Intra & Inter-Regional Industry Shocks: A New Metric with an Application to Australasian Currency Union

We place regional industry structures at centre stage in currency union analysis, decomposing differences between regional and aggregate cycles into 'industry structure' and 'industry cycle' effects. The industry structure effect indicates whether a region's industry structure causes its cycle to deviate from the aggregate; the industry cycle effect indicates the importance of region-specific shocks in causing a deviation between cycles. We apply the methodology to Australasia. One region, ACT, has a material industry structure effect arising from its heavy central government concentration. No other region has a material industry structure effect; their cycles differ from the aggregate due to region-specific shocks.

Building Bridges: Treating a New Transport Link as a Real Option

A transportation investment that materially improves links between centres opens up previously unavailable options for new activities. Traditional cost-benefit analysis, that focuses on valuing benefits such as reduced travel time and safety improvements, does not adequately account for increased options for new activities arising from such an investment. Instead, real options theory must be added to the analysis to evaluate the full benefits of the new link. Two inter-related problems with real options analysis for practical use are that: (a) the nature of the options potentially being created are difficult to value, and (b) the standard mathematics of real options analysis is complex. Nevertheless, the intuition behind the role of real options analysis is straight-forward. This paper uses a specific example – Auckland’s Harbour Bridge and the Northern Motorway that stretches beyond it – to illustrate the importance of real options analysis. It combines an illustrative, multi-period model of the real options problem, that clearly identifies the option value created by a new investment, with data on the effects of the Harbour Bridge and related investments. The illustrative model highlights that the inclusion of real options factors may either increase or decrease the attractiveness of a proposed investment, and it identifies the type of factors that would lead one to invest even where a standard benefit-cost ratio is less than one. These factors are considered in the context of the Harbour Bridge investments, demonstrating their practical, as well as theoretical, importance.

Building Bridges: Treating a New Transport Link as a Real Option

A transportation investment that materially improves links between centres opens up previously unavailable options for new activities. Traditional cost-benefit analysis does not adequately take account of the value of this option; real options theory must be added to the analysis to evaluate the full benefits. This paper uses a specific example, Auckland’s Harbour Bridge, to motivate the importance of real options analysis. Using illustrative, multi-period models of the real options problem, it highlights how inclusion of real options factors may either increase or decrease the attractiveness of a proposed investment. The models identify situations in which it is optimal to invest even where a standard benefit-cost ratio is less than one.Transport investment; real options; cost-benefit analysis

New Zealand: A Typical Australasian Ecomony?

We examine trend economic developments in New Zealand and in each of Australia's six states and two territories (i.e. nine regions) in order to inform issues regarding economic policy harmonisation across Australasia. Our focus is on trend developments in GDP, population, GDP per capita and employment (each at regional level), and in sectoral industry shares within each region. By comparing New Zealand developments with those in the eight Australian regions, we infer whether New Zealand's developments have been typical of those experienced elsewhere in Australasia. Examination of development trends also indicates the nature of the development process across Australasian regions. For instance, we examine the extent to which certain regions are experiencing growth in high-value industries (such as business and financial services), and examine the degree to which some are dependent on primary industries, including agriculture and mining. Analysis of all the data indicates that, while New Zealand has some idiosyncratic features, it is reasonable to regard it as a "typical" Australasian economy in many respects.Australia, New Zealand, Economic Union, Sectoral Development

The Economics of Infrastructure Investment: Beyond Simple Cost Benefit Analysis

This non-technical ‘think-piece’ examines aspects of infrastructure project evaluation, concentrating on circumstances that may render a standard cost benefit analysis (CBA) inappropriate. It is designed to make infrastructure investors and planners think deeply about their assumptions and to broaden the range of issues that are taken into account. Issues considered include: the role of CBA; network effects (increasing returns to scale) and the endogeneity of resources within an economy; the valuation of productive versus consumptive benefits; the value of traded versus non-traded sector production; the role and choice of the discount rate; and the importance of considering option values when making infrastructure investment and disinvestment decisions.Infrastructure, Cost Benefit Analysis, Evaluation

Crown Financial Asset Management: Objectives and Practice

This paper analyses key issues that may be relevant to setting the Crown's overall objectives and practices for financial asset and liability management. It examines implications of the nature of the Crown's balance sheet for asset and liability management and investigates the appropriate approach of the Crown towards managing risk (concluding that a risk averse approach is warranted). The issue of centralisation versus decentralisation of Crown asset and liability management is analysed both from a portfolio management perspective and from an organisational design perspective. Insights from private sector financial conglomerates are also incorporated. The paper concludes that individual Crown financial entities should each continue to be responsible for setting their own strategic asset allocation, after taking into account the nature of their liabilities. A central Crown body should, however, monitor and aggregate information from each of these entities and be delegated the responsibility and power to manage risks to the overall Crown balance sheet.Crown balance sheet; Public debt management

Regional and Industry Cycles in Australasia: Implications for a Common Currency

If two countries experience similar cycles, loss in monetary sovereignty following currency union may not be severe. Analysis of cyclical similarity is frequently carried out at the overall industry level, then interpreted with reference to regional industrial structures. By contrast, this paper explicitly incorporates regional industry structure into an examination of Australasian cycles. Since 1991, NZ and Australasian cycles have been highly correlated, but there is little evidence that the NZ cycle has been "caused" by Australian regional or industry cycles. We test whether the NZDAUD exchange rate has insulated NZ from Australian shocks, but find it has not played a major buffering role in response to Australian industry shocks (including mining shocks). Instead, the strongest impacts on the NZDAUD stem from the NZ cycle. An important loss of monetary sovereignty under currency union may therefore arise in response to NZ-specific shocks.

Commercial bank load loss recoveries

We present a new approach to analyse historical recovery rates on distressed bank assets. Our approach uses banks’ reported impaired assets and the corresponding specific provisions. The dynamics and drivers of this credit loss recovery proxy are studied for a comprehensive sample of Australian banks from 1989 to 2005. We find that macroeconomic and bank-specific factors influence banks’ estimates of loan loss recoveries, consistent with banks smoothing their earnings. In contrast with findings based on prices of distressed corporate bonds, banks record lower recoveries in years of strong economic growth

Impacts of planning rules, regulations, uncertainty and delay on residential property development

This paper proposes a framework for how houses could be developed, with a focus on how regulatory policies and practices affect decision making. The authors surveyed property developers in Auckland on how planning rules and regulations affect the cost of \u27affordable\u27 housing. Almost 90% of the developers surveyed had been affected by delays or uncertainties related to regulation. The typical cost range of regulations is estimated to be between $32,500 and$60,000 per dwelling in a subdivision and between $65,000 and$110,000 per apartment. Academic Abstract Dwelling prices are determined in the long run by the total costs of a development, where costs include regulatory costs, including costs of delay and uncertainty. We outline a conceptual framework for the development process and then develop a real options model of housing development that indicates more formally how regulatory policies and regulatory practices affect development decisions. We apply these insights to the design of a survey of property developers active in the Auckland market, with an emphasis on the ‘affordable’ part of the market. In surveying developers, we aim to elicit their views regarding the impacts that planning rules and regulations have on total development costs. We do not attempt to value the corresponding benefits of the planning rules and regulations, so this study is not a cost: benefit analysis of council planning approaches; rather it documents the costs of the rules and regulations – as perceived by developers – to provide a basis for benefits to be compared. Almost 90% of surveyed developers have been affected by delays or uncertainties related to regulation. Regulations that have had major effects on the actual building costs of apartments include: building height limits, balcony requirements, conforming to Council’s desired mix of apartment typologies and minimum floor to ceiling heights. Major cost effects on developing residential sections and standalone dwellings include: infrastructure contributions not related to the specific development, section size requirements, extended consent processes and urban design considerations stemming from Council’s urban designers. Reserve and development contributions and Watercare levies affect the costs of both types of development. Excluding the cost of Watercare and reserve and development contributions, the typical cost range of the total impact of regulations is estimated to vary between $32,500 and$60,000 per dwelling in a subdivision. In terms of affordable apartments, assuming the total internal floor area remains the same and no deck is built, the impact on total cost typically is estimated to range between $65,000 and$110,000 per apartment

Passing the buck: impacts of commodity price shocks on local outcomes

AbstractThe extent to which exogenous international agricultural price fluctuations are internalised by rural communities is of major interest for policy-makers concerned with regional economic performance. So too is the link between rural sector performance and urban outcomes, especially in agriculturally-based economies. Through vector autoregressive (VAR) modelling we estimate the causal effect of exogenous commodity price innovations on both rural and urban community outcomes. Our analysis demonstrates that restricting the focus to national effects may lead to incorrect inference. We therefore extend the analysis to a VAR using panel data covering all New Zealand districts over 1991–2011. House prices and housing investment are used as quarterly indicators of regional economic and population outcomes. By exploiting the variation in production bundles across communities we find that an increase in commodity prices leads to a permanent increase in housing investment and house prices across the country. However, we find that rural communities are relatively insulated from commodity price shocks, whereas urban areas are most affected by commodity price shocks. We discuss the reasons why this paradoxical result may arise