WEBVTT 00:00:00.000 --> 00:00:02.425 align:middle line:90% [SQUEAKING] 00:00:02.425 --> 00:00:04.850 align:middle line:90% [RUSTLING] 00:00:04.850 --> 00:00:08.245 align:middle line:90% [CLICKING] 00:00:08.245 --> 00:00:15.798 align:middle line:90% 00:00:15.798 --> 00:00:16.840 align:middle line:90% RICARDO J. CABALLERO: OK. 00:00:16.840 --> 00:00:19.660 align:middle line:90% Let's start. 00:00:19.660 --> 00:00:22.520 align:middle line:90% So hello, everyone. 00:00:22.520 --> 00:00:28.180 align:middle line:84% Welcome to 1402, Introduction to Macroeconomics. 00:00:28.180 --> 00:00:31.030 align:middle line:90% And I won't teach today. 00:00:31.030 --> 00:00:32.409 align:middle line:90% So that's a good news. 00:00:32.409 --> 00:00:34.220 align:middle line:90% I will start on Wednesday. 00:00:34.220 --> 00:00:36.970 align:middle line:84% So what I want to do today is essentially tell you 00:00:36.970 --> 00:00:39.190 align:middle line:84% what macro is about, macroeconomics 00:00:39.190 --> 00:00:44.470 align:middle line:84% is about, and also the rules of the game. 00:00:44.470 --> 00:00:48.190 align:middle line:84% So what a difference a single letter makes. 00:00:48.190 --> 00:00:50.500 align:middle line:84% Many of you must have taken 1401. 00:00:50.500 --> 00:00:53.440 align:middle line:84% In fact, some of you may be taking it concurrently, 00:00:53.440 --> 00:00:54.940 align:middle line:90% a lecture right before mine. 00:00:54.940 --> 00:00:57.490 align:middle line:90% 00:00:57.490 --> 00:01:00.130 align:middle line:90% And that's Microeconomics, 1401. 00:01:00.130 --> 00:01:01.600 align:middle line:90% This is macroeconomics. 00:01:01.600 --> 00:01:03.550 align:middle line:84% And it doesn't take a lot of imagination 00:01:03.550 --> 00:01:07.180 align:middle line:84% to realize that this course is about big things. 00:01:07.180 --> 00:01:08.980 align:middle line:90% We don't look at small things. 00:01:08.980 --> 00:01:10.300 align:middle line:90% That's what micro is about. 00:01:10.300 --> 00:01:15.310 align:middle line:84% Micro looks at a household, at a firm, at an industry. 00:01:15.310 --> 00:01:17.120 align:middle line:90% In macro we don't do that. 00:01:17.120 --> 00:01:19.060 align:middle line:90% We look at the whole economy. 00:01:19.060 --> 00:01:20.590 align:middle line:90% We think about the US. 00:01:20.590 --> 00:01:22.750 align:middle line:90% We think about China. 00:01:22.750 --> 00:01:24.580 align:middle line:84% We don't think about an individual price. 00:01:24.580 --> 00:01:28.370 align:middle line:84% We think about inflation, so the rate of change of all prices. 00:01:28.370 --> 00:01:30.610 align:middle line:84% We don't think about whether a particular worker 00:01:30.610 --> 00:01:31.810 align:middle line:90% is employed or unemployed. 00:01:31.810 --> 00:01:33.970 align:middle line:84% We think of whether the rate of unemployment 00:01:33.970 --> 00:01:36.970 align:middle line:84% is very high or low, things of that kind. 00:01:36.970 --> 00:01:38.410 align:middle line:84% When we look at two countries, we 00:01:38.410 --> 00:01:40.952 align:middle line:84% look at the exchange rate, which is the relative price of two 00:01:40.952 --> 00:01:43.220 align:middle line:84% currencies, not to individual goods in two 00:01:43.220 --> 00:01:45.990 align:middle line:84% different countries, but the whole currency and so on. 00:01:45.990 --> 00:01:48.620 align:middle line:90% So that's what macro is about. 00:01:48.620 --> 00:01:51.140 align:middle line:84% Now, you could think that macro is nothing else 00:01:51.140 --> 00:01:53.330 align:middle line:90% than the sum of lots of micros. 00:01:53.330 --> 00:01:55.490 align:middle line:84% After all, that's what an economy is made of. 00:01:55.490 --> 00:01:57.230 align:middle line:84% A population, a whole population is 00:01:57.230 --> 00:01:59.420 align:middle line:84% made of lots of individuals that can 00:01:59.420 --> 00:02:01.670 align:middle line:84% be analyzed with the tools of 1401 00:02:01.670 --> 00:02:05.450 align:middle line:84% and the sequence that follows 1401. 00:02:05.450 --> 00:02:06.950 align:middle line:90% But that doesn't work. 00:02:06.950 --> 00:02:09.770 align:middle line:84% And there are parallels in physics about this and so on. 00:02:09.770 --> 00:02:11.713 align:middle line:84% The way you want to study sort of big bodies 00:02:11.713 --> 00:02:13.130 align:middle line:84% is different from the way you want 00:02:13.130 --> 00:02:16.640 align:middle line:84% to understand the movements of small elements. 00:02:16.640 --> 00:02:18.964 align:middle line:90% And that's the case in macro. 00:02:18.964 --> 00:02:22.550 align:middle line:84% In macro there's a big line of research 00:02:22.550 --> 00:02:26.840 align:middle line:84% that has to do with the micro foundations of macro economics. 00:02:26.840 --> 00:02:31.100 align:middle line:84% But even in that case, which is very close to micro, 00:02:31.100 --> 00:02:34.880 align:middle line:84% most of the action ended up happening in the non-micro part, 00:02:34.880 --> 00:02:37.640 align:middle line:84% in the interactions, in the equilibrium 00:02:37.640 --> 00:02:39.420 align:middle line:90% aspects of the system. 00:02:39.420 --> 00:02:41.790 align:middle line:84% So it's a much more complicated object. 00:02:41.790 --> 00:02:43.700 align:middle line:84% And if you were to build it from the micro, 00:02:43.700 --> 00:02:45.980 align:middle line:84% it would be an incredibly complicated object. 00:02:45.980 --> 00:02:49.130 align:middle line:84% So one of the things we need to do in macroeconomics 00:02:49.130 --> 00:02:52.220 align:middle line:90% is take some shortcuts. 00:02:52.220 --> 00:02:54.660 align:middle line:84% That's what makes macro a lot of an art. 00:02:54.660 --> 00:02:56.420 align:middle line:90% It's not a science, per se. 00:02:56.420 --> 00:02:58.100 align:middle line:90% It's some sort of a science. 00:02:58.100 --> 00:02:59.750 align:middle line:90% It has the tools of a science. 00:02:59.750 --> 00:03:02.150 align:middle line:84% But it's a lot about shortcuts and tricks 00:03:02.150 --> 00:03:04.400 align:middle line:84% and so on to capture the essence of a problem that 00:03:04.400 --> 00:03:06.650 align:middle line:84% is very complex if you were to model it 00:03:06.650 --> 00:03:08.465 align:middle line:90% in all the gory details. 00:03:08.465 --> 00:03:11.450 align:middle line:90% 00:03:11.450 --> 00:03:15.260 align:middle line:84% And in this course, we're going to exaggerate on that sense. 00:03:15.260 --> 00:03:18.063 align:middle line:84% We're not going to do anything complicated, I promise you that. 00:03:18.063 --> 00:03:20.480 align:middle line:84% Some occasionally conceptually things will be complicated. 00:03:20.480 --> 00:03:24.350 align:middle line:84% But the math will not be complicated. 00:03:24.350 --> 00:03:26.510 align:middle line:84% So we're going to keep things very, very simple. 00:03:26.510 --> 00:03:28.430 align:middle line:84% I want to communicate the essence 00:03:28.430 --> 00:03:31.560 align:middle line:84% of the big macroeconomic relationships. 00:03:31.560 --> 00:03:33.540 align:middle line:90% This is not a PhD course. 00:03:33.540 --> 00:03:36.140 align:middle line:84% If you were to take a PhD course in macro, 00:03:36.140 --> 00:03:38.180 align:middle line:84% it would be a very mathy type course. 00:03:38.180 --> 00:03:42.260 align:middle line:84% In fact, most of the people that do apply in micro in our PhD 00:03:42.260 --> 00:03:44.900 align:middle line:84% program complain against macro because they find it too 00:03:44.900 --> 00:03:46.102 align:middle line:90% mathy and so on. 00:03:46.102 --> 00:03:47.810 align:middle line:84% But that's not going to be the case here. 00:03:47.810 --> 00:03:50.990 align:middle line:84% That's not what this course is about. 00:03:50.990 --> 00:03:54.900 align:middle line:84% My goal-- so if this is a successful course, 00:03:54.900 --> 00:03:57.810 align:middle line:84% it's not that you come out being a researcher in macro 00:03:57.810 --> 00:03:58.440 align:middle line:90% out of this. 00:03:58.440 --> 00:04:00.300 align:middle line:84% Hopefully you'll have a career eventually 00:04:00.300 --> 00:04:02.950 align:middle line:84% and do all the next steps that you need to do that. 00:04:02.950 --> 00:04:05.580 align:middle line:84% But I want you to be able to do is 00:04:05.580 --> 00:04:07.870 align:middle line:84% to read something like this-- this is a World Economic 00:04:07.870 --> 00:04:08.370 align:middle line:90% Outlook. 00:04:08.370 --> 00:04:11.010 align:middle line:84% It's a publication that the IMF puts out 00:04:11.010 --> 00:04:14.880 align:middle line:84% every six months in which it tells you how it sees the world 00:04:14.880 --> 00:04:16.920 align:middle line:84% and where we're heading and so on. 00:04:16.920 --> 00:04:18.089 align:middle line:90% No equations there. 00:04:18.089 --> 00:04:19.980 align:middle line:84% Lots of tables and stuff like that. 00:04:19.980 --> 00:04:22.980 align:middle line:84% I'd like you to be able to read that kind of document 00:04:22.980 --> 00:04:24.060 align:middle line:90% very clearly. 00:04:24.060 --> 00:04:26.880 align:middle line:84% I would like you to be able to read something in say, the Wall 00:04:26.880 --> 00:04:29.550 align:middle line:84% Street Journal and read even critically, 00:04:29.550 --> 00:04:31.710 align:middle line:84% sometimes disagreeing with what is in there-- 00:04:31.710 --> 00:04:33.630 align:middle line:90% Financial Times, The Economist. 00:04:33.630 --> 00:04:34.950 align:middle line:90% That's a goal of this course. 00:04:34.950 --> 00:04:36.550 align:middle line:90% It's not a lot more than that. 00:04:36.550 --> 00:04:37.470 align:middle line:90% It's just that. 00:04:37.470 --> 00:04:39.750 align:middle line:84% If you do a summer internship in Wall Street 00:04:39.750 --> 00:04:42.480 align:middle line:84% and you work in a macro hedge fund or whatever, 00:04:42.480 --> 00:04:44.440 align:middle line:84% this is going to be a good course for that. 00:04:44.440 --> 00:04:46.350 align:middle line:84% I mean, this is what traders really know. 00:04:46.350 --> 00:04:47.580 align:middle line:84% They don't know a lot more than that. 00:04:47.580 --> 00:04:48.830 align:middle line:90% Many traders should know that. 00:04:48.830 --> 00:04:49.510 align:middle line:90% They don't. 00:04:49.510 --> 00:04:52.860 align:middle line:84% But this does a level of knowledge. 00:04:52.860 --> 00:04:55.650 align:middle line:84% If it gets to be very complicated, I'm failing. 00:04:55.650 --> 00:04:59.010 align:middle line:84% That's not what I want to do here. 00:04:59.010 --> 00:05:02.250 align:middle line:84% The typical lecture-- again, this is not a lecture. 00:05:02.250 --> 00:05:04.230 align:middle line:84% The first lecture will be on Wednesday. 00:05:04.230 --> 00:05:06.637 align:middle line:84% The typical lecture-- and not in the first part 00:05:06.637 --> 00:05:08.220 align:middle line:84% of the course because you're not going 00:05:08.220 --> 00:05:11.040 align:middle line:84% to have the tools, the definitions and so on to do it. 00:05:11.040 --> 00:05:17.560 align:middle line:84% What I want to do is spend 5 to 10 minutes early on. 00:05:17.560 --> 00:05:19.060 align:middle line:84% Again, the first part of the course, 00:05:19.060 --> 00:05:22.240 align:middle line:84% we can do that because you don't have the knowledge to do that. 00:05:22.240 --> 00:05:25.290 align:middle line:84% But as you start building tools, I 00:05:25.290 --> 00:05:29.190 align:middle line:84% want to be able to talk about current events, something that 00:05:29.190 --> 00:05:31.950 align:middle line:84% is happening out there that I find interesting 00:05:31.950 --> 00:05:36.450 align:middle line:84% or something I received that morning, the morning 00:05:36.450 --> 00:05:38.760 align:middle line:84% of the lecture, which I find interesting. 00:05:38.760 --> 00:05:41.460 align:middle line:84% And if I think you already have the tools to begin to understand 00:05:41.460 --> 00:05:43.030 align:middle line:90% it, I'm going to be repetitive. 00:05:43.030 --> 00:05:45.330 align:middle line:84% I'm going to come back two, three, four times 00:05:45.330 --> 00:05:46.380 align:middle line:90% to the same topic. 00:05:46.380 --> 00:05:49.625 align:middle line:84% Hopefully you'll be more advanced in your knowledge 00:05:49.625 --> 00:05:51.000 align:middle line:84% in the later stages and you'll be 00:05:51.000 --> 00:05:53.400 align:middle line:84% able to understand it more and more. 00:05:53.400 --> 00:05:55.650 align:middle line:84% The typical lecture will have 5 to 10 minutes 00:05:55.650 --> 00:05:58.410 align:middle line:84% in which we'll talk about some facts, something 00:05:58.410 --> 00:05:59.630 align:middle line:90% that is going on. 00:05:59.630 --> 00:06:01.660 align:middle line:84% For example, a picture like this. 00:06:01.660 --> 00:06:02.950 align:middle line:90% This I received this morning. 00:06:02.950 --> 00:06:05.980 align:middle line:84% I think this came from Goldman, I think, Goldman Sachs. 00:06:05.980 --> 00:06:06.820 align:middle line:90% Yes. 00:06:06.820 --> 00:06:09.190 align:middle line:84% And what you have in that picture-- again, 00:06:09.190 --> 00:06:11.110 align:middle line:84% don't worry about details today-- 00:06:11.110 --> 00:06:13.090 align:middle line:90% is you have two lines. 00:06:13.090 --> 00:06:20.650 align:middle line:84% One of them is a measure of wages, wage growth, compensation 00:06:20.650 --> 00:06:21.580 align:middle line:90% to workers. 00:06:21.580 --> 00:06:24.010 align:middle line:84% And another one is a measure of inflation. 00:06:24.010 --> 00:06:25.540 align:middle line:84% Again, all those definitions will 00:06:25.540 --> 00:06:28.670 align:middle line:84% come in the next lecture on inflation. 00:06:28.670 --> 00:06:29.820 align:middle line:90% So it's the rate at which-- 00:06:29.820 --> 00:06:31.640 align:middle line:84% you must have heard about inflation. 00:06:31.640 --> 00:06:33.850 align:middle line:84% It's something, prices are rising. 00:06:33.850 --> 00:06:36.610 align:middle line:84% And what that picture shows you is that these two series 00:06:36.610 --> 00:06:39.260 align:middle line:90% are very highly correlated. 00:06:39.260 --> 00:06:44.000 align:middle line:84% So when wage growth is high, inflation tends to be high. 00:06:44.000 --> 00:06:45.770 align:middle line:84% And that's a big issue on these days. 00:06:45.770 --> 00:06:47.570 align:middle line:84% There's a lot of concern about this stuff. 00:06:47.570 --> 00:06:50.750 align:middle line:90% 00:06:50.750 --> 00:06:52.730 align:middle line:84% So let me try to explain a little bit what 00:06:52.730 --> 00:06:54.350 align:middle line:90% is a concern on these days. 00:06:54.350 --> 00:06:58.120 align:middle line:84% Again, if you don't understand anything, doesn't matter. 00:06:58.120 --> 00:06:59.620 align:middle line:84% If you don't understand anything I'm 00:06:59.620 --> 00:07:02.740 align:middle line:84% saying right now in the last lecture, then it matters. 00:07:02.740 --> 00:07:04.400 align:middle line:90% But now it doesn't matter. 00:07:04.400 --> 00:07:06.850 align:middle line:84% I'm just trying to give you a flavor of the kind of things 00:07:06.850 --> 00:07:08.720 align:middle line:90% we'll be talking about. 00:07:08.720 --> 00:07:11.360 align:middle line:84% That picture there, again, a variable 00:07:11.360 --> 00:07:13.340 align:middle line:84% that will define in the next lecture, not now, 00:07:13.340 --> 00:07:14.870 align:middle line:90% shows you the unemployment rate. 00:07:14.870 --> 00:07:17.330 align:middle line:84% You don't need any specific definition 00:07:17.330 --> 00:07:20.120 align:middle line:84% to know that to feel, at least get a sense, 00:07:20.120 --> 00:07:23.790 align:middle line:84% that, well, if unemployment is high, workers aren't very happy. 00:07:23.790 --> 00:07:25.970 align:middle line:84% It's not a good thing to have lots of unemployment. 00:07:25.970 --> 00:07:28.760 align:middle line:84% And what that series shows you the shaded areas 00:07:28.760 --> 00:07:30.680 align:middle line:90% are recessions in the US. 00:07:30.680 --> 00:07:33.890 align:middle line:84% What that series shows you is that typically in recessions, 00:07:33.890 --> 00:07:34.990 align:middle line:90% unemployment goes up. 00:07:34.990 --> 00:07:36.240 align:middle line:90% So that's one of the features. 00:07:36.240 --> 00:07:37.865 align:middle line:84% One of the main features of a recession 00:07:37.865 --> 00:07:40.220 align:middle line:90% is that unemployment is high. 00:07:40.220 --> 00:07:45.160 align:middle line:84% This episode here, it's called the Great Recession-- 00:07:45.160 --> 00:07:47.290 align:middle line:84% as a parallel for the Great Depression. 00:07:47.290 --> 00:07:49.420 align:middle line:84% The US had the Great Depression in the '30s. 00:07:49.420 --> 00:07:51.970 align:middle line:84% This is the Great Recession, the biggest sort 00:07:51.970 --> 00:07:55.270 align:middle line:84% of recession outside of the Great Depression in the US. 00:07:55.270 --> 00:07:58.750 align:middle line:84% And it's also known as the Global Financial Crisis 00:07:58.750 --> 00:08:01.400 align:middle line:84% because this was a recession all around the world. 00:08:01.400 --> 00:08:04.930 align:middle line:84% And what you can see is that unemployment went very high. 00:08:04.930 --> 00:08:07.150 align:middle line:84% That's a very feature, a telltale sign 00:08:07.150 --> 00:08:09.050 align:middle line:90% of a big recession. 00:08:09.050 --> 00:08:10.640 align:middle line:90% And then it took a long time. 00:08:10.640 --> 00:08:13.000 align:middle line:90% This was in recovering. 00:08:13.000 --> 00:08:15.945 align:middle line:84% COVID was a massive shock to the labor market 00:08:15.945 --> 00:08:18.070 align:middle line:84% So not surprisingly, unemployment, the unemployment 00:08:18.070 --> 00:08:19.690 align:middle line:90% rate spike there. 00:08:19.690 --> 00:08:22.000 align:middle line:84% But then it also recover, a lot faster 00:08:22.000 --> 00:08:23.560 align:middle line:90% than it recovered from that. 00:08:23.560 --> 00:08:26.230 align:middle line:84% And today we have unemployment rates that 00:08:26.230 --> 00:08:28.120 align:middle line:90% are at historically low levels. 00:08:28.120 --> 00:08:30.220 align:middle line:90% And that's a big issue. 00:08:30.220 --> 00:08:32.299 align:middle line:84% The rate of unemployment in the US 00:08:32.299 --> 00:08:35.450 align:middle line:90% is at historically low levels-- 00:08:35.450 --> 00:08:38.330 align:middle line:90% way below what is normal. 00:08:38.330 --> 00:08:41.510 align:middle line:84% Forget recessions, obviously way below what is it 00:08:41.510 --> 00:08:44.660 align:middle line:84% happens in recessions, but even way below what is normal, 00:08:44.660 --> 00:08:46.040 align:middle line:84% what happens during normal times. 00:08:46.040 --> 00:08:49.340 align:middle line:90% 00:08:49.340 --> 00:08:53.410 align:middle line:84% Closely related to that is wage growth. 00:08:53.410 --> 00:08:59.410 align:middle line:84% I have just one measure of wages there, is a series of wage that 00:08:59.410 --> 00:09:01.090 align:middle line:90% is particularly-- 00:09:01.090 --> 00:09:03.770 align:middle line:84% what I'm about to say is particularly sharp, 00:09:03.770 --> 00:09:07.360 align:middle line:84% which is the wages of in the accommodation and food service 00:09:07.360 --> 00:09:08.060 align:middle line:90% sectors. 00:09:08.060 --> 00:09:12.040 align:middle line:84% So wages have been rising very steadily and very fast recently 00:09:12.040 --> 00:09:14.230 align:middle line:84% everywhere, particularly in sectors 00:09:14.230 --> 00:09:16.600 align:middle line:84% like this, where we have some problems which 00:09:16.600 --> 00:09:17.830 align:middle line:90% we call labor supply. 00:09:17.830 --> 00:09:19.962 align:middle line:90% But I'll get back to that. 00:09:19.962 --> 00:09:20.920 align:middle line:90% So those are two facts. 00:09:20.920 --> 00:09:23.440 align:middle line:84% We have unemployment at extremely low levels 00:09:23.440 --> 00:09:27.670 align:middle line:84% and we have wage growth at a very fast pace. 00:09:27.670 --> 00:09:29.290 align:middle line:90% Now, that sounds wonderful, no? 00:09:29.290 --> 00:09:32.110 align:middle line:84% I mean, what else do you want, an economy which is few people 00:09:32.110 --> 00:09:37.210 align:middle line:84% unemployed and wages are growing a lot. 00:09:37.210 --> 00:09:40.120 align:middle line:84% I mean, if this was micro, this would be fantastic. 00:09:40.120 --> 00:09:43.300 align:middle line:84% OK, look the guy is employed and he's getting a high wage. 00:09:43.300 --> 00:09:45.250 align:middle line:90% This is great. 00:09:45.250 --> 00:09:48.600 align:middle line:90% Well, not so fast for macro. 00:09:48.600 --> 00:09:51.990 align:middle line:84% Not so fast because I already showed you in the first picture 00:09:51.990 --> 00:09:53.490 align:middle line:84% that I showed you, [INAUDIBLE] there 00:09:53.490 --> 00:09:56.682 align:middle line:84% is a connection between wage growth and inflation. 00:09:56.682 --> 00:09:58.140 align:middle line:84% And that's what we're experiencing. 00:09:58.140 --> 00:10:01.080 align:middle line:84% The normal level of inflation for an economy like the US 00:10:01.080 --> 00:10:02.340 align:middle line:90% is around 2%. 00:10:02.340 --> 00:10:03.120 align:middle line:90% That's normal. 00:10:03.120 --> 00:10:06.540 align:middle line:84% That's what central banks target in an economy like the US 00:10:06.540 --> 00:10:08.310 align:middle line:90% in the Euro area. 00:10:08.310 --> 00:10:11.790 align:middle line:84% Japan has been dreaming with 2%, but hasn't been able for decades 00:10:11.790 --> 00:10:12.840 align:middle line:90% to get it. 00:10:12.840 --> 00:10:15.210 align:middle line:90% Although now they are. 00:10:15.210 --> 00:10:17.940 align:middle line:84% But they weren't, for a couple of decades, to get to 2%. 00:10:17.940 --> 00:10:20.700 align:middle line:84% But that's about-- and we will discuss later in the course 00:10:20.700 --> 00:10:24.300 align:middle line:84% why 2% is about right for economies of the size of the US 00:10:24.300 --> 00:10:26.500 align:middle line:90% and so on. 00:10:26.500 --> 00:10:29.130 align:middle line:84% Obviously in recessions, these things can go low. 00:10:29.130 --> 00:10:32.400 align:middle line:84% And that's why in the COVID recessions 00:10:32.400 --> 00:10:35.040 align:middle line:84% inflation went to zero, essentially. 00:10:35.040 --> 00:10:36.870 align:middle line:90% But then it began to pick up. 00:10:36.870 --> 00:10:41.060 align:middle line:84% And it's now at levels, which are unheard of in the US since 00:10:41.060 --> 00:10:42.740 align:middle line:90% the '80s. 00:10:42.740 --> 00:10:46.370 align:middle line:84% So depending on the particular measure you use of inflation, 00:10:46.370 --> 00:10:48.840 align:middle line:90% it's around 6.5% to 8%. 00:10:48.840 --> 00:10:50.400 align:middle line:84% That's a level of inflation we have, 00:10:50.400 --> 00:10:53.870 align:middle line:84% which is way, way above what is considered 00:10:53.870 --> 00:10:57.140 align:middle line:84% a normal or reasonable target for the central banks 00:10:57.140 --> 00:10:58.430 align:middle line:90% for inflation. 00:10:58.430 --> 00:10:59.390 align:middle line:90% So that's a problem. 00:10:59.390 --> 00:11:02.780 align:middle line:84% We have had some good news recently in that inflation 00:11:02.780 --> 00:11:04.910 align:middle line:90% clearly peaked already-- 00:11:04.910 --> 00:11:07.550 align:middle line:84% again, definition of inflation, formal definition of inflation 00:11:07.550 --> 00:11:09.000 align:middle line:90% happens in the next lecture. 00:11:09.000 --> 00:11:11.108 align:middle line:90% But it already peaked. 00:11:11.108 --> 00:11:11.900 align:middle line:90% And it's declining. 00:11:11.900 --> 00:11:14.415 align:middle line:84% But it's still a very, very high levels. 00:11:14.415 --> 00:11:15.290 align:middle line:90% And that's a problem. 00:11:15.290 --> 00:11:16.923 align:middle line:84% That's a big macroeconomic problem. 00:11:16.923 --> 00:11:19.340 align:middle line:84% And one of the things we want to understand in this course 00:11:19.340 --> 00:11:21.680 align:middle line:90% is, well, what to do about it. 00:11:21.680 --> 00:11:22.860 align:middle line:90% How do you deal with that? 00:11:22.860 --> 00:11:26.390 align:middle line:84% What do central banks need to do in order to deal with that? 00:11:26.390 --> 00:11:29.090 align:middle line:84% Now, I've been talking about the US. 00:11:29.090 --> 00:11:33.180 align:middle line:84% But this is not specific to the US. 00:11:33.180 --> 00:11:37.520 align:middle line:84% This episode this recovery from COVID 00:11:37.520 --> 00:11:41.060 align:middle line:84% is incredibly common across different regions of the world. 00:11:41.060 --> 00:11:43.290 align:middle line:84% I mean, you see it everywhere with a few exceptions. 00:11:43.290 --> 00:11:47.090 align:middle line:84% And I'm going to talk about one major exception in a minute. 00:11:47.090 --> 00:11:49.460 align:middle line:90% But it's widespread. 00:11:49.460 --> 00:11:52.610 align:middle line:84% It's a widespread phenomenon that we had high unemployment. 00:11:52.610 --> 00:11:56.480 align:middle line:90% Then we had sort of very high-- 00:11:56.480 --> 00:11:58.740 align:middle line:84% well, I haven't told you that part yet. 00:11:58.740 --> 00:12:00.590 align:middle line:84% But then we had sort of low inflation. 00:12:00.590 --> 00:12:02.300 align:middle line:84% Then inflation picked up enormously. 00:12:02.300 --> 00:12:04.610 align:middle line:84% And now we're all worried about these very high levels 00:12:04.610 --> 00:12:05.610 align:middle line:90% of inflation. 00:12:05.610 --> 00:12:09.860 align:middle line:84% In fact, if you look at what happened 00:12:09.860 --> 00:12:12.410 align:middle line:84% between the Great Recession and the COVID recession, 00:12:12.410 --> 00:12:15.140 align:middle line:84% it was pretty normal to have 70% to 80% 00:12:15.140 --> 00:12:17.900 align:middle line:84% of the economies in the world having inflation 00:12:17.900 --> 00:12:20.340 align:middle line:90% levels at or below 2%. 00:12:20.340 --> 00:12:21.805 align:middle line:90% So that's a norm. 00:12:21.805 --> 00:12:23.180 align:middle line:84% If they throw you into a country, 00:12:23.180 --> 00:12:26.180 align:middle line:84% they drop you into a country, the normal thing would be well, 00:12:26.180 --> 00:12:27.020 align:middle line:90% it's about 2%. 00:12:27.020 --> 00:12:28.190 align:middle line:90% That's a level of inflation. 00:12:28.190 --> 00:12:29.898 align:middle line:84% Obviously, if I dropped you in Argentina, 00:12:29.898 --> 00:12:32.450 align:middle line:84% you're going to find a much bigger number, you know, 00:12:32.450 --> 00:12:34.370 align:middle line:90% 10,000%. 00:12:34.370 --> 00:12:39.360 align:middle line:84% But the bulk of the countries were around 2% or so. 00:12:39.360 --> 00:12:44.640 align:middle line:84% Today you don't find any country with inflation below 2%. 00:12:44.640 --> 00:12:48.060 align:middle line:84% Not even Japan, for years we're in deflation and trying 00:12:48.060 --> 00:12:50.670 align:middle line:90% to get sort of above zero. 00:12:50.670 --> 00:12:52.410 align:middle line:90% That's all they wanted. 00:12:52.410 --> 00:12:55.600 align:middle line:84% Not even in Japan you have inflation below 2% today. 00:12:55.600 --> 00:12:57.630 align:middle line:90% So this thing I showed you. 00:12:57.630 --> 00:13:00.420 align:middle line:84% And for more or less the same reasons, 00:13:00.420 --> 00:13:02.220 align:middle line:90% it's happening everywhere. 00:13:02.220 --> 00:13:04.510 align:middle line:90% Not exactly the same factors. 00:13:04.510 --> 00:13:08.400 align:middle line:84% It's the same episode, for example, 00:13:08.400 --> 00:13:11.940 align:middle line:84% with differences depending on the structure of the economy 00:13:11.940 --> 00:13:13.380 align:middle line:90% or in additional shocks. 00:13:13.380 --> 00:13:17.290 align:middle line:84% In Europe, for example they had very high inflation. 00:13:17.290 --> 00:13:18.960 align:middle line:90% But the problem is not-- 00:13:18.960 --> 00:13:22.830 align:middle line:84% the origin of the problem, the bulk of the problem 00:13:22.830 --> 00:13:25.410 align:middle line:90% is the same as in the US. 00:13:25.410 --> 00:13:27.300 align:middle line:84% But at the margin they are different. 00:13:27.300 --> 00:13:29.460 align:middle line:84% In Europe, the big driver of inflation, 00:13:29.460 --> 00:13:32.220 align:middle line:84% the big recent driver of inflation, 00:13:32.220 --> 00:13:35.840 align:middle line:84% is unlike the US, which is aggregate demand, a concept 00:13:35.840 --> 00:13:36.840 align:middle line:90% you'll understand later. 00:13:36.840 --> 00:13:38.547 align:middle line:84% It's essentially the war in Ukraine. 00:13:38.547 --> 00:13:41.130 align:middle line:84% That has increased the price of energy and the price of energy 00:13:41.130 --> 00:13:43.180 align:middle line:90% has led to lots of inflation. 00:13:43.180 --> 00:13:44.530 align:middle line:90% So there are different reasons. 00:13:44.530 --> 00:13:47.080 align:middle line:84% But all of them are sort of different reasons 00:13:47.080 --> 00:13:50.110 align:middle line:84% that you add on top of what is a common story, which 00:13:50.110 --> 00:13:55.600 align:middle line:84% is that we overheated coming out of the COVID episode 00:13:55.600 --> 00:14:00.040 align:middle line:84% and now we're struggling with that. 00:14:00.040 --> 00:14:01.690 align:middle line:84% Now, the main tool-- and we're going 00:14:01.690 --> 00:14:03.380 align:middle line:84% to talk a lot about in this course-- 00:14:03.380 --> 00:14:06.910 align:middle line:84% the main tool that central banks have to deal with inflation 00:14:06.910 --> 00:14:08.740 align:middle line:90% is the interest rate. 00:14:08.740 --> 00:14:11.980 align:middle line:84% So for reasons you'll understand later, 00:14:11.980 --> 00:14:15.250 align:middle line:84% although you may have intuition about some of those now, 00:14:15.250 --> 00:14:18.550 align:middle line:84% obviously when the central bank lowers the interest rates, 00:14:18.550 --> 00:14:22.190 align:middle line:84% then that helps the economy to expand. 00:14:22.190 --> 00:14:25.150 align:middle line:84% And when it increases interest rate, then it does the opposite. 00:14:25.150 --> 00:14:27.640 align:middle line:84% Rising Interest rate makes mortgages more expensive, 00:14:27.640 --> 00:14:30.340 align:middle line:84% make everything more expensive so people tend to consume less. 00:14:30.340 --> 00:14:32.380 align:middle line:84% Firms tend to invest less and so on 00:14:32.380 --> 00:14:35.920 align:middle line:84% because it's more expensive to invest, to borrow, to do 00:14:35.920 --> 00:14:36.970 align:middle line:90% something. 00:14:36.970 --> 00:14:40.780 align:middle line:90% And there you see it. 00:14:40.780 --> 00:14:43.930 align:middle line:84% I mean, this was the level of the interest rate in the US 00:14:43.930 --> 00:14:45.040 align:middle line:90% before COVID. 00:14:45.040 --> 00:14:46.120 align:middle line:90% When COVID came, boom. 00:14:46.120 --> 00:14:47.563 align:middle line:84% They brought it all the way down. 00:14:47.563 --> 00:14:49.480 align:middle line:84% It happens that you can not bring the interest 00:14:49.480 --> 00:14:51.580 align:middle line:90% rate a lot lower than zero. 00:14:51.580 --> 00:14:53.590 align:middle line:84% That's the reason it stayed close to zero. 00:14:53.590 --> 00:14:55.660 align:middle line:84% We're going to talk about that later on. 00:14:55.660 --> 00:14:57.253 align:middle line:84% But then eventually they realized 00:14:57.253 --> 00:14:58.420 align:middle line:90% that we're behind the curve. 00:14:58.420 --> 00:15:00.700 align:middle line:84% Inflation had picked up a lot and the central banks 00:15:00.700 --> 00:15:02.630 align:middle line:90% were behind the curve. 00:15:02.630 --> 00:15:05.710 align:middle line:84% So they began to hike rates in a hurry. 00:15:05.710 --> 00:15:10.030 align:middle line:84% And that's what we have been experiencing for the last year 00:15:10.030 --> 00:15:14.120 align:middle line:84% or so, very fast increase in the interest rate. 00:15:14.120 --> 00:15:16.360 align:middle line:84% Now, this is, of course, about macroeconomics. 00:15:16.360 --> 00:15:17.860 align:middle line:84% But I happen to do a lot of research 00:15:17.860 --> 00:15:19.510 align:middle line:90% between macro and finance. 00:15:19.510 --> 00:15:22.900 align:middle line:84% So I'm going to put a little bit more of a component of finance 00:15:22.900 --> 00:15:24.430 align:middle line:90% into-- 00:15:24.430 --> 00:15:26.590 align:middle line:84% I think I'm going to do most of that 00:15:26.590 --> 00:15:28.510 align:middle line:90% in the last third of the course. 00:15:28.510 --> 00:15:34.150 align:middle line:84% But monetary policy has lots of implications for finance, 00:15:34.150 --> 00:15:36.940 align:middle line:84% for equity, values, for the stock market, 00:15:36.940 --> 00:15:38.180 align:middle line:90% and stuff like that. 00:15:38.180 --> 00:15:46.170 align:middle line:84% So what you see here, this line here, is the SPX 500. 00:15:46.170 --> 00:15:51.775 align:middle line:84% It's the main index of equity in the US of shares. 00:15:51.775 --> 00:15:52.900 align:middle line:90% There are several indices-- 00:15:52.900 --> 00:15:55.850 align:middle line:90% NASDAQ, S&P, Dow, and so on. 00:15:55.850 --> 00:15:58.000 align:middle line:84% This is the main index, the most comprehensive, 00:15:58.000 --> 00:16:01.640 align:middle line:84% the one that takes the largest companies, 00:16:01.640 --> 00:16:03.727 align:middle line:90% and so on and so forth. 00:16:03.727 --> 00:16:05.310 align:middle line:84% And what you can see what happens here 00:16:05.310 --> 00:16:09.690 align:middle line:84% is that when COVID happened, the surprise that we had, 00:16:09.690 --> 00:16:13.410 align:middle line:84% really a pandemia, then the stock market crash, 00:16:13.410 --> 00:16:16.500 align:middle line:84% declined like 30% or something like that at the time. 00:16:16.500 --> 00:16:17.800 align:middle line:90% That's interesting facets. 00:16:17.800 --> 00:16:21.990 align:middle line:84% I mean, that's one characteristic of equity 00:16:21.990 --> 00:16:23.250 align:middle line:90% that I like a lot. 00:16:23.250 --> 00:16:28.140 align:middle line:84% Other risky assets, as well, but they anticipate what happens. 00:16:28.140 --> 00:16:30.930 align:middle line:84% What happened there is the stock market, 00:16:30.930 --> 00:16:33.420 align:middle line:84% the shareholders, realized that something big 00:16:33.420 --> 00:16:36.180 align:middle line:84% was-- negative and big-- was happening in front of us. 00:16:36.180 --> 00:16:38.080 align:middle line:90% So it was time to sell. 00:16:38.080 --> 00:16:40.480 align:middle line:84% And so the equity market collapsed. 00:16:40.480 --> 00:16:42.250 align:middle line:84% What happens next is even more interesting 00:16:42.250 --> 00:16:47.328 align:middle line:84% for a macro economist, which is this big boom here. 00:16:47.328 --> 00:16:48.370 align:middle line:90% There's an enormous boom. 00:16:48.370 --> 00:16:51.250 align:middle line:84% The economy here still was at levels of activity 00:16:51.250 --> 00:16:53.085 align:middle line:90% below what it had before COVID. 00:16:53.085 --> 00:16:55.210 align:middle line:84% But the stock market, the value in the stock market 00:16:55.210 --> 00:17:01.150 align:middle line:84% had way exceeded the level we had before the pandemic. 00:17:01.150 --> 00:17:04.720 align:middle line:84% And the main driver of that, I've shown that in some papers, 00:17:04.720 --> 00:17:06.670 align:middle line:90% the main driver of that is not-- 00:17:06.670 --> 00:17:10.040 align:middle line:84% I mean people tell lots of stories of Amazon 00:17:10.040 --> 00:17:12.099 align:middle line:84% and so on, Tesla, bla, blah, blah. 00:17:12.099 --> 00:17:15.490 align:middle line:84% If you look at the aggregate, the main reason for that rise 00:17:15.490 --> 00:17:16.930 align:middle line:90% was monetary policy. 00:17:16.930 --> 00:17:20.740 align:middle line:84% You can explain all that increase in the equity value 00:17:20.740 --> 00:17:23.500 align:middle line:84% in the US of the index-- not the individual shares, 00:17:23.500 --> 00:17:24.369 align:middle line:90% of the index-- 00:17:24.369 --> 00:17:26.510 align:middle line:90% by the effect of interest rates. 00:17:26.510 --> 00:17:29.300 align:middle line:84% So monetary policy plays a big role. 00:17:29.300 --> 00:17:30.850 align:middle line:84% If you care about finance, well, it 00:17:30.850 --> 00:17:33.310 align:middle line:84% plays a huge role in the value of assets. 00:17:33.310 --> 00:17:35.170 align:middle line:84% When monetary policy is very loose, 00:17:35.170 --> 00:17:37.730 align:middle line:84% that tends to increase the value of assets. 00:17:37.730 --> 00:17:40.400 align:middle line:84% And that's one of the mechanisms the central banks 00:17:40.400 --> 00:17:42.695 align:middle line:84% use to expand aggregate demand when they want 00:17:42.695 --> 00:17:43.820 align:middle line:90% to expand aggregate demand. 00:17:43.820 --> 00:17:45.903 align:middle line:84% They want people to feel-- you are in a recession, 00:17:45.903 --> 00:17:48.470 align:middle line:84% you want people to feel richer so they spend more and so on 00:17:48.470 --> 00:17:50.380 align:middle line:90% and so forth. 00:17:50.380 --> 00:17:51.730 align:middle line:90% What happened here? 00:17:51.730 --> 00:17:54.468 align:middle line:84% This decline, you can also explain it fully 00:17:54.468 --> 00:17:55.760 align:middle line:90% with the hike in interest rate. 00:17:55.760 --> 00:17:57.885 align:middle line:84% Remember, I showed you that the interest rate began 00:17:57.885 --> 00:17:59.620 align:middle line:90% to rise very rapidly here. 00:17:59.620 --> 00:18:02.770 align:middle line:84% Well, last year the equity market in the US 00:18:02.770 --> 00:18:05.050 align:middle line:84% and most major equity markets around the world 00:18:05.050 --> 00:18:07.150 align:middle line:90% declined by 20% or more. 00:18:07.150 --> 00:18:09.550 align:middle line:84% You can explain all that decline simply 00:18:09.550 --> 00:18:11.030 align:middle line:90% by increasing the interest rate. 00:18:11.030 --> 00:18:12.905 align:middle line:84% So that's another thing we need to understand 00:18:12.905 --> 00:18:15.490 align:middle line:84% is why is it that the interest-- why is the interest rate 00:18:15.490 --> 00:18:17.660 align:middle line:84% matter so much for something like equity? 00:18:17.660 --> 00:18:19.900 align:middle line:84% So when a value assets, and when I see what 00:18:19.900 --> 00:18:21.490 align:middle line:84% is the effect of the interest rate, 00:18:21.490 --> 00:18:23.330 align:middle line:84% and then we're going to think about, well, 00:18:23.330 --> 00:18:26.810 align:middle line:84% why would the central bank worry or not worry about these things, 00:18:26.810 --> 00:18:27.860 align:middle line:90% and so on and so forth. 00:18:27.860 --> 00:18:32.410 align:middle line:84% But the truth is that financial markets and the central banks 00:18:32.410 --> 00:18:33.850 align:middle line:90% interact all the time. 00:18:33.850 --> 00:18:38.860 align:middle line:84% I mean, if you are into Wall Street type thing, 00:18:38.860 --> 00:18:41.410 align:middle line:84% you are going to be watching every day, every time 00:18:41.410 --> 00:18:42.763 align:middle line:90% that the monetary minutes. 00:18:42.763 --> 00:18:44.680 align:middle line:84% The minutes of the central banks are released, 00:18:44.680 --> 00:18:48.130 align:middle line:84% you're going to be watching because it has a big implication 00:18:48.130 --> 00:18:51.105 align:middle line:90% for the value of your equity. 00:18:51.105 --> 00:18:53.230 align:middle line:84% Actually, something very interesting of this nature 00:18:53.230 --> 00:18:54.340 align:middle line:90% happened last week. 00:18:54.340 --> 00:19:00.160 align:middle line:84% On Friday, last Friday, there was 00:19:00.160 --> 00:19:02.170 align:middle line:90% a release of payroll numbers. 00:19:02.170 --> 00:19:06.010 align:middle line:84% So it's an employment index, employment numbers. 00:19:06.010 --> 00:19:13.460 align:middle line:84% And people expected the payroll to increase, 00:19:13.460 --> 00:19:15.688 align:middle line:90% so to add nonfarm payroll-- 00:19:15.688 --> 00:19:17.230 align:middle line:84% we'll talk about these things later-- 00:19:17.230 --> 00:19:21.310 align:middle line:90% by about 190,000 workers. 00:19:21.310 --> 00:19:24.700 align:middle line:84% At 8:30-- well and this, you're seeing here, 00:19:24.700 --> 00:19:27.370 align:middle line:84% is the behavior of the same index I showed you before, 00:19:27.370 --> 00:19:30.250 align:middle line:84% but the futures, so things you can trade before the market 00:19:30.250 --> 00:19:31.210 align:middle line:90% actually opens. 00:19:31.210 --> 00:19:33.670 align:middle line:84% The market in the US opens at 9:30 AM. 00:19:33.670 --> 00:19:38.020 align:middle line:84% But you can trade futures since Asia times. 00:19:38.020 --> 00:19:39.400 align:middle line:90% Anyway, so this is the path. 00:19:39.400 --> 00:19:40.810 align:middle line:90% It's all very quiet, tranquil. 00:19:40.810 --> 00:19:44.620 align:middle line:84% Everyone is waiting the release of this news at 8:30 AM. 00:19:44.620 --> 00:19:48.595 align:middle line:84% At 8:30 AM, great news for the labor market. 00:19:48.595 --> 00:19:51.730 align:middle line:90% 00:19:51.730 --> 00:19:55.990 align:middle line:84% The actual change in the payroll was not 190k. 00:19:55.990 --> 00:19:58.600 align:middle line:90% It was over a 500,000k. 00:19:58.600 --> 00:20:02.428 align:middle line:84% So enormous addition of jobs to the economy. 00:20:02.428 --> 00:20:04.220 align:middle line:84% And look what happens to the equity market. 00:20:04.220 --> 00:20:05.360 align:middle line:90% Boom. 00:20:05.360 --> 00:20:07.080 align:middle line:90% It imploded immediately. 00:20:07.080 --> 00:20:10.520 align:middle line:84% So this is wonderful news now for the economy-- lots of jobs. 00:20:10.520 --> 00:20:14.780 align:middle line:84% The equity market imploded as a result of that. 00:20:14.780 --> 00:20:18.132 align:middle line:90% Why do you think that happened? 00:20:18.132 --> 00:20:19.590 align:middle line:84% I've already given you a little bit 00:20:19.590 --> 00:20:22.740 align:middle line:84% of the ingredients for why, for an answer 00:20:22.740 --> 00:20:26.590 align:middle line:90% in the previous slides? 00:20:26.590 --> 00:20:31.380 align:middle line:84% The reason I'm showing you this is because in 15 minutes, 00:20:31.380 --> 00:20:34.130 align:middle line:84% it summarizes all that I was talking about in the previous 30 00:20:34.130 --> 00:20:36.870 align:middle line:90% minutes. 00:20:36.870 --> 00:20:38.570 align:middle line:90% Why do you think that happened? 00:20:38.570 --> 00:20:40.430 align:middle line:90% This is wonderful news. 00:20:40.430 --> 00:20:44.210 align:middle line:84% Why the stock market should crash like 2% from top 00:20:44.210 --> 00:20:46.100 align:middle line:90% to bottom as a result of that? 00:20:46.100 --> 00:20:49.070 align:middle line:90% 00:20:49.070 --> 00:20:50.800 align:middle line:84% AUDIENCE: There's a lot more labor 00:20:50.800 --> 00:20:57.490 align:middle line:84% because that gives a lot more supply of that thing, 00:20:57.490 --> 00:21:02.490 align:middle line:84% and thus, it decreases price because of high supply. 00:21:02.490 --> 00:21:03.930 align:middle line:90% RICARDO J. CABALLERO: No, but-- 00:21:03.930 --> 00:21:09.180 align:middle line:84% OK, that's an interesting explanation. 00:21:09.180 --> 00:21:12.150 align:middle line:90% It's not the one I have in mind. 00:21:12.150 --> 00:21:16.390 align:middle line:84% The explanation says, look, that means firms hire lots of people. 00:21:16.390 --> 00:21:18.750 align:middle line:84% So the price, that means they're going 00:21:18.750 --> 00:21:21.330 align:middle line:84% to be lots of supply of whatever goods they're producing. 00:21:21.330 --> 00:21:22.990 align:middle line:84% The price of those goods is going to decline. 00:21:22.990 --> 00:21:24.210 align:middle line:84% And that's going to be bad for profits. 00:21:24.210 --> 00:21:25.502 align:middle line:90% That's a story you had in mind. 00:21:25.502 --> 00:21:27.920 align:middle line:90% 00:21:27.920 --> 00:21:29.210 align:middle line:90% Maybe there's some of that. 00:21:29.210 --> 00:21:31.970 align:middle line:84% But I'm willing to bet that it's not the main thing. 00:21:31.970 --> 00:21:35.320 align:middle line:90% 00:21:35.320 --> 00:21:38.290 align:middle line:84% So the only clue I give you is that I already 00:21:38.290 --> 00:21:40.450 align:middle line:84% talk about these things five minutes ago. 00:21:40.450 --> 00:21:44.660 align:middle line:90% 00:21:44.660 --> 00:21:48.260 align:middle line:84% AUDIENCE: Employment is very closely related 00:21:48.260 --> 00:21:49.490 align:middle line:90% to inflation rates. 00:21:49.490 --> 00:21:51.352 align:middle line:90% [INAUDIBLE] up to 0.81. 00:21:51.352 --> 00:21:53.060 align:middle line:84% So this could be a result of expectations 00:21:53.060 --> 00:21:54.887 align:middle line:84% of continued high inflation rates. 00:21:54.887 --> 00:21:56.720 align:middle line:84% RICARDO J. CABALLERO: OK, you're very close. 00:21:56.720 --> 00:21:57.740 align:middle line:90% One step more. 00:21:57.740 --> 00:21:59.240 align:middle line:90% Yes. 00:21:59.240 --> 00:22:01.130 align:middle line:90% That means that-- 00:22:01.130 --> 00:22:03.453 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:22:03.453 --> 00:22:05.120 align:middle line:84% RICARDO J. CABALLERO: OK, there you are. 00:22:05.120 --> 00:22:07.310 align:middle line:90% So what happens? 00:22:07.310 --> 00:22:11.150 align:middle line:84% The shareholders wouldn't have done anything 00:22:11.150 --> 00:22:13.280 align:middle line:84% if they thought that the Fed would not 00:22:13.280 --> 00:22:14.870 align:middle line:90% be able to see this data. 00:22:14.870 --> 00:22:17.150 align:middle line:84% But they know that the Fed also sees this data 00:22:17.150 --> 00:22:18.740 align:middle line:84% and say, whoa, these guys are going 00:22:18.740 --> 00:22:20.030 align:middle line:84% to be worried because the economy is 00:22:20.030 --> 00:22:21.050 align:middle line:90% going to keep overheating. 00:22:21.050 --> 00:22:22.633 align:middle line:84% They're going to have to hike interest 00:22:22.633 --> 00:22:26.430 align:middle line:84% rates even more in order to cool down this economy. 00:22:26.430 --> 00:22:28.910 align:middle line:84% I already showed you that what happens in the labor market 00:22:28.910 --> 00:22:31.370 align:middle line:84% is very connected to what happens with inflation. 00:22:31.370 --> 00:22:33.470 align:middle line:90% The central bank knows that. 00:22:33.470 --> 00:22:36.560 align:middle line:84% And now we get this big surprise that means they're not really 00:22:36.560 --> 00:22:38.840 align:middle line:84% being able to-- they're not being successful 00:22:38.840 --> 00:22:42.090 align:middle line:84% at really slowing down one of the main drivers of inflation. 00:22:42.090 --> 00:22:45.270 align:middle line:84% And so financial markets are very forward looking. 00:22:45.270 --> 00:22:46.760 align:middle line:90% They say, whoa, this is coming. 00:22:46.760 --> 00:22:49.640 align:middle line:84% This only means that financial markets 00:22:49.640 --> 00:22:52.430 align:middle line:84% were betting that the Fed was going 00:22:52.430 --> 00:22:57.390 align:middle line:84% to begin to cut interest rates in four months more or so. 00:22:57.390 --> 00:23:00.350 align:middle line:84% And if you look at what the forwards did there, 00:23:00.350 --> 00:23:01.430 align:middle line:90% what the market-- 00:23:01.430 --> 00:23:03.420 align:middle line:84% you can extract what the market thinks. 00:23:03.420 --> 00:23:06.780 align:middle line:84% Right after this, it got immediately pushed out 00:23:06.780 --> 00:23:08.880 align:middle line:90% to the end of the year. 00:23:08.880 --> 00:23:09.608 align:middle line:90% So it's precise. 00:23:09.608 --> 00:23:11.400 align:middle line:84% It's the anticipation that the central bank 00:23:11.400 --> 00:23:12.760 align:middle line:90% will have to do something. 00:23:12.760 --> 00:23:15.870 align:middle line:84% And so I thought it was very interesting 00:23:15.870 --> 00:23:19.160 align:middle line:90% for that point of view. 00:23:19.160 --> 00:23:21.230 align:middle line:90% Recessions-- well, look. 00:23:21.230 --> 00:23:23.650 align:middle line:84% And these are all very good news. 00:23:23.650 --> 00:23:28.310 align:middle line:84% But everyone knows that the Fed needs to cool off the economy. 00:23:28.310 --> 00:23:32.620 align:middle line:84% So despite the fact that we're getting good news now, 00:23:32.620 --> 00:23:35.110 align:middle line:84% people expect, the majority of people 00:23:35.110 --> 00:23:38.245 align:middle line:84% expect a recession in the US for this year. 00:23:38.245 --> 00:23:40.120 align:middle line:84% I'm not going to explain this bar graph here. 00:23:40.120 --> 00:23:41.780 align:middle line:90% But these are forecasts. 00:23:41.780 --> 00:23:43.480 align:middle line:84% These are professional forecasters. 00:23:43.480 --> 00:23:47.060 align:middle line:90% And more than half of them-- 00:23:47.060 --> 00:23:51.040 align:middle line:84% so the median of them thinks that there is a 65% probability 00:23:51.040 --> 00:23:55.510 align:middle line:84% that there is a recession in the US this year. 00:23:55.510 --> 00:23:57.670 align:middle line:84% And we're going to talk a lot about this 00:23:57.670 --> 00:24:00.160 align:middle line:84% and probably we're going to be getting news about this 00:24:00.160 --> 00:24:01.458 align:middle line:90% while we're taking the course. 00:24:01.458 --> 00:24:03.250 align:middle line:84% So this is going to be a picture that we're 00:24:03.250 --> 00:24:06.610 align:middle line:90% going to discuss extensively. 00:24:06.610 --> 00:24:10.180 align:middle line:84% And the reason for the recession is nothing else than-- 00:24:10.180 --> 00:24:13.000 align:middle line:84% The reason you ask this forecast, why do you 00:24:13.000 --> 00:24:14.360 align:middle line:90% think we may have a recession? 00:24:14.360 --> 00:24:17.712 align:middle line:84% Well, because the Fed is trying to fight inflation. 00:24:17.712 --> 00:24:19.420 align:middle line:84% It's going to keep hiking interest rates. 00:24:19.420 --> 00:24:23.090 align:middle line:84% And at some point, it may break something. 00:24:23.090 --> 00:24:25.040 align:middle line:90% And that's the reason. 00:24:25.040 --> 00:24:26.840 align:middle line:84% But all these things you are going 00:24:26.840 --> 00:24:30.980 align:middle line:84% to be able to understand very clearly through models. 00:24:30.980 --> 00:24:35.000 align:middle line:84% The last thing I want to say before telling you 00:24:35.000 --> 00:24:37.160 align:middle line:84% a little bit the rules of the game 00:24:37.160 --> 00:24:40.730 align:middle line:84% is that I said before that the story I told you about the US 00:24:40.730 --> 00:24:42.860 align:middle line:84% is more or less what is happening all around. 00:24:42.860 --> 00:24:46.790 align:middle line:90% I was in Chile a month ago. 00:24:46.790 --> 00:24:47.390 align:middle line:90% I'm Chilean. 00:24:47.390 --> 00:24:49.247 align:middle line:90% And they have the same story. 00:24:49.247 --> 00:24:51.830 align:middle line:84% They start hiking interest rates a little earlier because they 00:24:51.830 --> 00:24:53.647 align:middle line:90% had more inflation than the US. 00:24:53.647 --> 00:24:55.355 align:middle line:84% But they're going through the same cycle. 00:24:55.355 --> 00:24:57.980 align:middle line:90% 00:24:57.980 --> 00:25:00.650 align:middle line:84% There's one big economy, the second largest economy 00:25:00.650 --> 00:25:05.330 align:middle line:84% in the world, that has not been part of this, which is China. 00:25:05.330 --> 00:25:09.190 align:middle line:84% China was very aggressive in the COVID policy, 00:25:09.190 --> 00:25:10.930 align:middle line:90% so zero COVID policy. 00:25:10.930 --> 00:25:12.945 align:middle line:84% So they really slowed down their economy. 00:25:12.945 --> 00:25:13.820 align:middle line:90% That's a consequence. 00:25:13.820 --> 00:25:14.987 align:middle line:90% They didn't want to do that. 00:25:14.987 --> 00:25:17.170 align:middle line:84% But as a result of a very strict COVID policy, 00:25:17.170 --> 00:25:20.110 align:middle line:84% they essentially shut down big parts of the economy 00:25:20.110 --> 00:25:21.100 align:middle line:90% for a long time. 00:25:21.100 --> 00:25:24.700 align:middle line:84% That, by the way, had big impact in the rest of the world, 00:25:24.700 --> 00:25:26.635 align:middle line:84% through the network of production, 00:25:26.635 --> 00:25:28.510 align:middle line:84% the chains of production and stuff like that. 00:25:28.510 --> 00:25:30.460 align:middle line:90% That was inflationary in itself. 00:25:30.460 --> 00:25:33.010 align:middle line:90% That part is dissipating. 00:25:33.010 --> 00:25:36.460 align:middle line:84% But for their own economy, for the domestic economy, 00:25:36.460 --> 00:25:40.870 align:middle line:84% that really slowed down China, an economy that grew typically 00:25:40.870 --> 00:25:44.960 align:middle line:84% at 5 and 1/2 to 6%, a lot higher 15 years ago. 00:25:44.960 --> 00:25:47.210 align:middle line:84% We're going to try to understand why later on. 00:25:47.210 --> 00:25:51.370 align:middle line:84% But last year, I don't know, it was 3% or less. 00:25:51.370 --> 00:25:57.410 align:middle line:84% Numbers in China were difficult to figure it out. 00:25:57.410 --> 00:26:00.160 align:middle line:84% They're not equally transparent to other numbers. 00:26:00.160 --> 00:26:02.050 align:middle line:84% But in any event, it's very clear 00:26:02.050 --> 00:26:04.580 align:middle line:90% that China slowed down a lot. 00:26:04.580 --> 00:26:07.130 align:middle line:84% And that policy recently changed. 00:26:07.130 --> 00:26:10.020 align:middle line:90% The zero-COVID policy changed. 00:26:10.020 --> 00:26:11.660 align:middle line:84% And so there is great expectation 00:26:11.660 --> 00:26:13.970 align:middle line:84% that now there is going to be a big boom in China 00:26:13.970 --> 00:26:15.650 align:middle line:90% because they are lagging behind. 00:26:15.650 --> 00:26:19.010 align:middle line:84% I mean, in the US when COVID began to dissipate, 00:26:19.010 --> 00:26:20.643 align:middle line:90% we got a huge boost to growth. 00:26:20.643 --> 00:26:23.060 align:middle line:84% And that's part of the reason we got all this inflation is 00:26:23.060 --> 00:26:26.780 align:middle line:84% because we had lots of growth coming out of the recession that 00:26:26.780 --> 00:26:27.800 align:middle line:90% happened in COVID. 00:26:27.800 --> 00:26:30.500 align:middle line:84% And more or less the same is expected in China. 00:26:30.500 --> 00:26:34.220 align:middle line:84% And one of the big reasons behind those big bounce backs 00:26:34.220 --> 00:26:35.428 align:middle line:90% is when people are desperate. 00:26:35.428 --> 00:26:36.762 align:middle line:90% They want to spend on something. 00:26:36.762 --> 00:26:39.588 align:middle line:84% They want to go to restaurants and cinemas and stuff like that. 00:26:39.588 --> 00:26:41.630 align:middle line:84% And the other one is they have the means to do it 00:26:41.630 --> 00:26:44.630 align:middle line:84% because they couldn't spend on anything for a while. 00:26:44.630 --> 00:26:48.230 align:middle line:84% And so they can travel and stuff like that. 00:26:48.230 --> 00:26:52.160 align:middle line:84% So people expect-- and this is a very large economy 00:26:52.160 --> 00:26:55.220 align:middle line:90% that suddenly sort of wakes up. 00:26:55.220 --> 00:26:57.350 align:middle line:84% No, that's a big thing for China. 00:26:57.350 --> 00:27:00.280 align:middle line:84% But it's also a big thing for the world. 00:27:00.280 --> 00:27:02.810 align:middle line:84% What happens in China doesn't stay in China. 00:27:02.810 --> 00:27:04.010 align:middle line:90% It's a big giant. 00:27:04.010 --> 00:27:05.180 align:middle line:90% So it moves. 00:27:05.180 --> 00:27:07.430 align:middle line:84% And for some countries it's very, very important. 00:27:07.430 --> 00:27:08.990 align:middle line:84% And this picture here shows you what 00:27:08.990 --> 00:27:10.940 align:middle line:84% is the impact on different regions 00:27:10.940 --> 00:27:13.550 align:middle line:84% of the world on the growth rate and different regions 00:27:13.550 --> 00:27:17.760 align:middle line:84% of the world of an increase by 1% in the rate of growth 00:27:17.760 --> 00:27:18.260 align:middle line:90% of China. 00:27:18.260 --> 00:27:22.120 align:middle line:90% 00:27:22.120 --> 00:27:25.030 align:middle line:84% Obviously all the neighbors benefit a lot. 00:27:25.030 --> 00:27:27.920 align:middle line:84% But Latin America benefits even more. 00:27:27.920 --> 00:27:28.700 align:middle line:90% Why is that? 00:27:28.700 --> 00:27:30.730 align:middle line:84% Well, because Latin America produces 00:27:30.730 --> 00:27:33.280 align:middle line:84% lots of commodities and China consumes 00:27:33.280 --> 00:27:36.230 align:middle line:84% lots of commodities when it's building and stuff like that. 00:27:36.230 --> 00:27:38.540 align:middle line:84% And so that's the reason big impact on Latin America. 00:27:38.540 --> 00:27:42.340 align:middle line:84% So this is a piece of good news for the world in the sense 00:27:42.340 --> 00:27:44.530 align:middle line:90% that activity will go up. 00:27:44.530 --> 00:27:48.940 align:middle line:90% But it's good news on average. 00:27:48.940 --> 00:27:51.890 align:middle line:84% But it may be too much of a good thing, as well. 00:27:51.890 --> 00:27:52.510 align:middle line:90% Why? 00:27:52.510 --> 00:27:54.910 align:middle line:84% Because many economists are going through what 00:27:54.910 --> 00:27:55.760 align:middle line:90% we described before. 00:27:55.760 --> 00:27:57.010 align:middle line:84% They're trying to bring down inflation. 00:27:57.010 --> 00:27:58.177 align:middle line:90% They don't want more demand. 00:27:58.177 --> 00:28:00.130 align:middle line:84% They want less for now because we're 00:28:00.130 --> 00:28:02.290 align:middle line:84% going to understand that connection later on how 00:28:02.290 --> 00:28:04.510 align:middle line:90% demand connects to inflation. 00:28:04.510 --> 00:28:05.770 align:middle line:90% But you want less. 00:28:05.770 --> 00:28:10.000 align:middle line:84% And now you're going to get this impulse from China, which is 00:28:10.000 --> 00:28:11.305 align:middle line:90% going to fuel more inflation. 00:28:11.305 --> 00:28:13.930 align:middle line:84% It's OK for China because they don't have an inflation problem. 00:28:13.930 --> 00:28:16.000 align:middle line:84% But it may be a problem for many of the countries 00:28:16.000 --> 00:28:22.180 align:middle line:84% that are trying to undo the inflationary consequences 00:28:22.180 --> 00:28:26.050 align:middle line:84% of the previous expansion, the expansion that followed COVID. 00:28:26.050 --> 00:28:26.710 align:middle line:90% OK, anyways. 00:28:26.710 --> 00:28:30.580 align:middle line:84% But this is the kind of things we're going to be talking about. 00:28:30.580 --> 00:28:32.620 align:middle line:84% I said the course is not going to be mathy, 00:28:32.620 --> 00:28:34.540 align:middle line:84% but it's going to be all about models. 00:28:34.540 --> 00:28:36.370 align:middle line:84% The next lecture is the most boring lecture 00:28:36.370 --> 00:28:38.470 align:middle line:84% of the course I tell you in advance because it's 00:28:38.470 --> 00:28:39.010 align:middle line:90% definitions. 00:28:39.010 --> 00:28:40.552 align:middle line:84% I need to go through the definitions. 00:28:40.552 --> 00:28:42.490 align:middle line:90% At least I get bored. 00:28:42.490 --> 00:28:45.080 align:middle line:84% But the rest, there's always little models 00:28:45.080 --> 00:28:46.150 align:middle line:90% but it's simple models. 00:28:46.150 --> 00:28:48.970 align:middle line:84% OK, but the models are going to try 00:28:48.970 --> 00:28:51.740 align:middle line:84% to explain the kind of things I discussed today. 00:28:51.740 --> 00:28:55.150 align:middle line:84% So that's what this course is about. 00:28:55.150 --> 00:28:57.333 align:middle line:84% Ideally, if we're successful, you're 00:28:57.333 --> 00:28:58.750 align:middle line:84% going to be able to read something 00:28:58.750 --> 00:29:01.090 align:middle line:84% like the World Economic Outlook, which will have 00:29:01.090 --> 00:29:02.860 align:middle line:90% lots of pictures like this. 00:29:02.860 --> 00:29:05.525 align:middle line:84% And you're going to be able to write a little equation very 00:29:05.525 --> 00:29:07.150 align:middle line:84% simple on the side to try to understand 00:29:07.150 --> 00:29:10.240 align:middle line:84% what is going on there, and to catch the mistakes, as well. 00:29:10.240 --> 00:29:13.690 align:middle line:84% OK, WEO has less mistakes than the Wall Street Journal, 00:29:13.690 --> 00:29:15.940 align:middle line:84% but you will catch mistakes, you'll see, 00:29:15.940 --> 00:29:18.420 align:middle line:90% you'll be proud of those. 00:29:18.420 --> 00:29:30.000 align:middle line:90%