Okay, let's uh
let's start. So,
hello everyone. Um welcome to 1402,
uh introduction to microeconomics.
Um
I won't teach today, so that's a good
news. Uh I will start on Wednesday.
So, what I want to today is essentially
tell you what macro is about,
macroeconomics is about,
and uh also the rules of of the game.
So, what a difference a single letter
makes. Many of you must have taken 1401.
In fact, some of you may be taking it
concurrently. It's a lecture right
before mine.
And uh
you know, that's microeconomics, 1401,
and this is macroeconomics, and it
doesn't take a lot of imagination to
realize that this course is about big
things, no? We don't look at small
things. That's what micro is about.
Micro looks at a household, at a firm,
at an industry. Uh
in macro, we don't do that. We look at
the whole economy. We think about the
US. We think about China.
Uh we don't think about an individual
price. We think about inflation, so the
rate of change of all prices. We don't
think about whether a particular worker
is employed or unemployed. We think of
whether the rate of unemployment is very
high or low, things of that kind. Okay?
When we look at two countries, we look
at the exchange rate, which is the
relative price of two currencies, not
two individual goods in two different
countries, but the whole currency, and
so on. So, that's what macro is about.
Now, you could think that macro is
nothing else than the sum of lots of
micros, no? After all, that's what an
economy is made of. A population, a
whole population is made of lots of
individuals that can be analyzed with
the tools of 1401 and and the sequence
that follows uh 1401.
But that doesn't work. And there are
parallels in physics about this, and so
on. The way you want to study sort of
big bodies is different from the way you
want to understand the movements of a
small elements. And and that's the case
in macro. In macro, there's a big
line of research that has to do with uh
the microfoundations of macroeconomics.
But even in that case, which is very
close to micro, uh
most of the action ends up happening in
the non-micro part, in the interactions,
in in the in the equilibrium aspects
of the system. So, so it's a much more
complicated object, and if you were to
build it from the micro, it would be an
incredibly complicated object. So, one
of the things we need to do in
macroeconomics is take some shortcuts.
And and and that's what makes macro a
lot of an art. It's not a science per
se. It's some sort of a science. It has
the tools of a science,
but it's a lot about shortcuts and
tricks, and so on, to capture the
essence of a problem that is very
complex if you were to model it in in
the all the gory details. Okay? And um
and in this course, we're going to
exaggerate on that sense. We're not
going to do anything complicated. I
promise you that. Some occasionally,
conceptually, things will be
complicated, but the math will not be
complicated. Okay?
Uh so, we're going to keep things very
very simple. I want to communicate the
essence of the big macroeconomic
relationships.
This is not a PhD course. If you were to
take a a PhD course in macro, it would
be a very mathy type course.
In fact, most of the people that do
apply in micro in our PhD program
complain against macro because they find
it too mathy, and so on. Okay? But
that's not going to be the case here.
That's not what this course is about.
My goal,
so if this is a successful course, is
not that you come out being a researcher
in macro out of this. Hopefully, you'll
have a career eventually and do all the
next steps that you need to do that. But
I want you to be able to do is to read
something like this. This is a World
Economic Outlook. It's a publication
that the IMF puts out every 6 months, in
which it tells you what the how it sees
the world and where where heading, and
so on. No equations there. Lots of
tables and stuff like that. I'd like you
to be able to read that kind of document
very clearly. I would like you to be
able to read something, say, the Wall
Street Journal, and read it even
critically. Sometimes disagreeing with
what's in there.
Financial Times, The Economist. That's
the goal of this course. It's not a lot
more than that. It's just that. If you
do a summer inter- in Wall Street, and
you work in a macro hedge fund or
whatever,
this is going to be a good course for
that. I mean, this is what traders
really know. They don't know a lot more
than that. Many traders should know
that. They don't. But this that's the
level of knowledge. I'm not
if it gets to be very complicated, I'm
failing. That's not what I want to do
here.
The typical lecture, again, this is not
a lecture. The next The first lecture
will be on Wednesday.
The typical lecture, and not in the
first part of the course, because you're
not going to have the tools, the
definitions, and so on, to do it.
What I want to do is
is
uh
spend 5 to 10 minutes early on. Again,
the first part of the course, we can't
do that because you don't have the still
the knowledge to do that.
But as as you start building tools,
I want to be able to sort of
talk about current events, something
that is happening out there that I find
I find interesting, or something I
received that morning may even uh the
the morning of the lecture, in which I
which I find interesting. And if I think
you already have the tools to begin to
understand it, I'm going to be
repetitive. I'm going to sort of come
back to three, four times to the same
topic. Hopefully, you'll be know you'll
be more advanced in your knowledge in
the later stages, so you'll be able to
understand it more and more.
Okay? So, the typical lecture will have
5 to 10 minutes, in which we'll talk
about some facts, something that is
going on.
For example, a picture like this. This
is I received it this morning. I think
this came from Goldman, I think. Goldman
Sachs, yes.
And what you have in that picture,
again, don't worry about details today,
is you have two lines. One of them is a
measure of uh
uh wages,
wage growth, compensation to workers,
and another one is a measure of
inflation. Again, all those definitions
will come in the next lecture.
Uh and inflation, so it's the rate at
which, you know, you must have heard
about inflation. It's something prices
are rising, no?
And what that picture shows you is that
these two series are very highly
correlated.
Okay? So, when wage growth is high,
inflation tends to be high. Okay? And
that's a big issue on these days.
There's a lot of concern about this
stuff.
So, let me let me try to explain a
little bit what is a concern on these
days. Again,
if you don't understand anything, it
doesn't matter.
If you don't understand anything I'm
saying right now, in the last lecture,
then it matters. But now it doesn't
matter, you know? I'm just trying to
give you a flavor of the kind of things
we'll be talking about.
That picture there,
again, a variable that we'll define in
the next lecture, not now, shows you the
unemployment rate. You don't need any
specific definition
to know that to feel, at least get a
sense that, well, if unemployment is
high, workers aren't very happy. It's
not a good thing to have lots of
unemployment.
And what that series shows you, the
shaded areas are recessions in the US.
What that series shows you is that
typically in recessions, unemployment
goes up. So, that's one of the features
one of the main features of a recession
is that unemployment is high.
This episode here
is is called the Great Recession, as a
parallel for the Great Depression. The
US had the Great Depression in the '30s.
This is the Great Recession, the biggest
sort of recession outside of the Great
Depression in the US. And it's also
known
as the Global Financial Crisis, because
this was a recession all around the
world. And what you can see is that
unemployment went very high.
That's a very feature a telltale sign of
a of of a big recession. And then it
took a long time. This was in in in sort
of recovery.
COVID was a massive shock to the labor
market. So, not surprisingly,
unemployment the unemployment rate did
spike there.
But then it also recovered a lot faster
than it recovered from that.
And today, we have unemployment rates
that are at historically low levels. And
that's a big issue.
The rate of unemployment in the US is at
historically low levels. Okay? Way below
what is normal
uh
forget recessions, obviously way below
what is in if it happens in recession.
But even way below what is normal, what
happens during normal times.
Okay?
Closely related to that is wage growth.
I have just one measure of wages there.
It's a wage It's a It's a series of
wages that is
that is particularly that that what I'm
about to say is particularly sharp,
which is the wages of in the
accommodation and food service sectors.
So, wages have been rising very steadily
and and very fast recently everywhere,
particularly in sectors like these, you
know, where we have some problems with
what we call labor supply. But we'll
I'll get back to that. Okay? So, those
are two facts. We have unemployment at
extremely low levels,
and we have wage growth at a very high
fast pace.
Now, that sounds wonderful, no? I mean,
what else do you want? An economy in
which few people are unemployed,
and and
and wages are growing a lot. I mean, if
this was micro, this would be fantastic.
Say, "Okay, look. The guy is employed,
and he's getting a high wage. This is
great."
Well, not so fast for macro.
Not so fast because I already showed you
in the first picture that I showed you
to motivate, there's a connection
between wage growth and inflation.
And that's what we're experiencing. The
normal level of inflation for an economy
like the US is around 2%. That's normal.
That's what central banks target in an
economy like the US, in the Euro area.
Japan has been dreaming with 2% but he
hasn't been able for decades to get it
but although
now they are but but they weren't for a
couple of decades to get to 2% but
that's about and we will discuss later
in the course why 2% is about right for
economies of the size of the US and so
on.
Obviously in in recessions these things
can go low and that's what
you know that in the COVID recessions
inflation went to zero essentially.
But then it began to pick up and it's
now at levels which are unheard of in
the US since the '80s.
Okay? So depending on the particular
measure you use of inflation is around 6
and 1/2% to 8%. That's the level of
inflation we have which is way way above
what is considered a normal reasonable
target for the central banks for the
inflation. Okay? So that's a problem. We
have had some good news recently in that
inflation clearly picked already.
Again definition of inflation formal
definition inflation happens in the next
lecture but
it already picked and it's declining but
it's still a very very high level and
that's a problem. That's a big
macroeconomic problem and one of the
things we want to understand in this
course is well what to do about it. How
do you do how do you deal with that?
What do central banks need to do
in order to deal with that? Now
I've been talking about the US but this
is not specific to the US.
Uh
this is episode this recovery from COVID
is is incredibly common across different
regions of the world. I mean you see it
everywhere with a few exceptions and I'm
going to talk about one major exception
in a minute.
But but it's it's it's it's widespread.
It's a widespread phenomenon that you
know we had high unemployment then we
had sort of very high uh
uh well I haven't told you that part yet
but then we had sort of low inflation
then inflation pick up enormously and
now we're all worried about this very
high levels of inflation. In fact
uh
if you look at sort of what happened
between the great recession and the
COVID recession it was pretty normal to
have 70 to 80% of the economies in the
world having inflation levels at or
below 2%. So that's a norm. You so if if
I throw you into a country say drop you
into a country the normal thing would be
well it's about 2% that's the level of
inflation. Obviously if I drop you in
Argentina you're going to find a much
bigger number no?
10,000% but but but but the the bulk of
the countries were around uh 2% or so.
Today you don't find any country with
inflation below 2%.
Okay? Not even Japan that for years were
in deflation and trying to get sort of
uh above zero. That's what they all they
wanted.
Not even in Japan you have inflation
below 2% So this thing I show you and
for more or less the same reasons uh is
happening everywhere.
Not exactly the same factors is the same
episode in for example in
and then with differences
depending on the structure of the
economy or in additional shocks. In
Europe for example they have very high
inflation.
Uh
but the problem is not
the origin of the problem the
the bulk of the of the problem is the
same as in the US.
But the but at the margin they're
different. In in Europe the big driver
of inflation the big recent driver of
inflation
is unlike the US which is I is aggregate
demand I will discuss later is
essentially the war in Ukraine. That has
increased the price of energy and the
price of energy has led to lots of
inflation. So there are different
reasons but all of them are sort of
different reasons that you add on top of
what is a common story which is that we
overheated coming out of the COVID COVID
episode and and and now
we're struggling struggling with that.
Now the main tool and we're going to
talk a lot about this in this course.
The main tool that central banks have to
deal with inflation is the interest
rate.
Okay? So for reasons you'll understand
later uh although you may have an
intuition about some of those now
obviously when the central bank lowers
the interest rates then that helps the
economy to expand.
Uh and when it increases interest rate
then it does the opposite. Raising
interest rate makes mortgages more
expensive makes everything more
expensive so people tend to consume less
firms tend to invest less and so on
because it's more expensive to invest to
borrow to to do something. Okay? And and
there
there you see it. I mean this was the
level of the interest rate in the US
before COVID. When COVID came boom they
brought it all the way down. It happens
that you cannot bring interest rate a
lot lower than zero. That's the reason
it stayed close to zero there. We're
going to talk about that later on.
But then eventually they realized that
were behind the curve. Inflation had
picked up a lot and the central banks
were
behind it behind the curve. So they
began to hike rates
in a hurry. Okay? And that's what we
have been experiencing for for the last
uh
year or so.
Okay? Very fast increase in the interest
rate.
Now this is a course about
macroeconomics but I happen to do a lot
of research between macro and finance so
I'm going to put a little bit more of a
component of finance into in the in the
I think I'm going to do most of that
in the last third of the course.
But monetary policy has lots of
implications for for for for finance for
equity values for the stock market and
stuff like that.
So what you see here
is the
the this line here is the is the S S S
S&P X 500. It's the index the main
index of equity in the US of shares.
Okay? And there are several indices
Nasdaq S&P Dow and so on. This is the
main index the most comprehensive the
one that takes the largest
the largest companies
and so on and so forth.
And when you can see what happens here
is that when COVID happened the
the surprise that we had really a
pandemia
then the stock market crashed. It
declined like 30% or something like that
at the time.
That's interesting of assets. I mean
that's one of
one characteristic of of
equity that I like a lot. Other risky
assets as well but but but but they like
a lot they they anticipate what happens.
What happened there is
the stock market the shareholders
realized that something big was negative
and big was happening in front of us so
it was time to sell you know and so the
equity market collapsed.
What happens next is even more
interesting for a macroeconomist
which is this
this big boom here.
It's an enormous boom. The the economy
here is still was at levels of activity
below what it had before COVID but the
stock market the value of the stock
market had way exceeded
the level we had before
the pandemia.
Okay?
And the main driver of that I've shown
that in some papers. The main driver of
that is not I mean people tell lots of
stories you know you know Amazon and so
on and so on but Tesla blah blah. If you
look at the aggregate the main reason
for that rise was monetary policy. Was
you can explain
all that increase in the equity value in
the US
of the index not individual shares of
the index by the effect of interest
rates. Okay? So monetary policy plays a
big role. If you care about finance well
it plays a huge role in the value of
assets. When monetary policy is very
loose that tends to increase the the
value of assets and that's
one of the mechanism the central banks
use to expand aggregate demand when they
want to expand aggregate demand. They
want people to feel if you are in a
recession you want people to feel richer
so they spend more and so on and so
forth.
What happened here?
This decline you can also explain it
fully with the hiking interest. Remember
I showed you that the interest rate
began to rise very rapidly here.
Well last year the equity market in the
US and most major equity markets around
the world declined by 20% or more.
You can explain all that decline simply
by the increase in the interest rate. So
that's another thing we need to
understand is why is it the interest why
is it the interest rate matters so much
for something like equity? So we want to
value assets and we want to see what is
the effect of the interest rate and then
we're going to think about well why
would the central bank worry or not
worry about these things and so on and
so forth. But the truth is that
financial markets
and the central banks
interact all the time. I mean
it's the
If you are in again in into Wall Street
type thing you're going to be watching
every day every time that the monetary
minutes the minutes of the central banks
are released you're going to be watching
because it has a big implication
uh for the value of your equity.
Actually something very interesting of
this nature happened last week. On
Friday
uh
last Friday
um the there was a release of payroll
numbers. So it's an employment index.
Okay? Employment numbers.
And
people expected uh
and and the the payroll to increase to
so to add non-farm payroll we'll talk
about these things later by about
190,000
workers.
At 8:30 well and this
you're seeing here is the behavior of
the same index I showed you before but
the futures. So these things you can
trade before the market actually opens.
The market in the US opens at 9:30 a.m.
but you can trade futures since Asia
times. Okay?
Anyway so this is the path. It's all
very quiet tranquil. Everyone is waiting
the release of this news at 8:30 a.m.
At 8:30 a.m.
great news for the labor market.
Not only
not
the the the actual change in the payroll
was not 190k. It was over a 500,000k.
So, enormous addition of jobs
to the economy.
And look what happens to the equity
market. Boom.
It imploded immediately.
So, this is wonderful news now for the
economy. Lots of jobs. The equity market
imploded as a result of that.
Why do you think that happened?
I've already given you a little bit of
the ingredients for why
for an answer
in in in in the previous slides.
The reason I'm showing you this is
because it's a in in one in 15 minutes,
it summarizes all that I was talking
about in the previous 30 minutes.
Why do you think that happened?
This is wonderful news.
Why why the stock market should
crash like 2% from top to bottom as a
result of that.
Um
because there's a lot more
labor because
um that
gives a lot more um supply of
um that thing and thus it increases the
price because high supply.
No, but uh okay, that's an interesting
Okay, that that's an interesting
explanation. It's not the one I have in
mind.
It's a this this explanation says,
"Look, that means firms hire lots of
people, so the price
that means there's going to be lots of
supply of whatever goods they're
producing. The price of those goods is
going to decline and that's going to be
bad for profits." That's the story you
had in mind?
Yeah.
Maybe there's some of that, but I I'm
willing to bet that it's not the main
thing.
Is
So, the only clue I'll give you is that
I already talked about these things 5
minutes ago.
Um employment is very closely um related
to inflation rates. Yes. to uh 0.81, so
this could be result of expectations of
higher uh continued high inflation.
Okay, you're very close. One step more.
Yes.
That that means that that means that so
expect higher interest rates. Okay, that
there you are. So, what happens? Uh the
bank the
the shareholders wouldn't have done
anything if they thought that the Fed
would not be able to see this data.
But they know that the Fed also sees
this data. They say, "Whoa, these guys
are going to be worried because the
economy's going to keep overheating.
They're going to have to hike interest
rates even more in order to cool down
this economy." Okay? I already showed
you that what happens in the labor
market is very connected to what happens
in with inflation. The the central bank
knows that. And now they get this big
surprise that means they're not really
been able to they're not been successful
at really slowing down one of the main
drivers of inflation.
And so
financial markets are very
forward-looking. They say, "Whoa, this
is coming. This is only means that
they're going to
financial markets were betting that that
the Fed was going to begin to cut
interest rate
uh in six four months more or so."
And if you look at what the forwards
deal there is, so what the market you
can you can extract what the market
thinks. Right after this, it only got
immediately pushed out to the end of of
the year. Okay, so so it's precisely
this anticipation that the central bank
will have to do something. And and so I
thought it was
very interesting from that point of
view.
Recessions, well
Look, and these are all very good news,
but
everyone knows that the Fed needs to
cool off the economy.
So, despite the fact that we're getting
good news now,
uh people expect the majority of people
expect a recession in the US for this
year.
I'm not going to explain this bar
graphic here, but these are forecasters.
These are professional forecasters and
more than half of them uh
so the median of them thinks that there
is a 65% probability that there is a
recession in the US this year.
I'm a little Well, we're going to talk a
lot about this. And probably you're
going to be getting news about this
while we're taking the course. So, this
is going to be a sort of picture that
we're going to discuss
extensively. Uh
and the reason for the recession is
nothing else than the reason you ask at
this forecast, "Why do you think we may
have a recession?" Well, because the Fed
is trying to fight inflation. It's going
to keep hiking interest rate and at some
point it may break something.
Okay?
And and and that's that's the reason.
But we're going to all these things you
are going to be able to understand very
clearly hopefully through models.
The last thing I want to say before
uh
telling you a little bit the rules of
the game
is that I said before that the story I
told you about the US is more or less
what has happened all around, you know?
I was in Chile uh
a month ago. I'm Chilean and they have
the same story. They started hiking
interest rate a little earlier because
they had more inflation than the US, but
they're going through the same cycle. Um
There's one big economy, the second
largest economy in the world that has
not been part of this,
which is China.
China was very aggressive in the COVID
uh policy, you know? So, zero COVID
policy. So, they really slowed down
their economy. That's a consequence.
They didn't want to do that, but as a
result of a very strict COVID policy,
they essentially shut down big parts of
the economy for a long time. That, by
the way, had big impact in the rest of
the world through the
network of production, the chains of
production and stuff like that. That was
inflationary in itself. That part is
dissipating.
But but for the the their own economy,
for the domestic economy, that really
slowed down China. An economy that, you
know, grew typically at 5 and 1/2 to 6%.
A lot higher 15 years ago. I'm going to
try to understand why later on.
But last year, I don't know, it was 3%
or or or less.
Numbers in China are
difficult to
to figure out. They're not equally
transparent to other numbers.
But but in any event, but it's very
clear that China slowed down a lot.
And that policy recently changed.
Okay, the zero COVID policy has changed.
And so there's great expectation that
now there's going to be a big boom in
China because they're lagging behind. I
mean, in in in the US when COVID began
to dissipate, we got a huge boost to
growth. And that's part of the reason we
got all this inflation is because we had
lots of growth
coming out of the recession that
happened in COVID. And the more or less
the same is expected in China. And one
of the big reasons behind those big
bounce backs is well, people are
desperate. They want to spend on
something. They want to go to
restaurants and cinemas and stuff like
that.
And the other one is they have the means
to do it because they couldn't spend on
anything for a while, you know? And so
they can travel and
and stuff like that. So, so people
expect and this is a
very large economy that suddenly sort of
wakes up.
You know, that's a big thing for China,
but it's also a big thing for the world.
You know, what what happens in China
doesn't stay in China. It's a big giant,
so it moves. And for some countries it's
very very important. In this picture
here it shows what is the impact on
different regions of the world on the
growth rate in different regions of the
world of an increase in by 1% in the
rate of growth of China.
One of the the most
uh
obviously all the neighbors are benefit
a lot. But Latin America benefits even
more. Why is that? Well, because Latin
America produces lots of commodities and
China consumes lots of commodity when
it's building and and stuff like that.
And so that's the reason big impact on
Latin America. So, this is
a piece of good news for the world in
the sense that activity will go up.
But
it's good news on average,
but it may be too much of a good thing
as well. Why? Because many economies are
going through what we described before.
They're trying to bring down inflation.
They don't want more demand. They want
less for now because we're going to
understand the connection later on how
demand connects to inflation, but but
you want less. And now you're going to
get this the this impulse from China,
which is going to fuel more inflation.
It's okay for China because they don't
have an inflation problem. But it may be
a problem for many of the countries that
are trying to uh undo uh the
inflationary
consequences of the previous expansion,
the expansion that followed COVID.
Okay, anyways, but this is the kind of
things we're going to be talking about.
The I said the course is not going to be
mathy, but it's going to be all about
models. The next lecture is the most
boring lecture of the course. I
tell you in advance because it's
definitions. I need to go through
definitions. At least I get bored.
But but the rest those always which are
little models, but simple models, okay?
But the models
are going to try to explain the kind of
things I I I discussed today. So, that's
what this course is about. It's It's
It's
is ideally, if we're successful, you're
going to be able to read something like
the World Economic Outlook, which will
have lots of pictures like these,
and you're going to be able to write a
little equation, very simple, on the
side to try to understand what is going
on there. And to catch the mistakes as
well.
Okay? I we all have less mistakes than
the Wall Street Journal, but but you
will catch mistakes. You'll see. You'll
be proud of it.