZ+Petrol.jpg" width="400" /></a></div>
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh7f8_fqvSIPRc58RQZ_MZciZSOLX2UyiUxjZDwlAJES3PyCsm_vm9-BXYdqYlTfAYyvpE5rS8XnGcbFcoJ_84BJRVKBtvmevhZfQnv-nopVNUSTYsqL3f8Oht2wRnpsTlOgRTrdLPG8rHY/s1600/NZ+Petrol+2.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em; text-align: center;"><img border="0" data-original-height="288" data-original-width="480" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh7f8_fqvSIPRc58RQZ_MZciZSOLX2UyiUxjZDwlAJES3PyCsm_vm9-BXYdqYlTfAYyvpE5rS8XnGcbFcoJ_84BJRVKBtvmevhZfQnv-nopVNUSTYsqL3f8Oht2wRnpsTlOgRTrdLPG8rHY/s400/NZ+Petrol+2.jpg" width="400" /></a></div>
<br />
<div class="separator" style="clear: both; text-align: center;">
</div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<br />
What do we see?<br />
<br />
First, the price of petrol has been increasing lately. The average quarter-on-quarter growth rate over the period from 2006 Q2 to 2018 Q2 is 0.44 percent. The growth rate in 2017 Q4 was 5.9 percent. Since then it fell to 2.5 percent in 2018 Q1 and picked up a little to 3.1 percent in 2018 Q2. The data show that the price of NZ petrol did not fall as much as crude did after the collapse of the oil market in 2014.<br />
<br />
Second, petrol prices in New Zealand are associated with crude oil prices. The simple correlation between crude prices and our petrol prices<i> inflation rates</i> is 82 and 84 percent and highly statistically significant for the WIT and Brent respectively.<br />
<br />
High petrol price could be explained by (1) high tax on petrol at the pump; (2) excess demand for petrol; (3) higher international crude prices; (4) lower NZ dollar; (5) higher company profit margins; (6) higher cost of production such as unit labor cost; and (7) noncompetitive market (i.e., the marginal cost > the price). There could be an omitted variable, but I would say these are the important ones to start with.<br />
<div>
<br /></div>
I believe that New Zealanders have the right to complain about the tax rate on petrol, but not about the companies profit margins.Company profit is taxable.<br />
<br />
The profit margin declines as competition increases because new entrants in the market would chew bits of the market profit. Hence, prices should fall as competition increases.<br />
<br />
Unlike countries like Singapore, for example, we have no restrictions on the number of cars in the streets. Petrol is a normal good. We buy less of it when the price goes up. And, we buy more when income and population increase. If the supply of petrol is a little bit inelastic, an upward shift in demand raises the price considerably. The government should have an idea about the elasticities of supply and demand of fuel.<br />
<br />
From the above, the only assured measure to reduce petrol price in the hand of the government is the tax on petrol (it's been a long time since I checked, but I assume we don't have import duties on crude!).<br />
<br />
The government has no control over international crude prices, domestic excess demand for petrol, the value of the Kiwi dollar, the company profit margin, and the cost of labor.<br />
<br />
Re competition, if petrol companies have been making large profits and the market is competitive we would have expected new entrants in the market, which should have resulted in lower petrol prices over time. That did not seem to have happened. Why? Is it because companies have not been making extraordinarily high profit as some might suggest? Or because there is a lack of competition?<br />
<br />
Could the government promote more competition in the NZ petrol market? I don't know much about this, but maybe there are "restrictions to entry," which the government could remove.<br />
<br />
Also, the higher the tax on petrol the higher the price. If the price of petrol is higher than the marginal cost then the tax reduces competitiveness. <br />
<br />
<br />
</div>
razzakwhttp://www.blogger.com/profile/04087757393890499853noreply@blogger.com0tag:blogger.com,1999:blog-2680978804801859885.post-27008861098085981682018-08-14T09:46:00.000+03:002018-08-14T09:46:01.197+03:00Remembering Iraq's Wars <div dir="ltr" style="text-align: left;" trbidi="on">
<br />
<div class="MsoNormal">
<span style="font-family: "Garamond",serif; font-size: 12.0pt; line-height: 107%;">August and September of every year remind me of Iraq wars. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Garamond",serif; font-size: 12.0pt; line-height: 107%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Garamond",serif; font-size: 12.0pt; line-height: 107%;">The Iraqi economy was growing quite nicely in the 1970s. Surely
high oil prices helped, but there was a promising development plan in place, industrialization
was taking shape, and human capital investments were up. A growing middle –
income class began to flourish. Real GDP per working-age person (15-64 year) grew
from USD 5000 in 1970s to a nearly USD 12,000 in 1980.<a href="file:///E:/Weshah%20work/MYData/Blog/Blog%2034/The%20Iraqi%20economy%20was%20ticking%20quite%20nicely%20in%20the%201970s.docx#_ftn1" name="_ftnref1" style="mso-footnote-id: ftn1;" title=""><span class="MsoFootnoteReference"><span style="mso-special-character: footnote;"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-family: "Garamond",serif; font-size: 12.0pt; line-height: 107%; mso-ansi-language: EN-US; mso-bidi-font-family: Arial; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[1]</span></span><!--[endif]--></span></span></a>
</span><span style="color: red; mso-ascii-font-family: Calibri; mso-bidi-font-family: Calibri; mso-fareast-font-family: "Times New Roman"; mso-hansi-font-family: Calibri;"><o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Garamond",serif; font-size: 12.0pt; line-height: 107%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Garamond",serif; font-size: 12.0pt; line-height: 107%;">Then 25 years of wars. The first war is the Iraq-Iran war
(September 22 1980 to August 20 1988); proven oil reserves were of about 30 billion
barrels and a large budget surplus of nearly 40 billion dollars. The second war
is the Iraqi invasion of Kuwait in August 2, 1990, which led to the American-led
war that saw the destruction of Iraq by February 1991. Nothing survived. Real
income per working-age person was as low as USD 2,000 in 1991. Third, the 15-year
crippling economic sanctions followed, which I believe had more negative
effects than the wars. Half million children died. Iraq was deprived from the basics
(e.g., hospitals didn’t have bandages and students didn’t have pencils). People
paid the heavy price. Fourth, the American-led ground invasion and occupation
of the country began March 20, 2003. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Garamond",serif; font-size: 12.0pt; line-height: 107%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Garamond",serif; font-size: 12.0pt; line-height: 107%;">Real income per working-age person USD 4,600 in 2003 is lower
than the 1970 level. <span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Garamond",serif; font-size: 12.0pt; line-height: 107%;">Now imagine that Iraq had continued to develop without the
wars and ask what would have been its GDP per working-age person. Figure (1)
plots my projection of real GDP per working-age person for the period 1981 to
2002 based on baseline period from 1970 to 1979.<a href="file:///E:/Weshah%20work/MYData/Blog/Blog%2034/The%20Iraqi%20economy%20was%20ticking%20quite%20nicely%20in%20the%201970s.docx#_ftn2" name="_ftnref2" style="mso-footnote-id: ftn2;" title=""><span class="MsoFootnoteReference"><span style="mso-special-character: footnote;"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-family: "Garamond",serif; font-size: 12.0pt; line-height: 107%; mso-ansi-language: EN-US; mso-bidi-font-family: Arial; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[2]</span></span><!--[endif]--></span></span></a><o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div align="center" class="MsoNormal" style="text-align: center;">
<span style="font-family: "Garamond",serif; font-size: 12.0pt; line-height: 107%;">Figure
(1)<o:p></o:p></span></div>
<div align="center" class="MsoNormal" style="text-align: center;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi5wIhX24uV8hRE7T_l9XIrQ7UV04-NTzjstlsTQBusUp4VJVWog6mxOPXCq9er_WvnOARub5xQsZwr27UsRw7LYNIALEBrxqwCHFOYYLEZcGUcgvU4xuV0yDx78fCgn2uO3wPUerx9BhYg/s1600/Figure.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="288" data-original-width="480" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi5wIhX24uV8hRE7T_l9XIrQ7UV04-NTzjstlsTQBusUp4VJVWog6mxOPXCq9er_WvnOARub5xQsZwr27UsRw7LYNIALEBrxqwCHFOYYLEZcGUcgvU4xuV0yDx78fCgn2uO3wPUerx9BhYg/s400/Figure.jpg" width="400" /></a></div>
<div align="center" class="MsoNormal" style="text-align: center;">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "Garamond",serif; font-size: 12.0pt; line-height: 107%;">Everything else remained unchanged, I estimate that real
income per working-age person could have increased to be somewhere between a
low of USD 12,000 and a high of USD 15,500 in 2002. The projections are affected by the small sample and other
measurement and estimation problems and should be taken with a grain of salt. However, it is not unreasonable to imagine Iraq’s real GDP
per person around USD 20,000 in 2002 had it continued with its
development plans of human capital and accelerated its manufacturing production that began in the 1970s.
Who knows what Iraq would have looked like today had it not suffered all that
destruction? <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: "Garamond",serif; font-size: 12.0pt; line-height: 107%;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "Garamond",serif; font-size: 12.0pt; line-height: 107%;">Mesopotamia is very old. Twenty or
thirty years of wars is relatively short relative to a long history. The people
who built the ‘cradle of civilization’ can, at some point and under certain helpful conditions, rebuild again. <span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div style="mso-element: footnote-list;">
<!--[if !supportFootnotes]--><br clear="all" />
<hr align="left" size="1" width="33%" />
<!--[endif]-->
<div id="ftn1" style="mso-element: footnote;">
<div class="MsoFootnoteText">
<a href="file:///E:/Weshah%20work/MYData/Blog/Blog%2034/The%20Iraqi%20economy%20was%20ticking%20quite%20nicely%20in%20the%201970s.docx#_ftnref1" name="_ftn1" style="mso-footnote-id: ftn1;" title=""><span class="MsoFootnoteReference"><span style="font-family: "Garamond",serif;"><span style="mso-special-character: footnote;"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-family: "Garamond",serif; font-size: 10.0pt; line-height: 107%; mso-ansi-language: EN-US; mso-bidi-font-family: Arial; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[1]</span></span><!--[endif]--></span></span></span></a><span style="font-family: "Garamond",serif;"> I am using real GDP in chained PPP and
capital stock from the Penn World table 9.0. <o:p></o:p></span></div>
<div class="MsoFootnoteText">
<br /></div>
</div>
<div id="ftn2" style="mso-element: footnote;">
<div class="MsoFootnoteText">
<a href="file:///E:/Weshah%20work/MYData/Blog/Blog%2034/The%20Iraqi%20economy%20was%20ticking%20quite%20nicely%20in%20the%201970s.docx#_ftnref2" name="_ftn2" style="mso-footnote-id: ftn2;" title=""><span class="MsoFootnoteReference"><span style="font-family: "Garamond",serif;"><span style="mso-special-character: footnote;"><!--[if !supportFootnotes]--><span class="MsoFootnoteReference"><span style="font-family: "Garamond",serif; font-size: 10.0pt; line-height: 107%; mso-ansi-language: EN-US; mso-bidi-font-family: Arial; mso-bidi-language: AR-SA; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-language: EN-US; mso-fareast-theme-font: minor-latin;">[2]</span></span><!--[endif]--></span></span></span></a><span style="font-family: "Garamond",serif;"> I estimate a VAR, which included real GDP
per working-age person (15-64), capital – output ratio, and working-age
population. The price of oil is a proxy for Terms of Trade shocks. The model
was estimated over the short period 1970 to 1980, then dynamic stochastic
projections from 1981 to 2002 were computed. I use bootstrapping and solve the
model 10,000 times. The mean of the dynamic stochastic projections is plotted. <o:p></o:p></span></div>
</div>
</div>
<br /></div>
razzakwhttp://www.blogger.com/profile/04087757393890499853noreply@blogger.com0