New Zealand’s most damaging global export

What is New Zealand’s most damaging global export?  No.  It’s not Barnaby Joyce.  It’s not  fush und chups either.  It’s the Phillips Curve:

a single-equation econometric model, named after William Phillips (a Kiwi!), describing a historical inverse relationship between rates of unemployment and corresponding rates of rises in wages that result within an economy.

The Phillips Curve provides the “intellectual” justification for Keynsian central bankers to meddle through monetary policy.

Don’t believe TAFKAS?  Perhaps let the RBA advise:

The Phillips curve is clearly a useful empirical device for examining the determinants of inflation in Australia. It also, however, provides an intellectual framework for the analysis of monetary policy. In this section, we discuss the intellectual development of the Phillips curve framework within the Reserve Bank of Australia, and particularly within its Research Department. This is of particular interest because many of the Australian empirical studies of the Phillips curve came from this part of the Reserve Bank. It also seems likely that the ideas formulated in this research would have had an influence, perhaps after some time, on the formulation of monetary policy in Australia.

The Phillips Curve remains the basis of thinking within many central banks, including the US Federal Reserve:

The Phillips Curve is one key factor in the Federal Reserve’s decision-making on interest rates. The Fed’s mandate is to aim for maximum sustainable employment — basically the level of employment at the NAIRU— and stable prices—which it defines to be 2 percent inflation. Because monetary policy acts with a lag, the Fed wants to know what inflation will be in the future, not just at any given moment. The Phillips Curve is a tool the Fed uses to forecast what will happen to inflation when the unemployment rate falls, as it has in recent years.

Given recent economic history, it is fair to ask whether the inflation rate-unemployment rate relationship predicted in Phillips’ model still holds – especially given the constant redefinition of inflation and unemployment (hedonic adjustments anyone?).  But never let the failure of an economic model and hypothesis get in the way of a bunch of Keynesian technocrats who want to tinker with an economy.

PS – Stable prices.  Ha!  2-3% inflation.  How’z that for stable.  Imagine building a house on a “stable” foundation that moves 2-3% every year.

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11 Responses to New Zealand’s most damaging global export

  1. Ƶĩppʯ (ȊꞪꞨV)

    We must introduce euthanasia as the new national sport, to surely eradicate the human virus destroying the planet.

  2. 2dogs

    The Phillips Curve was useful when the main driver of inflation was wages growth.

    These days, the main driver of inflation is government action – those industries with the highest level of government action, such as energy and education, have the highest rate of inflation. Clothing and footwear, with very little government involvement, has falling prices.

  3. Tel

    Un Zud eel sow end vented deh 2 peasant in fleecing tear gut.

    Where Did the 2% Doctrine Come From?

    The answer, as the book explains, is that it came from New Zealand; specifically, an act of its Parliament: the Reserve Bank of New Zealand Act of 1989. The whole point of the original project was to get inflation down from its unacceptably high level, then about 5%. In its origin, it had nothing to do with making inflation go up. Very important in this context was that the original goal was not 2% inflation, but a range of zero to 2%, as agreed to between New Zealand’s Minister of Finance the Governor of the Reserve Bank. In subsequent international central banking evolution, the “zero” part seems to have been forgotten.

    https://www.lawliberty.org/2018/11/14/perpetual-inflation-vs-sound-money-review-brendan-brown-2-federal-reserve/

  4. John A

    2dogs #3003410, posted on May 3, 2019, at 5:09 pm

    The Phillips Curve was useful when the main driver of inflation was wages growth.

    These days, the main driver of inflation is government action – those industries with the highest level of government action, such as energy and education, have the highest rate of inflation. Clothing and footwear, with very little government involvement, has falling prices.

    Wages growth was never the main driver of inflation, historically or recently. Government action – whether the sovereign clipping the coinage or charging seigniorage, or a central bank creating money out of thin air – was (read is) always the main driver.

    However, your first sentence remains valid, logically.

  5. Jim Rose

    Thomas Humphrey of the Federal reserve bank of Richmond Road
    prehistory of the Phillips curve. Includes reference to the 1970s reprint in the Journal of political economy of an Irving Fisher article from 1926 titled, retitled I discovered the Phillips curve

  6. Rob MW

    Given recent economic history, it is fair to ask whether the inflation rate-unemployment rate relationship predicted in Phillips’ model still holds – especially given the constant redefinition of inflation and unemployment (hedonic adjustments anyone?).

    The real question is; what is ‘unemployment’ ? John Howard’s magic trick in bringing down the rate of unemployment by shifting the long term unemployed into a matrix that removes them from the official figures would have made Harry Houdini proud.

    Under the current structure there is a constant definition for inflation. It’s the price of a candle today compared to tomorrow’s price.

  7. miltonf

    Theoretical garbage. I thought they had short run and long run Phillips curves too.

  8. Roger

    What is New Zealand’s most damaging global export?

    Derryn Hinch, surely.

  9. Colonel Crispin Berka

    2-3% inflation. How’z that for stable.

    It is stable if what you’re trying to stabilise is the purchasing power of the currency and the total amount of goods and services on offer in the market is increasing at 2.5% per year in economic growth.
    Inflation of the money supply in line with inflation of demand for currency leads to stable real currency value.
    This mainly goes wrong only when the central bank deliberately inflates the money supply faster than economic growth which then creates currency devaluation and nominal price rises and so erodes the value of nominal savings accounts.

    The deception is that the percentage figure that is usually quoted (1.3% lately) is actually the CPI and is really a measure of currency devaluation not inflation. But the government and the media talking heads put a spin on this by calling it “inflation” so you will think this is just some inevitable environmental parameter like the weather and nothing to do with a deliberate and sustained attack on your bank balance.
    If that is where the “2-3%” figure came from then I’m surprised TAFKAS has fallen for it.

  10. Tezza

    I though the notion that 2% increase in the price index was effectively price stability arose from the fact that quality improvements are significantly underdone in compiling CPI and GDP deflators. What may be measured as price increases are mostly unmeasured quality improvements and zero actual inflation.

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