Tag Archives: Coronavirus

Game Theory and why we go to a coronavirus lockdown

Michael Cameron posted a nice piece on his blog about this – Sex, Drugs and Economics.

Game theory refers to the decision that a firm/individual makes depends on its assumptions about other firms/individuals. Ultimately this means that individuals will try and calculate the best course of action depending on how others behave. When we were in a Level 2 situation the advise was no mass gatherings, physical distance on public transport, limit non-essential travel etc. Although the announcements of the four levels were made clear on the Saturday it was inevitable that we would be moving to Level 4 very quickly – Wednesday. Being able to police Level 2 would have been near impossible and the risk of community transmission meant that complete lockdown was needed.

In a Level 2 situation, which was somewhat voluntary, people had two choices – Stay home (cooperate) or Act Normally (defect). The table below looks at the payoffs if you don’t lockdown early and already have community transmission.

As Cameron points out: For most people, acting normally is a dominant strategy, at least in the early stages of the coronavirus spreading. They are better off acting normally if everyone else stays home (because they mostly get to go on with their lives as normal, and have low risk of catching the coronavirus; whereas staying home they would be giving up on things they like to do), and they are better off acting normally if everyone else is acting normally (because life goes on as normal, rather than giving up on things they like to do). So, individually people are better off acting normally.

Any voluntary measure is subject to the prisoners’ dilemma which is why we went to an early full lockdown. As we are in lockdown repeated games requires trust and the correct behaviour outlined by the government – this is essential to eliminate the virus. Therefore the dominant strategy of ‘Act Normally’ is no longer an option. Cameron quoted Robert Frank whom I have blogged on here

‘smart for one, dumb for all’.

Stay safe everyone

RBNZ announce QE

Below is a link to a very good interview with RBNZ Governor Adrian Orr on Radio NZ ‘Morning Report’ programme. Loads of good material on monetary policy – useful for discussion purposes with my A2 class today – online.

Radio New Zealand – Adrian Orr interview

The Monetary Policy Committee decided to implement a Large Scale Asset Purchase programme (LSAP) of New Zealand government bonds. The programme will purchase $30 billion of New Zealand government bonds, across a range of maturities, in the secondary market over the next 12 months. The programme aims to provide further support to the economy, build confidence, and keep interest rates on government bonds low. The low OCR – 0.25%, lower long-term interest rates, and the fiscal stimulus recently announced together provide considerable support to the economy through this challenging period.

This Time it is Different

I have mentioned in previous posts the work of Ken Rogoff and Carmen Reinhart – co-authors of “This Time is Different” – 2009. Below is a summary from Amazon

Throughout history, rich and poor countries alike have been lending, borrowing, crashing–and recovering–their way through an extraordinary range of financial crises. Each time, the experts have chimed, “this time is different”–claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters. With this breakthrough study, leading economists Carmen Reinhart and Kenneth Rogoff definitively prove them wrong.

However the rise of the coronavirus and the impact it is having on the global economy is not the same as previous recessions/ depressions in history. Ken Rogoff found it hard to think of a historical parallel and came up with the Spanish flu epidemic which killed millions of people worldwide. Rogoff talks to Paul Solmon of PBS about the impact of the coronavirus.

Economics of Coronavirus – mindmap

Three different shocks that are prevalent

Supply shock – will become more visible in the coming weeks as importers from China maybe unable to source adequate supply given widespread shutdowns across Chinese manufacturing.This loss of intermediate goods for production of final products cause a decline in revenue and consumer well-being. A good example of supply shocks were the oil crisis years of 1973 (oil prices up 400%) and 1979 (oil prices up 200%).

Demand shock – is already affecting consumer demand as travel slows, people avoid large gatherings, and consumers reduce discretionary spending. Already many sports fixtures have been cancelled which in turn hits revenue streams. With the uncertainty about job security demand in the consumer market will drop – cars, electronics, iPhones etc. Also tourism and airline industries are also exposed to the fall in demand.

Financial shock – although the supply and demand shocks will eventually subside, the global financial system is likely to have a longer-lasting impact. Long-term growth is the willingness of borrowers and lenders to invest and these decisions are influenced by: increased uncertainty regarding the global supply chain; a loss of confidence in the economy to withstand another attack; and a loss of confidence regarding the infrastructure for dealing with this and future crises.

Policy options

Monetary policy is limited to what it can do with interest rates so low. Even with lower interest rates this does not tackle the problem of coronavirus – cheaper access to money won’t suddenly improve the supply chain or mean that consumers will start to spend more of their income. The RBNZ (NZ Central Bank) could instruct trading banks to be more tolerant of economic conditions.

Fiscal policy will be a much more powerful weapon – the government can help households by expanding the social safety net – extending unemployment benefit. Also the guaranteeing of employment should layoffs occur. Tourism and airline industries are being hit particularly hard. Although more of a monetary phenomenon the ‘Helicopter Drop’ could a policy tool of the government. A lot of governments already have introduced ‘shock therapy’ and unleashed significant stimulus measures:

  • Hong Kong – giving away cash to population – equivalent NZ$2,120.
  • China – infrastructure projects and subsidising business to pay workers.
  • Japan – trillions of Yen to subsidising workers. Small firms get 0% interest on loans.
  • Italy – fiscal expansion and a debt moratorium including mortgages
  • US – congress nearing stimulus package
  • NZ – stimulus package industry based

Source: The Real Economy Blog