1
00:00:16,879 --> 00:00:22,199
So, today I'm going to talk about the

2
00:00:18,320 --> 00:00:24,399
Phillips curve and inflation. Um

3
00:00:22,199 --> 00:00:25,320
Now, as I said in the previous lecture,

4
00:00:24,399 --> 00:00:27,159
uh

5
00:00:25,320 --> 00:00:30,039
the material that is specific to this

6
00:00:27,160 --> 00:00:31,920
lecture will not enter this quiz.

7
00:00:30,039 --> 00:00:33,359
It's the beginning of what is perhaps

8
00:00:31,920 --> 00:00:37,160
the most important model you'll see in

9
00:00:33,359 --> 00:00:38,920
the in in this in this uh class, but

10
00:00:37,159 --> 00:00:42,039
it will take us uh three or four

11
00:00:38,920 --> 00:00:44,600
lectures to to develop. So, I'm going to

12
00:00:42,039 --> 00:00:45,320
say things that certainly will

13
00:00:44,600 --> 00:00:46,920
um

14
00:00:45,320 --> 00:00:49,679
may help you understand a little better

15
00:00:46,920 --> 00:00:51,560
the previous lecture, and so

16
00:00:49,679 --> 00:00:52,799
if you're only concerned about the next

17
00:00:51,560 --> 00:00:55,240
quiz,

18
00:00:52,799 --> 00:00:57,679
uh there will be a sort of uh small

19
00:00:55,240 --> 00:01:00,120
review of the previous lecture here. Uh

20
00:00:57,679 --> 00:01:02,359
but again, anything that's specific to

21
00:01:00,119 --> 00:01:03,280
this lecture and was not in the previous

22
00:01:02,359 --> 00:01:06,719
one

23
00:01:03,280 --> 00:01:08,280
won't be part of of this quiz.

24
00:01:06,719 --> 00:01:10,239
So, what is this Phillips curve? Well,

25
00:01:08,280 --> 00:01:14,320
in in uh

26
00:01:10,239 --> 00:01:16,239
in 1958, an an economist uh at LSE, the

27
00:01:14,319 --> 00:01:17,879
London School of Economics,

28
00:01:16,239 --> 00:01:20,439
came up with some just an empirical

29
00:01:17,879 --> 00:01:24,640
relationship. This is A.W. Phillips. He

30
00:01:20,439 --> 00:01:28,319
found that using historical data

31
00:01:24,640 --> 00:01:30,760
uh for the US, I think he did it. Um

32
00:01:28,319 --> 00:01:33,639
uh there was a negative relation up to

33
00:01:30,760 --> 00:01:35,160
sort of the '50s, I think. Uh

34
00:01:33,640 --> 00:01:37,799
the there was a negative relation

35
00:01:35,159 --> 00:01:39,759
between uh the unemployment rate and the

36
00:01:37,799 --> 00:01:42,479
rate of inflation.

37
00:01:39,760 --> 00:01:44,040
And then our very own Paul Samuelson and

38
00:01:42,480 --> 00:01:46,240
Robert Solow

39
00:01:44,040 --> 00:01:48,280
labeled this relationship the Phillips

40
00:01:46,239 --> 00:01:49,759
curve in honor of uh

41
00:01:48,280 --> 00:01:52,000
A.W. Phillips.

42
00:01:49,760 --> 00:01:55,880
And nowadays it's sort of is a central

43
00:01:52,000 --> 00:01:58,040
concept uh in macroeconomics, and

44
00:01:55,879 --> 00:02:00,399
uh and uh it's certainly very, very

45
00:01:58,040 --> 00:02:02,719
relevant to understand what is going on

46
00:02:00,400 --> 00:02:04,480
uh right now in not only in the US

47
00:02:02,719 --> 00:02:06,159
economy, but in most economies around

48
00:02:04,480 --> 00:02:07,280
the world.

49
00:02:06,159 --> 00:02:08,960
So, let me

50
00:02:07,280 --> 00:02:10,520
show you sort of this is not the one

51
00:02:08,960 --> 00:02:12,480
that uh

52
00:02:10,520 --> 00:02:14,960
that Phillips uh plotted. I think this

53
00:02:12,479 --> 00:02:15,519
is the one that uh

54
00:02:14,960 --> 00:02:17,920
uh

55
00:02:15,520 --> 00:02:20,960
Samuelson and Solow plotted for data

56
00:02:17,919 --> 00:02:23,879
from between 1900 and 1960 uh

57
00:02:20,960 --> 00:02:25,920
for the US, you found you find sort of

58
00:02:23,879 --> 00:02:27,519
this sort of negative correlation. I

59
00:02:25,919 --> 00:02:28,479
think it's reasonable.

60
00:02:27,520 --> 00:02:29,480
Uh

61
00:02:28,479 --> 00:02:31,679
um

62
00:02:29,479 --> 00:02:34,519
there's negative correlation between

63
00:02:31,680 --> 00:02:36,120
uh the unemployment rate and inflation

64
00:02:34,520 --> 00:02:37,760
rate, no? At very low levels of

65
00:02:36,120 --> 00:02:39,759
unemployment, you typically see very

66
00:02:37,759 --> 00:02:41,759
high levels of inflation.

67
00:02:39,759 --> 00:02:44,000
Conversely, sort of at very high levels

68
00:02:41,759 --> 00:02:46,719
of unemployment, you tend to receive low

69
00:02:44,000 --> 00:02:49,000
levels of inflation or even deflation.

70
00:02:46,719 --> 00:02:52,159
In fact, this period includes the the

71
00:02:49,000 --> 00:02:53,960
Great Depression, for example.

72
00:02:52,159 --> 00:02:56,400
So,

73
00:02:53,960 --> 00:02:59,040
that's sort of the data. And and again,

74
00:02:56,400 --> 00:03:00,960
this was just an empirical regularity.

75
00:02:59,039 --> 00:03:03,840
But we can build some theory about this

76
00:03:00,960 --> 00:03:05,560
relationship using the ingredients most

77
00:03:03,840 --> 00:03:07,319
of the ingredients that

78
00:03:05,560 --> 00:03:10,599
I mean, essentially we can build a

79
00:03:07,319 --> 00:03:13,039
relationship that is downward sloping

80
00:03:10,599 --> 00:03:14,239
from the ingredients we already have.

81
00:03:13,039 --> 00:03:15,679
And this is the part that is a little

82
00:03:14,240 --> 00:03:17,280
bit of a review

83
00:03:15,680 --> 00:03:20,879
of the previous lecture.

84
00:03:17,280 --> 00:03:22,759
Remember that we had um um

85
00:03:20,879 --> 00:03:25,199
actually the previous two lectures. We

86
00:03:22,759 --> 00:03:28,239
had a wage setting equation

87
00:03:25,199 --> 00:03:29,639
W equal expected prices

88
00:03:28,240 --> 00:03:31,400
and then a decreasing function of

89
00:03:29,639 --> 00:03:34,279
unemployment and an increasing function

90
00:03:31,400 --> 00:03:36,080
of uh these labor market supporting

91
00:03:34,280 --> 00:03:38,479
institutions or

92
00:03:36,080 --> 00:03:40,840
worker supporting institutions, that

93
00:03:38,479 --> 00:03:43,119
institutional variables, I should say.

94
00:03:40,840 --> 00:03:46,439
And um and then we had a price setting

95
00:03:43,120 --> 00:03:48,000
equation, which was simply the wage uh

96
00:03:46,439 --> 00:03:50,960
marked up.

97
00:03:48,000 --> 00:03:53,120
M is a positive constant. So, let me

98
00:03:50,960 --> 00:03:55,920
start from these two what So, what I'm

99
00:03:53,120 --> 00:03:57,400
trying to do is derive a Phillips curve.

100
00:03:55,919 --> 00:03:59,559
Again, this was only an empirical

101
00:03:57,400 --> 00:04:01,319
relationship, but it turns out that even

102
00:03:59,560 --> 00:04:03,920
with theory we knew by the time of, you

103
00:04:01,319 --> 00:04:05,479
know, Samuelson and and and Solow, we

104
00:04:03,919 --> 00:04:07,679
could sort of come up with a with a

105
00:04:05,479 --> 00:04:09,359
theory of that relationship. And that

106
00:04:07,680 --> 00:04:11,280
theory builds on the ingredients we have

107
00:04:09,360 --> 00:04:12,960
been looking at. So, these are the price

108
00:04:11,280 --> 00:04:14,719
set the wage setting equation, the price

109
00:04:12,960 --> 00:04:16,920
setting equation. I'm going to just

110
00:04:14,719 --> 00:04:19,519
simplify things and assume that this

111
00:04:16,920 --> 00:04:22,079
this relationship here, this function f

112
00:04:19,519 --> 00:04:24,680
of u z, is some linear function, at

113
00:04:22,079 --> 00:04:26,519
least locally linear function, uh which

114
00:04:24,680 --> 00:04:28,720
is decreasing in unemployment and

115
00:04:26,519 --> 00:04:32,359
increasing in z.

116
00:04:28,720 --> 00:04:32,360
Why is it decreasing in unemployment?

117
00:04:35,319 --> 00:04:39,040
This says, no, that that if unemployment

118
00:04:37,759 --> 00:04:41,639
goes up,

119
00:04:39,040 --> 00:04:43,640
for any given expected price,

120
00:04:41,639 --> 00:04:46,479
wage demand is lower.

121
00:04:43,639 --> 00:04:49,560
Okay? And that's essentially because uh

122
00:04:46,480 --> 00:04:50,840
for the worker is is sort of is a

123
00:04:49,560 --> 00:04:52,280
becoming unemployed is a scary

124
00:04:50,839 --> 00:04:54,199
situation.

125
00:04:52,279 --> 00:04:56,279
Conversely, for firms it's higher it's

126
00:04:54,199 --> 00:04:56,839
easier to find uh

127
00:04:56,279 --> 00:04:59,279
uh

128
00:04:56,839 --> 00:05:01,279
a worker and and uh

129
00:04:59,279 --> 00:05:04,279
and uh So, as we said, a worker is

130
00:05:01,279 --> 00:05:05,679
scared for two reasons. One is that it's

131
00:05:04,279 --> 00:05:07,879
more likely it gets fired when

132
00:05:05,680 --> 00:05:10,879
unemployment is high, typically that's a

133
00:05:07,879 --> 00:05:13,639
recession. It's also likely they know

134
00:05:10,879 --> 00:05:15,759
that that worker knows that if she were

135
00:05:13,639 --> 00:05:17,319
to fall into the unemployment pool, it

136
00:05:15,759 --> 00:05:19,759
would take a longer time to get out of

137
00:05:17,319 --> 00:05:21,639
it. Okay? And the firms are seeing the

138
00:05:19,759 --> 00:05:24,000
opposite side. It's pretty easy for them

139
00:05:21,639 --> 00:05:26,279
to replace a worker if they were to

140
00:05:24,000 --> 00:05:28,839
dismiss a worker because there's lots of

141
00:05:26,279 --> 00:05:30,759
available workers in unemployment. Okay?

142
00:05:28,839 --> 00:05:32,279
So, that's the reason that's negative.

143
00:05:30,759 --> 00:05:34,680
So, I'm going to stick this function

144
00:05:32,279 --> 00:05:37,519
back in here.

145
00:05:34,680 --> 00:05:39,720
And then I'm going to replace this W

146
00:05:37,519 --> 00:05:42,079
with this function in there in the price

147
00:05:39,720 --> 00:05:46,800
setting equation, and I end up with an

148
00:05:42,079 --> 00:05:50,399
equation for P. Okay? So, this says that

149
00:05:46,800 --> 00:05:52,480
the price, given the expected price,

150
00:05:50,399 --> 00:05:54,239
is decreasing in unemployment and

151
00:05:52,480 --> 00:05:55,920
increasing in z and increasing in the

152
00:05:54,240 --> 00:05:58,879
markup.

153
00:05:55,920 --> 00:06:01,840
So, again, why is this price decreasing

154
00:05:58,879 --> 00:06:01,839
in unemployment?

155
00:06:02,600 --> 00:06:05,800
This is the part that is review of the

156
00:06:04,079 --> 00:06:07,319
previous lecture.

157
00:06:05,800 --> 00:06:09,319
Previous today. Because

158
00:06:07,319 --> 00:06:10,879
the wages go down and then the labor uh

159
00:06:09,319 --> 00:06:14,159
factors of production are cheaper. Okay,

160
00:06:10,879 --> 00:06:16,279
perfect. Because wages go down, since uh

161
00:06:14,160 --> 00:06:17,520
our firm needs one worker to produce one

162
00:06:16,279 --> 00:06:19,759
unit of a good, then the cost of

163
00:06:17,519 --> 00:06:22,759
production of one unit goes down with

164
00:06:19,759 --> 00:06:24,399
the wage, and and therefore the price

165
00:06:22,759 --> 00:06:26,879
goes down. Because the firm is asking

166
00:06:24,399 --> 00:06:31,359
for a constant markup over that wage,

167
00:06:26,879 --> 00:06:35,120
the wage declines, and the price drops.

168
00:06:31,360 --> 00:06:37,400
Good. So, that's all review. So,

169
00:06:35,120 --> 00:06:39,959
this equation you had seen just without

170
00:06:37,399 --> 00:06:42,079
an explicit functional form here. What I

171
00:06:39,959 --> 00:06:43,479
want to do is to go from here. This is

172
00:06:42,079 --> 00:06:44,839
still not the Phillips curve. Remember,

173
00:06:43,480 --> 00:06:46,759
the Phillips curve was a relationship

174
00:06:44,839 --> 00:06:48,519
between inflation

175
00:06:46,759 --> 00:06:51,279
and unemployment. Here we have a

176
00:06:48,519 --> 00:06:53,359
relationship between the price level

177
00:06:51,279 --> 00:06:55,639
and unemployment. Okay? So, we want to

178
00:06:53,360 --> 00:06:57,560
take one

179
00:06:55,639 --> 00:06:58,680
one derivative higher. We want to go to

180
00:06:57,560 --> 00:07:00,079
relation between

181
00:06:58,680 --> 00:07:03,759
inflation and unemployment. And

182
00:07:00,079 --> 00:07:04,560
inflation is is the rate of change of P.

183
00:07:03,759 --> 00:07:07,000
No?

184
00:07:04,560 --> 00:07:09,519
It's not it's not a level of P.

185
00:07:07,000 --> 00:07:11,639
So, to do that, all that we'll do is So,

186
00:07:09,519 --> 00:07:12,680
this when I don't have a subscript here,

187
00:07:11,639 --> 00:07:14,599
I mean

188
00:07:12,680 --> 00:07:16,639
the price at time t.

189
00:07:14,600 --> 00:07:18,360
Okay? And this is the expected price for

190
00:07:16,639 --> 00:07:18,959
next period, that's what we have.

191
00:07:18,360 --> 00:07:21,319
Uh

192
00:07:18,959 --> 00:07:22,239
but today for next period.

193
00:07:21,319 --> 00:07:25,120
What I'm going to do, I'm going to

194
00:07:22,240 --> 00:07:27,840
divide both sides by P minus 1. By that,

195
00:07:25,120 --> 00:07:29,360
I mean the price in the previous period.

196
00:07:27,839 --> 00:07:32,199
Okay? So, both sides. I'm going to

197
00:07:29,360 --> 00:07:34,759
divide this side by P minus 1.

198
00:07:32,199 --> 00:07:36,920
And and and this one by P minus 1.

199
00:07:34,759 --> 00:07:39,759
So, I get that expression. Okay? That's

200
00:07:36,920 --> 00:07:41,520
exactly the same equation we had before.

201
00:07:39,759 --> 00:07:44,560
All that I did is I divided by P minus

202
00:07:41,519 --> 00:07:46,120
1. Remember remember what this means.

203
00:07:44,560 --> 00:07:49,120
So, if this is the price for the

204
00:07:46,120 --> 00:07:50,079
beginning for January 2023,

205
00:07:49,120 --> 00:07:51,879
uh

206
00:07:50,079 --> 00:07:54,919
this is the price for, say, where we're

207
00:07:51,879 --> 00:07:56,719
using annual data, for January 2022.

208
00:07:54,920 --> 00:08:00,240
Okay? So, I'm dividing by the price of

209
00:07:56,720 --> 00:08:03,520
January 2022 both sides.

210
00:08:00,240 --> 00:08:06,800
Now, notice that remember that I can

211
00:08:03,519 --> 00:08:08,639
that P over P minus 1 is equal to 1 plus

212
00:08:06,800 --> 00:08:10,759
the inflation rate. Remember where

213
00:08:08,639 --> 00:08:14,279
inflation rate is just

214
00:08:10,759 --> 00:08:16,279
P minus P minus 1 over P minus 1. So,

215
00:08:14,279 --> 00:08:17,519
this is just straightforward algebra,

216
00:08:16,279 --> 00:08:21,279
no?

217
00:08:17,519 --> 00:08:21,279
Remember our definition of inflation.

218
00:08:33,799 --> 00:08:39,519
That's P minus that's inflation. Okay?

219
00:08:36,440 --> 00:08:41,039
So, 1 plus pi is just

220
00:08:39,519 --> 00:08:43,079
P minus uh

221
00:08:41,038 --> 00:08:44,319
over P minus 1. Okay? And that's what

222
00:08:43,080 --> 00:08:45,720
you have there.

223
00:08:44,320 --> 00:08:48,400
I can do the same for expected

224
00:08:45,720 --> 00:08:51,279
inflation.

225
00:08:48,399 --> 00:08:51,279
Notice that

226
00:08:53,399 --> 00:08:58,279
sometimes people get confused, but

227
00:08:56,120 --> 00:09:00,320
expected inflation

228
00:08:58,279 --> 00:09:02,199
is equal to P

229
00:09:00,320 --> 00:09:05,120
expected

230
00:09:02,200 --> 00:09:07,640
not minus P expected minus 1. It's P

231
00:09:05,120 --> 00:09:10,200
minus 1.

232
00:09:07,639 --> 00:09:12,080
P minus 1.

233
00:09:10,200 --> 00:09:15,200
And the reason I'm not subtracting the

234
00:09:12,080 --> 00:09:16,240
expectation here is because at time t,

235
00:09:15,200 --> 00:09:18,200
which is when you're forming that

236
00:09:16,240 --> 00:09:21,000
expectation, you already know what

237
00:09:18,200 --> 00:09:22,680
happened at t minus 1.

238
00:09:21,000 --> 00:09:25,440
Okay? So, that's the reason this is

239
00:09:22,679 --> 00:09:26,559
expected inflation. I don't I don't need

240
00:09:25,440 --> 00:09:28,480
uh uh

241
00:09:26,559 --> 00:09:31,000
um

242
00:09:28,480 --> 00:09:33,080
to put expectations in here. Okay? So,

243
00:09:31,000 --> 00:09:35,480
that's pi e.

244
00:09:33,080 --> 00:09:37,520
And so, what we get is

245
00:09:35,480 --> 00:09:40,279
uh I can replace

246
00:09:37,519 --> 00:09:42,759
this guy here for 1 plus pi, this guy

247
00:09:40,279 --> 00:09:45,919
here for 1 plus pi e,

248
00:09:42,759 --> 00:09:47,919
and I get the following relationship.

249
00:09:45,919 --> 00:09:49,679
Okay?

250
00:09:47,919 --> 00:09:52,240
All that I've done is substituting this

251
00:09:49,679 --> 00:09:54,279
for that, that for that.

252
00:09:52,240 --> 00:09:58,200
So, that's our price setting equation

253
00:09:54,279 --> 00:10:00,720
now expressed in terms of inflation rate

254
00:09:58,200 --> 00:10:02,680
unexpected inflation rate

255
00:10:00,720 --> 00:10:04,320
and now you know

256
00:10:02,679 --> 00:10:05,919
if not we're not in Argentina we're in

257
00:10:04,320 --> 00:10:07,720
the US

258
00:10:05,919 --> 00:10:09,199
inflation if expected inflation is a

259
00:10:07,720 --> 00:10:11,840
small numbers

260
00:10:09,200 --> 00:10:15,120
and the log of 1 plus a small number is

261
00:10:11,840 --> 00:10:15,120
approximately that number

262
00:10:15,960 --> 00:10:19,120
so

263
00:10:17,279 --> 00:10:23,439
I'm going to use this approximation

264
00:10:19,120 --> 00:10:26,360
which again is valid for X small

265
00:10:23,440 --> 00:10:30,440
and and so I can replace this 1 plus pi

266
00:10:26,360 --> 00:10:33,519
for pi and this 1 plus pi e for pi e

267
00:10:30,440 --> 00:10:36,440
this 1 plus m for m

268
00:10:33,519 --> 00:10:39,879
plus no and this term here if these

269
00:10:36,440 --> 00:10:41,760
numbers are not too large again plus

270
00:10:39,879 --> 00:10:43,399
minus alpha u

271
00:10:41,759 --> 00:10:45,840
plus z

272
00:10:43,399 --> 00:10:48,679
and that I do all that and I end up with

273
00:10:45,840 --> 00:10:48,680
this expression

274
00:10:51,120 --> 00:10:56,039
all that I've done is I took logs of

275
00:10:53,120 --> 00:10:59,039
this so I get log of 1 plus pi equal to

276
00:10:56,039 --> 00:11:02,719
log of 1 plus pi e plus log of 1 plus m

277
00:10:59,039 --> 00:11:07,399
plus log of 1 minus alpha u plus alpha z

278
00:11:02,720 --> 00:11:09,399
I'm saying if pi pi e m alpha u plus z

279
00:11:07,399 --> 00:11:11,559
are not very large numbers which we're

280
00:11:09,399 --> 00:11:13,600
going to assume then this is

281
00:11:11,559 --> 00:11:16,159
approximately right so I can rewrite

282
00:11:13,600 --> 00:11:17,320
that expression as that

283
00:11:16,159 --> 00:11:20,000
approximately I should have put an

284
00:11:17,320 --> 00:11:20,000
approximately

285
00:11:22,000 --> 00:11:25,960
okay so now we have something that looks

286
00:11:23,679 --> 00:11:27,399
a lot more than like the empirical

287
00:11:25,960 --> 00:11:29,560
relationship we were talking about we

288
00:11:27,399 --> 00:11:32,079
have a relationship between inflation

289
00:11:29,559 --> 00:11:34,039
and unemployment so this says that

290
00:11:32,080 --> 00:11:35,600
for any given expected inflation and

291
00:11:34,039 --> 00:11:37,559
markups and and labor market

292
00:11:35,600 --> 00:11:39,279
institutions

293
00:11:37,559 --> 00:11:40,559
higher unemployment means lower

294
00:11:39,279 --> 00:11:43,240
inflation

295
00:11:40,559 --> 00:11:43,239
why is that

296
00:11:43,399 --> 00:11:47,319
so that curve tells you that's a

297
00:11:44,720 --> 00:11:51,920
negative relation we wanted no it says

298
00:11:47,320 --> 00:11:51,920
higher unemployment lower inflation

299
00:11:53,600 --> 00:11:56,159
why is that

300
00:12:02,039 --> 00:12:05,799
look you had it very clear when we talk

301
00:12:04,159 --> 00:12:07,919
about this no

302
00:12:05,799 --> 00:12:10,120
you you understood very clearly why an

303
00:12:07,919 --> 00:12:13,519
increase in unemployment lower the wage

304
00:12:10,120 --> 00:12:15,720
you understood very clearly why

305
00:12:13,519 --> 00:12:18,319
therefore an increase in unemployment

306
00:12:15,720 --> 00:12:20,120
lower the price

307
00:12:18,320 --> 00:12:22,160
I haven't done anything but algebra in

308
00:12:20,120 --> 00:12:23,639
the two steps so the same economics

309
00:12:22,159 --> 00:12:26,600
behind the explanations that you had

310
00:12:23,639 --> 00:12:29,879
before apply to this curve here

311
00:12:26,600 --> 00:12:31,759
so the reason inflation will be lower

312
00:12:29,879 --> 00:12:33,439
when you unemployment is higher given

313
00:12:31,759 --> 00:12:35,838
all the rest

314
00:12:33,440 --> 00:12:38,160
is because there's really less wage wage

315
00:12:35,839 --> 00:12:39,800
pressure workers will demand lower wages

316
00:12:38,159 --> 00:12:41,639
that means lower prices and therefore

317
00:12:39,799 --> 00:12:43,319
inflation will be lower the economics

318
00:12:41,639 --> 00:12:45,240
hasn't changed at all I only I only

319
00:12:43,320 --> 00:12:47,720
divided both sides

320
00:12:45,240 --> 00:12:49,759
by p minus 1 and I took the logs and I

321
00:12:47,720 --> 00:12:50,759
approximated so so the economics has not

322
00:12:49,759 --> 00:12:53,000
changed

323
00:12:50,759 --> 00:12:55,799
it just did a little bit of

324
00:12:53,000 --> 00:12:57,759
basic math okay

325
00:12:55,799 --> 00:12:59,439
so all the what I'm trying to say is all

326
00:12:57,759 --> 00:13:02,000
the intuitions that you can already you

327
00:12:59,440 --> 00:13:03,960
already had from the wage setting price

328
00:13:02,000 --> 00:13:06,279
setting equations and so on you can

329
00:13:03,960 --> 00:13:08,560
apply to the Phillips curve as well

330
00:13:06,279 --> 00:13:08,559
okay

331
00:13:08,600 --> 00:13:13,800
good so now we have something that

332
00:13:11,200 --> 00:13:16,080
in principle could explain the type of

333
00:13:13,799 --> 00:13:17,838
relationship that Phillips

334
00:13:16,080 --> 00:13:22,800
found and then Samuelson Solo

335
00:13:17,839 --> 00:13:22,800
corroborated with extended data

336
00:13:23,279 --> 00:13:25,799
so

337
00:13:26,200 --> 00:13:30,280
let's let's see how do we get to

338
00:13:27,679 --> 00:13:31,959
something that looks like what

339
00:13:30,279 --> 00:13:34,439
these people run as a

340
00:13:31,960 --> 00:13:38,200
they run a regression essentially

341
00:13:34,440 --> 00:13:40,400
or they correlated and inflation

342
00:13:38,200 --> 00:13:42,720
inflation with unemployment

343
00:13:40,399 --> 00:13:44,240
and they found a downward sloping

344
00:13:42,720 --> 00:13:45,879
relationship

345
00:13:44,240 --> 00:13:47,839
well

346
00:13:45,879 --> 00:13:48,679
look what if that happens here suppose

347
00:13:47,839 --> 00:13:51,360
that

348
00:13:48,679 --> 00:13:54,599
that we assume that expected inflation

349
00:13:51,360 --> 00:13:56,480
is equal to some constant

350
00:13:54,600 --> 00:13:58,000
in in economics we say when that's the

351
00:13:56,480 --> 00:14:00,480
case

352
00:13:58,000 --> 00:14:03,679
and especially if pi is a low number

353
00:14:00,480 --> 00:14:06,159
inflation expectations are well anchored

354
00:14:03,679 --> 00:14:07,838
meaning you know any single year they

355
00:14:06,159 --> 00:14:09,159
can be a price of oil is high or

356
00:14:07,839 --> 00:14:10,720
something happens and inflation will

357
00:14:09,159 --> 00:14:12,600
deviate from that

358
00:14:10,720 --> 00:14:15,200
but people are all the time expecting

359
00:14:12,600 --> 00:14:17,000
for inflation sort of to go back to the

360
00:14:15,200 --> 00:14:18,560
what is a normal level

361
00:14:17,000 --> 00:14:19,799
nowadays

362
00:14:18,559 --> 00:14:22,679
or at least

363
00:14:19,799 --> 00:14:25,519
a few years ago in the US the normal

364
00:14:22,679 --> 00:14:28,719
level was around 2% say okay so people

365
00:14:25,519 --> 00:14:31,519
say well this year inflation was 1.8 but

366
00:14:28,720 --> 00:14:33,879
we expect next year 2% the next year we

367
00:14:31,519 --> 00:14:35,879
got surprises on the upside price of

368
00:14:33,879 --> 00:14:38,838
food went up something like that we got

369
00:14:35,879 --> 00:14:40,200
inflation of 2.3% but you ask people how

370
00:14:38,839 --> 00:14:42,240
do you what much do you expect for next

371
00:14:40,200 --> 00:14:45,400
year they say well 2%

372
00:14:42,240 --> 00:14:47,320
so so that's what a model of expectation

373
00:14:45,399 --> 00:14:49,679
like this means is that you know you're

374
00:14:47,320 --> 00:14:51,800
always expecting something which is

375
00:14:49,679 --> 00:14:54,000
some historical value on that we have

376
00:14:51,799 --> 00:14:56,199
agreed is a reasonable level for our

377
00:14:54,000 --> 00:14:58,759
economy or something like that okay

378
00:14:56,200 --> 00:15:01,879
so you see that if I replace expected

379
00:14:58,759 --> 00:15:04,000
inflation for a constant here pi bar

380
00:15:01,879 --> 00:15:06,720
then I have then my Phillips curve is

381
00:15:04,000 --> 00:15:09,120
really this is inflation then I have a

382
00:15:06,720 --> 00:15:11,120
constant minus alpha u

383
00:15:09,120 --> 00:15:12,879
that's the simplest of the

384
00:15:11,120 --> 00:15:14,919
downward sloping relationship I can have

385
00:15:12,879 --> 00:15:17,399
that case is a line downward sloping

386
00:15:14,919 --> 00:15:19,439
line no that's it

387
00:15:17,399 --> 00:15:20,799
of course you know it could be

388
00:15:19,440 --> 00:15:22,280
non-linear and so on but but this

389
00:15:20,799 --> 00:15:24,479
captures the essence so that's the

390
00:15:22,279 --> 00:15:27,919
theory for why

391
00:15:24,480 --> 00:15:29,600
Phillips was finding what he was finding

392
00:15:27,919 --> 00:15:31,719
our theory of the

393
00:15:29,600 --> 00:15:33,240
wage of the labor market if you will and

394
00:15:31,720 --> 00:15:35,959
the price setting

395
00:15:33,240 --> 00:15:39,159
behavior of firms gives us a Phillips

396
00:15:35,958 --> 00:15:43,319
curve of the kind that he had in mind

397
00:15:39,159 --> 00:15:45,360
and if you look in the 60s in the US

398
00:15:43,320 --> 00:15:47,079
then you see this negative relationship

399
00:15:45,360 --> 00:15:49,399
that eventually become sort of became a

400
00:15:47,078 --> 00:15:51,599
steeper it wasn't linear like this it

401
00:15:49,399 --> 00:15:53,480
was a little convex but but it's

402
00:15:51,600 --> 00:15:55,920
downward sloping

403
00:15:53,480 --> 00:15:58,200
and in fact

404
00:15:55,919 --> 00:16:02,120
to some extent

405
00:15:58,200 --> 00:16:04,000
our own very our very own Bob Solo and

406
00:16:02,120 --> 00:16:06,360
Paul Samuelson

407
00:16:04,000 --> 00:16:08,440
were advising the US government at the

408
00:16:06,360 --> 00:16:10,839
time and they said well you know let's

409
00:16:08,440 --> 00:16:13,280
exploit this stuff a little

410
00:16:10,839 --> 00:16:14,640
we like to have lower unemployment we

411
00:16:13,279 --> 00:16:16,639
can live with a little less more

412
00:16:14,639 --> 00:16:18,360
inflation but we know there's a negative

413
00:16:16,639 --> 00:16:20,799
trade-off there's a negative trade-off

414
00:16:18,360 --> 00:16:22,440
between these two things okay so

415
00:16:20,799 --> 00:16:24,359
if we like to lower unemployment it's

416
00:16:22,440 --> 00:16:26,280
fine we get a little more of inflation

417
00:16:24,360 --> 00:16:29,399
and initially the deal was very good

418
00:16:26,279 --> 00:16:31,360
because this curve was very flat

419
00:16:29,399 --> 00:16:33,000
you see you could cut him unemployment a

420
00:16:31,360 --> 00:16:35,000
lot you can see the dates here cutting

421
00:16:33,000 --> 00:16:37,000
unemployment a lot and you're not

422
00:16:35,000 --> 00:16:39,519
getting a lot of inflation

423
00:16:37,000 --> 00:16:41,519
eventually the deal the deal turned into

424
00:16:39,519 --> 00:16:42,720
a much rather deal much more rather deal

425
00:16:41,519 --> 00:16:43,958
because

426
00:16:42,720 --> 00:16:45,399
then to lower a little bit more

427
00:16:43,958 --> 00:16:48,958
unemployment we start getting a lot more

428
00:16:45,399 --> 00:16:50,838
of inflation okay so people for a while

429
00:16:48,958 --> 00:16:53,159
you know were okay with this model

430
00:16:50,839 --> 00:16:54,959
assuming that inflation was low but when

431
00:16:53,159 --> 00:16:57,159
they realized that this thing was being

432
00:16:54,958 --> 00:16:59,399
exploited then they began to sort of

433
00:16:57,159 --> 00:17:01,199
change the expectations they made I

434
00:16:59,399 --> 00:17:03,679
think that's what we had here but but

435
00:17:01,200 --> 00:17:05,120
the the reason held pretty well

436
00:17:03,679 --> 00:17:07,319
during this time and again it became

437
00:17:05,119 --> 00:17:09,359
steeper and steeper as we

438
00:17:07,319 --> 00:17:12,799
pushed it more and more towards sort of

439
00:17:09,359 --> 00:17:14,198
very low levels of unemployment

440
00:17:12,799 --> 00:17:15,399
so that's the story but again there is

441
00:17:14,199 --> 00:17:17,000
your model of the Phillips curve and

442
00:17:15,400 --> 00:17:18,720
that

443
00:17:17,000 --> 00:17:21,439
it's a very very good model for the

444
00:17:18,720 --> 00:17:23,838
times where Phillips also estimated his

445
00:17:21,439 --> 00:17:25,800
his Phillips curve

446
00:17:23,838 --> 00:17:27,919
now

447
00:17:25,799 --> 00:17:30,799
if you sort of turn the page and look at

448
00:17:27,920 --> 00:17:32,920
the same data in the 70s

449
00:17:30,799 --> 00:17:33,799
look how it looks

450
00:17:32,920 --> 00:17:36,279
okay

451
00:17:33,799 --> 00:17:37,720
so from 1970 to 1995 that's the data you

452
00:17:36,279 --> 00:17:40,440
have there there's no negative

453
00:17:37,720 --> 00:17:41,400
relationship thing is all over the place

454
00:17:40,440 --> 00:17:43,600
okay

455
00:17:41,400 --> 00:17:44,840
so had Mr. Phillips been born a few

456
00:17:43,599 --> 00:17:47,839
years

457
00:17:44,839 --> 00:17:49,240
few decades later and had he estimated

458
00:17:47,839 --> 00:17:50,480
his regression he would have found

459
00:17:49,240 --> 00:17:52,759
nothing

460
00:17:50,480 --> 00:17:54,279
there would be no curve in his honor at

461
00:17:52,759 --> 00:17:55,359
least if he had run that same regression

462
00:17:54,279 --> 00:17:56,759
maybe he would have run a different

463
00:17:55,359 --> 00:17:57,959
regression but

464
00:17:56,759 --> 00:18:00,440
nothing

465
00:17:57,960 --> 00:18:03,039
okay so what happened

466
00:18:00,440 --> 00:18:04,880
well our theory can explain as well what

467
00:18:03,039 --> 00:18:07,519
happened there

468
00:18:04,880 --> 00:18:09,600
remember the theory is not that

469
00:18:07,519 --> 00:18:11,319
inflation is equal to a constant minus

470
00:18:09,599 --> 00:18:13,399
the

471
00:18:11,319 --> 00:18:14,879
minus

472
00:18:13,400 --> 00:18:16,360
alpha u

473
00:18:14,880 --> 00:18:18,760
the theory says

474
00:18:16,359 --> 00:18:20,519
this is a constant only if

475
00:18:18,759 --> 00:18:21,759
the model of expectation is this

476
00:18:20,519 --> 00:18:24,400
constant

477
00:18:21,759 --> 00:18:26,920
but if expectation is moving around

478
00:18:24,400 --> 00:18:29,519
or if anything in this constant is

479
00:18:26,920 --> 00:18:31,200
moving around then then there's another

480
00:18:29,519 --> 00:18:34,359
source of variation

481
00:18:31,200 --> 00:18:36,400
okay for example what happens suppose

482
00:18:34,359 --> 00:18:39,279
that you're here in 1965 and all of the

483
00:18:36,400 --> 00:18:41,320
sudden you get a the price of oil goes

484
00:18:39,279 --> 00:18:43,319
up a lot and I'm telling you capture the

485
00:18:41,319 --> 00:18:44,918
price of oil with an increase in m firms

486
00:18:43,319 --> 00:18:46,559
need to sort of mark up things more in

487
00:18:44,919 --> 00:18:48,000
order to cover higher energy energy

488
00:18:46,559 --> 00:18:50,839
costs

489
00:18:48,000 --> 00:18:52,640
well look at what m does m says that for

490
00:18:50,839 --> 00:18:54,759
any given level of unemployment now I

491
00:18:52,640 --> 00:18:57,240
get higher inflation that's what an oil

492
00:18:54,759 --> 00:18:58,480
shock does no you get an oil shock then

493
00:18:57,240 --> 00:18:59,559
for any given level of unemployment now

494
00:18:58,480 --> 00:19:00,640
you get find yourself with more

495
00:18:59,559 --> 00:19:02,359
inflation

496
00:19:00,640 --> 00:19:04,759
so that moves you in the opposite

497
00:19:02,359 --> 00:19:06,839
direction moves you up there and that's

498
00:19:04,759 --> 00:19:08,759
one of the reasons

499
00:19:06,839 --> 00:19:10,480
for these points around here

500
00:19:08,759 --> 00:19:12,158
we got lots of inflation because we got

501
00:19:10,480 --> 00:19:17,360
massive oil shocks

502
00:19:12,159 --> 00:19:17,360
during the 70s and early 80s okay

503
00:19:18,720 --> 00:19:23,559
we had wars in the Middle East and so on

504
00:19:20,599 --> 00:19:25,719
that that led to to those shocks so that

505
00:19:23,559 --> 00:19:27,960
so that was one of the reasons

506
00:19:25,720 --> 00:19:29,600
we got shocks here

507
00:19:27,960 --> 00:19:31,480
to this term here

508
00:19:29,599 --> 00:19:33,240
and that sort of

509
00:19:31,480 --> 00:19:35,159
muddied the relationship

510
00:19:33,240 --> 00:19:37,200
but the other reason which is more

511
00:19:35,159 --> 00:19:38,679
interesting I think and that you already

512
00:19:37,200 --> 00:19:40,600
began to see that something was

513
00:19:38,679 --> 00:19:41,640
happening here

514
00:19:40,599 --> 00:19:44,119
is that

515
00:19:41,640 --> 00:19:45,720
as inflation went up

516
00:19:44,119 --> 00:19:48,399
people sort of stopped believing in this

517
00:19:45,720 --> 00:19:52,200
model so the expectation formation

518
00:19:48,400 --> 00:19:52,200
mechanism changed

519
00:19:52,559 --> 00:19:56,039
okay so this guy

520
00:19:54,200 --> 00:19:57,120
began to react

521
00:19:56,039 --> 00:19:58,839
to

522
00:19:57,119 --> 00:20:01,519
endogenous variables. And I'm going to

523
00:19:58,839 --> 00:20:03,959
explain more precisely what So, that's

524
00:20:01,519 --> 00:20:06,680
what we mean by expected inflation

525
00:20:03,960 --> 00:20:09,480
became the anchor. It was no longer

526
00:20:06,680 --> 00:20:11,560
anchored around this constant of 2%

527
00:20:09,480 --> 00:20:13,720
but but but it became the anchor. It

528
00:20:11,559 --> 00:20:15,559
began to follow the data. So, if if the

529
00:20:13,720 --> 00:20:17,319
data came with more inflation, then

530
00:20:15,559 --> 00:20:19,559
people believed that next year we would

531
00:20:17,319 --> 00:20:22,799
have more inflation as well. Okay, not

532
00:20:19,559 --> 00:20:24,279
back to 2% but if we got 5% inflation

533
00:20:22,799 --> 00:20:26,359
today, people began to say, "Well, okay,

534
00:20:24,279 --> 00:20:28,359
I don't think that next year my best

535
00:20:26,359 --> 00:20:30,799
estimate is 2% is probably closer to

536
00:20:28,359 --> 00:20:33,079
5%." Okay, that's what it means

537
00:20:30,799 --> 00:20:34,919
de-anchoring. That's what has the Fed

538
00:20:33,079 --> 00:20:36,519
and most central banks around the world

539
00:20:34,920 --> 00:20:39,680
terrified today.

540
00:20:36,519 --> 00:20:42,319
Inflation is very is much higher than 2%

541
00:20:39,680 --> 00:20:43,440
and they're very worried about this guy

542
00:20:42,319 --> 00:20:46,319
becoming

543
00:20:43,440 --> 00:20:48,440
the anchor or an anchor. Okay.

544
00:20:46,319 --> 00:20:50,279
I'll get back to that in a second.

545
00:20:48,440 --> 00:20:51,200
Anyway, so but let me let me explain

546
00:20:50,279 --> 00:20:53,000
this

547
00:20:51,200 --> 00:20:54,279
how this expected inflation term work

548
00:20:53,000 --> 00:20:56,880
here.

549
00:20:54,279 --> 00:20:59,279
So, let me replace the model of

550
00:20:56,880 --> 00:21:00,560
expected inflation

551
00:20:59,279 --> 00:21:02,639
for something which is some weighted

552
00:21:00,559 --> 00:21:03,720
average of a constant.

553
00:21:02,640 --> 00:21:05,120
That's

554
00:21:03,720 --> 00:21:07,519
and

555
00:21:05,119 --> 00:21:09,879
the most recent inflation.

556
00:21:07,519 --> 00:21:12,079
Okay. So, this model says, "What is my

557
00:21:09,880 --> 00:21:13,800
expected inflation for next year? Well,

558
00:21:12,079 --> 00:21:15,279
it's an average of this long-run target

559
00:21:13,799 --> 00:21:17,000
that we have,

560
00:21:15,279 --> 00:21:18,279
say 2%,

561
00:21:17,000 --> 00:21:20,799
and whatever was the most recent

562
00:21:18,279 --> 00:21:22,559
inflation."

563
00:21:20,799 --> 00:21:24,839
If theta in the model I showed you

564
00:21:22,559 --> 00:21:25,960
before, the one that applied to the '60s

565
00:21:24,839 --> 00:21:28,399
and so on,

566
00:21:25,960 --> 00:21:30,000
up to the '60s, had essentially theta

567
00:21:28,400 --> 00:21:32,920
equal to zero.

568
00:21:30,000 --> 00:21:35,400
So, this guy didn't show up there

569
00:21:32,920 --> 00:21:36,880
and and expected inflation was very well

570
00:21:35,400 --> 00:21:39,440
anchored.

571
00:21:36,880 --> 00:21:41,880
What we began to happen

572
00:21:39,440 --> 00:21:43,720
as we began to move that way

573
00:21:41,880 --> 00:21:45,240
and then we got hit by oil shocks so we

574
00:21:43,720 --> 00:21:46,920
So, people began to see much higher

575
00:21:45,240 --> 00:21:48,039
inflation numbers than they were used

576
00:21:46,920 --> 00:21:50,120
to,

577
00:21:48,039 --> 00:21:51,240
then this theta

578
00:21:50,119 --> 00:21:54,039
began to

579
00:21:51,240 --> 00:21:55,880
increase. Okay. So, people began to sort

580
00:21:54,039 --> 00:21:57,279
of change the model of expectation and

581
00:21:55,880 --> 00:21:58,560
began to think that

582
00:21:57,279 --> 00:22:00,519
inflation was going to be more

583
00:21:58,559 --> 00:22:02,399
persistent than they used to think in

584
00:22:00,519 --> 00:22:03,920
the past. So, in high inflation today

585
00:22:02,400 --> 00:22:05,800
means high inflation tomorrow. That's

586
00:22:03,920 --> 00:22:07,920
what it means more persistent. In the

587
00:22:05,799 --> 00:22:10,240
past was high inflation today was was a

588
00:22:07,920 --> 00:22:12,920
back draw, we'll go back to sort of the

589
00:22:10,240 --> 00:22:15,039
normal long-run average. Now, that's no

590
00:22:12,920 --> 00:22:16,640
longer the case. And so, if I replace

591
00:22:15,039 --> 00:22:18,119
this more general model of expected

592
00:22:16,640 --> 00:22:20,280
inflation

593
00:22:18,119 --> 00:22:22,359
here in the Phillips curve, I get this

594
00:22:20,279 --> 00:22:23,440
expression which now has this extra

595
00:22:22,359 --> 00:22:24,678
term.

596
00:22:23,440 --> 00:22:26,640
So, the

597
00:22:24,679 --> 00:22:29,080
we used to have theta equal to zero but

598
00:22:26,640 --> 00:22:31,480
during the '70s and '80s and even early

599
00:22:29,079 --> 00:22:33,879
'90s, actually that theta got to be very

600
00:22:31,480 --> 00:22:35,799
close to one.

601
00:22:33,880 --> 00:22:37,920
Okay, if you estimate these models, you

602
00:22:35,799 --> 00:22:39,678
get that theta was very close to one.

603
00:22:37,920 --> 00:22:41,200
And look at what happens when theta gets

604
00:22:39,679 --> 00:22:43,759
very close to one.

605
00:22:41,200 --> 00:22:45,519
So, when theta is is one literally, then

606
00:22:43,759 --> 00:22:47,400
the best forecast for inflation is the

607
00:22:45,519 --> 00:22:49,240
previous inflation.

608
00:22:47,400 --> 00:22:53,400
Okay, so this year is 5% and I think

609
00:22:49,240 --> 00:22:55,240
next year is 5%, not 2%, 5%.

610
00:22:53,400 --> 00:22:57,759
If this year is 7%, I think next year is

611
00:22:55,240 --> 00:23:00,319
7% again.

612
00:22:57,759 --> 00:23:02,440
And so, if you do that, then my expected

613
00:23:00,319 --> 00:23:04,879
inflation becomes lag inflation pi t

614
00:23:02,440 --> 00:23:07,679
minus one. So, if I stick in replace the

615
00:23:04,880 --> 00:23:09,520
expected inflation for pi t minus one, I

616
00:23:07,679 --> 00:23:11,320
get to this Phillips curve

617
00:23:09,519 --> 00:23:14,920
which I can rewrite

618
00:23:11,319 --> 00:23:16,960
as the change in inflation in relation

619
00:23:14,920 --> 00:23:18,840
as as a relationship between the change

620
00:23:16,960 --> 00:23:20,319
in inflation and the level of

621
00:23:18,839 --> 00:23:22,240
unemployment.

622
00:23:20,319 --> 00:23:25,639
So, now what you have is that if

623
00:23:22,240 --> 00:23:28,319
unemployment is very low, then inflation

624
00:23:25,640 --> 00:23:30,600
is is picking up, you know, it's going

625
00:23:28,319 --> 00:23:33,279
there. So, if inflation if unemployment

626
00:23:30,599 --> 00:23:34,719
is very low, not only inflation is high,

627
00:23:33,279 --> 00:23:36,200
but it's also growing

628
00:23:34,720 --> 00:23:37,319
over time.

629
00:23:36,200 --> 00:23:39,440
Okay.

630
00:23:37,319 --> 00:23:41,279
That's the reason sometimes people refer

631
00:23:39,440 --> 00:23:44,200
to this formulation of the Phillips

632
00:23:41,279 --> 00:23:45,720
curve as the accelerationist Phillips

633
00:23:44,200 --> 00:23:47,759
curve because now there's a relation

634
00:23:45,720 --> 00:23:50,559
between unemployment and the change in

635
00:23:47,759 --> 00:23:51,879
inflation. And if you estimate

636
00:23:50,559 --> 00:23:54,200
this Phillips curve, this

637
00:23:51,880 --> 00:23:57,160
accelerationist Phillips curve on the

638
00:23:54,200 --> 00:23:59,000
data I just showed you of the '70s and

639
00:23:57,160 --> 00:24:00,880
'80s, you get a much better

640
00:23:59,000 --> 00:24:03,119
relationship. Okay, you still have the

641
00:24:00,880 --> 00:24:05,120
oil shocks that messed things up

642
00:24:03,119 --> 00:24:07,319
but but you can start seeing recovering

643
00:24:05,119 --> 00:24:09,079
this negative relationship. But again,

644
00:24:07,319 --> 00:24:10,559
it's between the change in inflation and

645
00:24:09,079 --> 00:24:12,480
the level of unemployment. And that's a

646
00:24:10,559 --> 00:24:14,599
very scary situation for a central bank

647
00:24:12,480 --> 00:24:17,839
to find itself in because it's very easy

648
00:24:14,599 --> 00:24:17,839
to for things to escalate.

649
00:24:19,160 --> 00:24:21,320
Okay.

650
00:24:22,359 --> 00:24:27,559
So, by the mid-'90s,

651
00:24:25,160 --> 00:24:30,200
we had re-anchored expectations. There

652
00:24:27,559 --> 00:24:32,119
was a sort of very aggressive

653
00:24:30,200 --> 00:24:33,920
policy to control inflation by Paul

654
00:24:32,119 --> 00:24:37,359
Volcker

655
00:24:33,920 --> 00:24:39,200
in the US and it was imitated around the

656
00:24:37,359 --> 00:24:41,719
world with some lag,

657
00:24:39,200 --> 00:24:43,880
but but inflation became re-anchored.

658
00:24:41,720 --> 00:24:46,440
So, we went back to this theta equal to

659
00:24:43,880 --> 00:24:48,000
zero type model. The expected inflation

660
00:24:46,440 --> 00:24:51,200
in the US, the target inflation of the

661
00:24:48,000 --> 00:24:53,759
central bank was around 2% that became

662
00:24:51,200 --> 00:24:56,200
what people expected for the next year

663
00:24:53,759 --> 00:24:59,400
and and that re-anchored. So, we went

664
00:24:56,200 --> 00:24:59,400
back in other words

665
00:25:00,279 --> 00:25:04,920
to that sort of Phillips curve.

666
00:25:03,160 --> 00:25:06,960
Okay, and that's what central banks want

667
00:25:04,920 --> 00:25:09,039
to be at. They want to have inflation

668
00:25:06,960 --> 00:25:10,519
expectation very well anchored.

669
00:25:09,039 --> 00:25:12,960
And they were very successful after the

670
00:25:10,519 --> 00:25:15,639
'90s. And so, we got

671
00:25:12,960 --> 00:25:17,360
into again now Look, I'm I'm now I'm not

672
00:25:15,640 --> 00:25:19,440
running the accelerations. I'm again

673
00:25:17,359 --> 00:25:21,359
running inflation against unemployment

674
00:25:19,440 --> 00:25:24,320
and you again can see this downward

675
00:25:21,359 --> 00:25:26,000
sloping relationship. Okay.

676
00:25:24,319 --> 00:25:28,159
So, that was very good news. Was great

677
00:25:26,000 --> 00:25:31,319
success of monetary policy

678
00:25:28,160 --> 00:25:34,080
during the '90s and later was the

679
00:25:31,319 --> 00:25:36,159
re-anchoring of expected inflation again

680
00:25:34,079 --> 00:25:37,960
all around the developed world and many

681
00:25:36,160 --> 00:25:39,720
of the include even

682
00:25:37,960 --> 00:25:41,559
Latin America, many economies in Latin

683
00:25:39,720 --> 00:25:43,400
America saw re-anchored expectation,

684
00:25:41,559 --> 00:25:47,159
Asia and so on. So,

685
00:25:43,400 --> 00:25:47,160
so it was a good time for central banks.

686
00:25:51,759 --> 00:25:54,279
Okay.

687
00:25:59,039 --> 00:26:01,799
So, the next

688
00:26:00,119 --> 00:26:03,639
thing I want to do, this will connect

689
00:26:01,799 --> 00:26:05,200
more with the with the the previous

690
00:26:03,640 --> 00:26:07,480
lecture. This is the last thing I want

691
00:26:05,200 --> 00:26:10,240
to say

692
00:26:07,480 --> 00:26:12,160
for this lecture then I'm I may start

693
00:26:10,240 --> 00:26:13,920
the review afterwards.

694
00:26:12,160 --> 00:26:16,160
Um

695
00:26:13,920 --> 00:26:17,759
is that I want to connect now this

696
00:26:16,160 --> 00:26:19,160
Phillips curve with something we

697
00:26:17,759 --> 00:26:20,599
discussed in the previous lecture which

698
00:26:19,160 --> 00:26:22,120
is the natural rate of unemployment

699
00:26:20,599 --> 00:26:23,839
because that's the way

700
00:26:22,119 --> 00:26:26,039
you'll typically see the Phillips curve

701
00:26:23,839 --> 00:26:27,599
written and and that's

702
00:26:26,039 --> 00:26:30,559
also the way

703
00:26:27,599 --> 00:26:32,480
that sort of uh you know, when Chairman

704
00:26:30,559 --> 00:26:34,839
Powell is talking about the labor market

705
00:26:32,480 --> 00:26:37,039
tightness and so on, he's not talking

706
00:26:34,839 --> 00:26:38,319
relative to M and Z and things like

707
00:26:37,039 --> 00:26:39,960
that, he's talking relative to what is

708
00:26:38,319 --> 00:26:42,119
called the natural rate of unemployment.

709
00:26:39,960 --> 00:26:45,360
So, I want to go from a Phillips curve

710
00:26:42,119 --> 00:26:45,359
that looks like that,

711
00:26:46,119 --> 00:26:50,799
you know, like that, to one that has the

712
00:26:48,400 --> 00:26:53,080
natural rate of unemployment in there.

713
00:26:50,799 --> 00:26:54,799
And so, that's the last step

714
00:26:53,079 --> 00:26:55,759
in this lecture.

715
00:26:54,799 --> 00:26:57,240
So,

716
00:26:55,759 --> 00:26:59,039
remember the definition of the natural

717
00:26:57,240 --> 00:27:00,160
rate of unemployment. What was the

718
00:26:59,039 --> 00:27:02,839
definition of the natural rate of

719
00:27:00,160 --> 00:27:02,840
unemployment?

720
00:27:04,400 --> 00:27:09,960
Was it the unemployment rate that God

721
00:27:07,400 --> 00:27:09,960
gave us?

722
00:27:10,679 --> 00:27:13,240
Any God?

723
00:27:15,480 --> 00:27:21,079
No.

724
00:27:17,480 --> 00:27:21,079
It had a very precise meaning for us.

725
00:27:24,000 --> 00:27:29,920
And remember, we used exactly that model

726
00:27:27,119 --> 00:27:29,919
to figure it out.

727
00:27:30,319 --> 00:27:32,559
Remember?

728
00:27:34,240 --> 00:27:38,120
We we solved the Actually, we solved the

729
00:27:36,679 --> 00:27:39,800
natural rate of unemployment from

730
00:27:38,119 --> 00:27:41,959
something like this. I think we had the

731
00:27:39,799 --> 00:27:44,119
function still generic function f of U

732
00:27:41,960 --> 00:27:46,120
Z. But we solved from an expression like

733
00:27:44,119 --> 00:27:47,919
this.

734
00:27:46,119 --> 00:27:50,119
We said,

735
00:27:47,920 --> 00:27:51,679
"Under one assumption,

736
00:27:50,119 --> 00:27:52,839
we can call this

737
00:27:51,679 --> 00:27:55,200
U

738
00:27:52,839 --> 00:27:57,119
U N, the natural rate of unemployment.

739
00:27:55,200 --> 00:27:59,840
What was that assumption?"

740
00:27:57,119 --> 00:28:01,839
And that's the only thing

741
00:27:59,839 --> 00:28:03,639
Expected price Okay, expected price is

742
00:28:01,839 --> 00:28:05,678
equal to the actual price. Okay, so we

743
00:28:03,640 --> 00:28:07,440
said if this is equal to that, then you

744
00:28:05,679 --> 00:28:08,800
solve out that's the natural rate of

745
00:28:07,440 --> 00:28:12,360
unemployment. And that's the only thing

746
00:28:08,799 --> 00:28:14,000
that that it that means that that that

747
00:28:12,359 --> 00:28:15,919
natural rate of unemployment means

748
00:28:14,000 --> 00:28:17,400
simply that when when the

749
00:28:15,920 --> 00:28:19,840
when the price is equal to the expected

750
00:28:17,400 --> 00:28:19,840
price.

751
00:28:20,319 --> 00:28:23,279
But if the price

752
00:28:23,839 --> 00:28:29,799
is equal to the expected price,

753
00:28:26,960 --> 00:28:29,799
what else is equal?

754
00:28:33,079 --> 00:28:37,119
I pointed at the right expressions

755
00:28:35,000 --> 00:28:37,119
there.

756
00:28:37,559 --> 00:28:41,000
Inflation is equal to expected

757
00:28:39,279 --> 00:28:44,599
inflation.

758
00:28:41,000 --> 00:28:45,799
So, I can use the same logic I used here

759
00:28:44,599 --> 00:28:47,799
for the natural rate of unemployment

760
00:28:45,799 --> 00:28:49,519
using the Phillips curve.

761
00:28:47,799 --> 00:28:51,440
I can say, "Okay,

762
00:28:49,519 --> 00:28:53,799
my I can solve out for the natural rate

763
00:28:51,440 --> 00:28:55,679
of unemployment here simply by setting

764
00:28:53,799 --> 00:28:58,279
the expected inflation equal to actual

765
00:28:55,679 --> 00:28:58,280
inflation."

766
00:28:58,640 --> 00:29:01,679
Okay.

767
00:28:59,720 --> 00:29:04,039
And if I do this, I can solve for the

768
00:29:01,679 --> 00:29:05,159
natural rate of unemployment from here.

769
00:29:04,039 --> 00:29:06,599
U N.

770
00:29:05,159 --> 00:29:08,480
I mean, I'm going to give I'm going to

771
00:29:06,599 --> 00:29:11,359
put the superscript N here when I when

772
00:29:08,480 --> 00:29:12,319
you let me replace pi e for pi. That's a

773
00:29:11,359 --> 00:29:13,918
That's what I

774
00:29:12,319 --> 00:29:16,119
That's what I

775
00:29:13,919 --> 00:29:17,840
The fact that I replace this pi e for pi

776
00:29:16,119 --> 00:29:19,519
is what allows me to put the superscript

777
00:29:17,839 --> 00:29:21,279
N there. Call it the natural rate of

778
00:29:19,519 --> 00:29:22,720
unemployment. And now I can solve it.

779
00:29:21,279 --> 00:29:23,960
Well, obviously that cancels with that

780
00:29:22,720 --> 00:29:25,960
and I can solve the natural rate of

781
00:29:23,960 --> 00:29:28,720
unemployment and it's equal to this

782
00:29:25,960 --> 00:29:30,279
function here.

783
00:29:28,720 --> 00:29:33,440
So, why is the natural rate of

784
00:29:30,279 --> 00:29:35,759
unemployment increasing in M?

785
00:29:33,440 --> 00:29:38,080
A question like that can come up in the

786
00:29:35,759 --> 00:29:39,480
quiz.

787
00:29:38,079 --> 00:29:41,039
I'm not going to use the Phillips curve

788
00:29:39,480 --> 00:29:42,640
to ask you if I ask you about that, but

789
00:29:41,039 --> 00:29:43,759
I can ask you that. What

790
00:29:42,640 --> 00:29:47,440
What happens to the natural rate of

791
00:29:43,759 --> 00:29:47,440
unemployment if M goes up?

792
00:29:47,519 --> 00:29:50,680
You know that.

793
00:29:49,119 --> 00:29:53,319
UN will go up, but what is the

794
00:29:50,680 --> 00:29:53,320
mechanism?

795
00:29:59,200 --> 00:30:02,880
So, why does the natural rate of

796
00:30:00,440 --> 00:30:06,039
unemployment go up when

797
00:30:02,880 --> 00:30:08,000
the markup goes up?

798
00:30:06,039 --> 00:30:10,039
Yep. If the real cost is constant, wages

799
00:30:08,000 --> 00:30:12,039
have to go down, right?

800
00:30:10,039 --> 00:30:14,000
I mean, another way of saying it is that

801
00:30:12,039 --> 00:30:16,799
the firms are not willing to pay they

802
00:30:14,000 --> 00:30:19,759
want to pay a lower real wage.

803
00:30:16,799 --> 00:30:22,159
At the original level of unemployment

804
00:30:19,759 --> 00:30:24,319
before the change in M,

805
00:30:22,160 --> 00:30:26,279
workers would not take that lower real

806
00:30:24,319 --> 00:30:27,879
wage.

807
00:30:26,279 --> 00:30:29,319
No, it's not an equilibrium real wage

808
00:30:27,880 --> 00:30:31,000
because workers say, "No, no, at this

809
00:30:29,319 --> 00:30:32,879
level of unemployment we need a higher

810
00:30:31,000 --> 00:30:34,559
real wage."

811
00:30:32,880 --> 00:30:37,120
So, the only way to restore equilibrium

812
00:30:34,559 --> 00:30:39,039
in that model we had was to increase

813
00:30:37,119 --> 00:30:40,959
unemployment because that will lower the

814
00:30:39,039 --> 00:30:42,920
bargaining power of workers and they

815
00:30:40,960 --> 00:30:44,720
will end up accepting the lower real

816
00:30:42,920 --> 00:30:46,320
wage that firms are willing to offer

817
00:30:44,720 --> 00:30:48,039
now. Okay.

818
00:30:46,319 --> 00:30:52,319
So, that's the reason

819
00:30:48,039 --> 00:30:52,319
uh we get this this markup effect.

820
00:30:53,359 --> 00:30:57,479
Z is

821
00:30:55,279 --> 00:31:00,079
same logic. It's a little easier to see

822
00:30:57,480 --> 00:31:02,400
it there, but Z means, well, at any

823
00:31:00,079 --> 00:31:04,639
given level of unemployment

824
00:31:02,400 --> 00:31:06,320
an increase in Z means workers want a

825
00:31:04,640 --> 00:31:07,840
higher real wage.

826
00:31:06,319 --> 00:31:09,159
Firms are not willing to pay a higher

827
00:31:07,839 --> 00:31:11,119
real wage,

828
00:31:09,160 --> 00:31:13,200
so you have to bring down the real wage

829
00:31:11,119 --> 00:31:14,399
that workers demand and the only way

830
00:31:13,200 --> 00:31:15,680
that can happen is with a higher

831
00:31:14,400 --> 00:31:17,000
unemployment.

832
00:31:15,680 --> 00:31:22,120
Okay. That's the reason the natural rate

833
00:31:17,000 --> 00:31:22,119
of unemployment is also increasing in Z.

834
00:31:23,119 --> 00:31:26,799
Okay.

835
00:31:24,440 --> 00:31:29,559
And now the last step.

836
00:31:26,799 --> 00:31:31,319
The last step is to

837
00:31:29,559 --> 00:31:33,799
You see, I can go back to my Phillips

838
00:31:31,319 --> 00:31:33,799
curve.

839
00:31:34,400 --> 00:31:40,480
Say that.

840
00:31:36,920 --> 00:31:45,080
And I'm going to replace M plus Z

841
00:31:40,480 --> 00:31:48,839
for alpha UN. I can do that, you see?

842
00:31:45,079 --> 00:31:51,919
I can replace this M plus C Z for alpha

843
00:31:48,839 --> 00:31:51,919
times UN.

844
00:31:52,680 --> 00:31:58,679
How do I know that? Well, M plus C Z is

845
00:31:55,559 --> 00:32:01,039
equal to UN times alpha.

846
00:31:58,679 --> 00:32:04,800
I can replace in the Phillips curve

847
00:32:01,039 --> 00:32:06,319
M plus C by alpha UN and I can re

848
00:32:04,799 --> 00:32:08,000
I can therefore

849
00:32:06,319 --> 00:32:10,159
rewrite the Phillips curve in the

850
00:32:08,000 --> 00:32:12,319
following form.

851
00:32:10,160 --> 00:32:16,200
Inflation is equal to expected inflation

852
00:32:12,319 --> 00:32:18,359
minus alpha times the gap between the

853
00:32:16,200 --> 00:32:20,519
unemployment rate and the natural rate

854
00:32:18,359 --> 00:32:22,359
of unemployment.

855
00:32:20,519 --> 00:32:23,599
Okay. So,

856
00:32:22,359 --> 00:32:25,279
so

857
00:32:23,599 --> 00:32:27,759
when

858
00:32:25,279 --> 00:32:29,519
Chairman Powell is worried about labor

859
00:32:27,759 --> 00:32:31,879
market being very tight, what he's

860
00:32:29,519 --> 00:32:33,240
saying is, well, unemployment is likely

861
00:32:31,880 --> 00:32:34,920
to be below the natural rate of

862
00:32:33,240 --> 00:32:36,559
unemployment.

863
00:32:34,920 --> 00:32:37,840
Because if unemployment is below the

864
00:32:36,559 --> 00:32:41,359
natural rate of unemployment, that's

865
00:32:37,839 --> 00:32:43,720
putting upward pressure on inflation.

866
00:32:41,359 --> 00:32:43,719
Okay.

867
00:32:44,160 --> 00:32:47,160
So, that's a

868
00:32:45,359 --> 00:32:50,559
So, that's what it means. This gap is

869
00:32:47,160 --> 00:32:52,040
very important uh for macroeconomists

870
00:32:50,559 --> 00:32:54,480
and certainly for central bankers that

871
00:32:52,039 --> 00:32:55,720
are very worried about inflation. Okay?

872
00:32:54,480 --> 00:32:58,120
That gap here.

873
00:32:55,720 --> 00:32:59,880
Problem is is this this is a difficult

874
00:32:58,119 --> 00:33:02,119
object to estimate, so you have to have

875
00:32:59,880 --> 00:33:04,360
estimates as

876
00:33:02,119 --> 00:33:05,719
The truth is that it's very difficult to

877
00:33:04,359 --> 00:33:06,959
know what it is, although there are

878
00:33:05,720 --> 00:33:09,039
estimates out there and I'm going to

879
00:33:06,960 --> 00:33:10,559
show you one.

880
00:33:09,039 --> 00:33:12,759
You notice that something is wrong when

881
00:33:10,559 --> 00:33:14,159
this guy starts picking up. It's a It's

882
00:33:12,759 --> 00:33:15,160
a little bit the other way around, you

883
00:33:14,160 --> 00:33:16,679
know?

884
00:33:15,160 --> 00:33:18,880
Uh uh

885
00:33:16,679 --> 00:33:20,759
the US in fact had a the opposite

886
00:33:18,880 --> 00:33:21,840
problem

887
00:33:20,759 --> 00:33:23,720
um

888
00:33:21,839 --> 00:33:25,399
before COVID. It's a somehow

889
00:33:23,720 --> 00:33:27,279
unemployment was very low relative to

890
00:33:25,400 --> 00:33:28,640
historical levels, but inflation was not

891
00:33:27,279 --> 00:33:30,759
picking up.

892
00:33:28,640 --> 00:33:33,360
So, that was implicitly telling us that

893
00:33:30,759 --> 00:33:34,839
for some reason, not fully understood,

894
00:33:33,359 --> 00:33:36,479
the natural rate of unemployment was

895
00:33:34,839 --> 00:33:38,199
declining.

896
00:33:36,480 --> 00:33:40,880
Okay.

897
00:33:38,200 --> 00:33:43,519
So, here is one picture that looks

898
00:33:40,880 --> 00:33:45,840
is one estimate uh again, I I don't

899
00:33:43,519 --> 00:33:48,400
trust any particular estimate, but

900
00:33:45,839 --> 00:33:49,559
it tells a story. That's one particular

901
00:33:48,400 --> 00:33:52,360
estimate of the natural rate of

902
00:33:49,559 --> 00:33:54,480
unemployment in the US, that blue line.

903
00:33:52,359 --> 00:33:57,519
And what you see in red the red is the

904
00:33:54,480 --> 00:33:58,799
actual rate of unemployment in the US.

905
00:33:57,519 --> 00:34:00,559
So,

906
00:33:58,799 --> 00:34:03,159
what happens when when in situations

907
00:34:00,559 --> 00:34:03,159
like these?

908
00:34:04,640 --> 00:34:08,240
So, what do you think what's happening

909
00:34:05,960 --> 00:34:09,679
to inflation in in this episode, which

910
00:34:08,239 --> 00:34:12,959
is right after the global financial

911
00:34:09,679 --> 00:34:12,960
crisis or the great recession?

912
00:34:15,480 --> 00:34:18,398
So, what what what do you need to read

913
00:34:17,039 --> 00:34:19,960
here? Well,

914
00:34:18,398 --> 00:34:21,839
the unemployment rate was a lot higher

915
00:34:19,960 --> 00:34:24,159
than the

916
00:34:21,840 --> 00:34:25,760
natural rate of unemployment.

917
00:34:24,159 --> 00:34:28,159
Does that put upward or downward

918
00:34:25,760 --> 00:34:29,440
pressure on inflation?

919
00:34:28,159 --> 00:34:30,800
Downward pressure on inflation. No,

920
00:34:29,440 --> 00:34:32,840
unemployment is very high relative to

921
00:34:30,800 --> 00:34:34,960
natural rate of unemployment. It's minus

922
00:34:32,840 --> 00:34:36,440
alpha times U minus UN.

923
00:34:34,960 --> 00:34:37,878
So, and that's what happened. We had

924
00:34:36,440 --> 00:34:39,599
lots of problem with inflation.

925
00:34:37,878 --> 00:34:41,519
Inflation was going very low. We even

926
00:34:39,599 --> 00:34:43,079
had negative inflation there, a little

927
00:34:41,519 --> 00:34:46,800
deflation for a while.

928
00:34:43,079 --> 00:34:48,358
Okay. So, that was a problem.

929
00:34:46,800 --> 00:34:49,879
Here is the period that they described

930
00:34:48,358 --> 00:34:51,759
before is a little mysterious because we

931
00:34:49,878 --> 00:34:52,719
went unemployment went below what we

932
00:34:51,760 --> 00:34:54,120
thought it was a natural rate of

933
00:34:52,719 --> 00:34:55,878
unemployment and inflation wasn't really

934
00:34:54,119 --> 00:34:57,679
picking up a lot. At the end began to

935
00:34:55,878 --> 00:34:59,119
pick up a little, but it wasn't picking

936
00:34:57,679 --> 00:35:00,839
up a lot and that was a little bit of a

937
00:34:59,119 --> 00:35:03,319
mystery.

938
00:35:00,840 --> 00:35:04,519
Now, we're in this situation here,

939
00:35:03,320 --> 00:35:07,760
which

940
00:35:04,519 --> 00:35:10,519
we have extremely low unemployment

941
00:35:07,760 --> 00:35:12,160
and very high inflation. So, so this I

942
00:35:10,519 --> 00:35:13,639
think this captures well the situation

943
00:35:12,159 --> 00:35:15,599
right now. We have a

944
00:35:13,639 --> 00:35:17,639
negative gap between unemployment and

945
00:35:15,599 --> 00:35:18,759
the natural rate of unemployment and

946
00:35:17,639 --> 00:35:20,759
that's the reason that's putting a lot

947
00:35:18,760 --> 00:35:22,160
of pressure on inflation.

948
00:35:20,760 --> 00:35:23,520
We also have other things that are

949
00:35:22,159 --> 00:35:25,079
putting pressure on inflation that come

950
00:35:23,519 --> 00:35:26,000
from the supply side of the economy and

951
00:35:25,079 --> 00:35:29,440
so on.

952
00:35:26,000 --> 00:35:31,639
So, that combination is pretty bad for

953
00:35:29,440 --> 00:35:35,039
for the

954
00:35:31,639 --> 00:35:36,079
inflation outcomes and outlook

955
00:35:35,039 --> 00:35:38,199
as well.

956
00:35:36,079 --> 00:35:38,199
Okay.

957
00:35:38,639 --> 00:35:41,960
So, that's where we're at.

958
00:35:40,800 --> 00:35:43,680
We're going to talk a lot more about

959
00:35:41,960 --> 00:35:45,440
this because this is what is going on

960
00:35:43,679 --> 00:35:47,000
right now.

961
00:35:45,440 --> 00:35:48,559
Any questions about that? Otherwise, I

962
00:35:47,000 --> 00:35:51,358
want to start sort of reviewing things,

963
00:35:48,559 --> 00:35:51,358
although I don't know.

964
00:35:51,599 --> 00:35:57,319
Any question about this? Yep.

965
00:35:54,840 --> 00:35:59,600
Is correction to increase unemployment?

966
00:35:57,320 --> 00:36:01,320
Sorry? Is the only way to fix, I guess,

967
00:35:59,599 --> 00:36:03,880
the inflationary expectations? Well,

968
00:36:01,320 --> 00:36:07,280
that's a very good question.

969
00:36:03,880 --> 00:36:07,280
That's a very good question.

970
00:36:09,119 --> 00:36:13,000
I'm I'm trying to decide what to

971
00:36:14,039 --> 00:36:20,320
answer what with what do we have.

972
00:36:17,719 --> 00:36:20,319
Um

973
00:36:23,239 --> 00:36:27,039
There are two views

974
00:36:24,880 --> 00:36:29,800
at this moment.

975
00:36:27,039 --> 00:36:32,440
There's one view

976
00:36:29,800 --> 00:36:33,760
that says there's no way around that.

977
00:36:32,440 --> 00:36:34,679
They just look at these curves and say,

978
00:36:33,760 --> 00:36:35,800
"Look,

979
00:36:34,679 --> 00:36:38,039
there's no way around that. That's the

980
00:36:35,800 --> 00:36:38,920
reason we need a recession."

981
00:36:38,039 --> 00:36:40,440
Okay.

982
00:36:38,920 --> 00:36:43,280
Because otherwise we were not going to

983
00:36:40,440 --> 00:36:45,639
control inflation.

984
00:36:43,280 --> 00:36:47,760
And a recession means high unemployment.

985
00:36:45,639 --> 00:36:50,079
Okay, that's one view.

986
00:36:47,760 --> 00:36:51,400
At this moment, it's becoming the

987
00:36:50,079 --> 00:36:53,079
dominant view.

988
00:36:51,400 --> 00:36:56,320
It has gone in cycles, but at this

989
00:36:53,079 --> 00:36:56,319
moment it's the dominant view.

990
00:36:57,000 --> 00:37:01,840
There is a another view,

991
00:36:59,800 --> 00:37:04,320
which is the one that the central bank

992
00:37:01,840 --> 00:37:06,400
the Fed adopted for a while,

993
00:37:04,320 --> 00:37:08,160
that said, "Well, this is not the only

994
00:37:06,400 --> 00:37:11,200
indicator of tightness of the labor

995
00:37:08,159 --> 00:37:13,239
market. There is other things as well."

996
00:37:11,199 --> 00:37:14,879
And those indicators are moving in the

997
00:37:13,239 --> 00:37:16,799
right direction.

998
00:37:14,880 --> 00:37:18,920
And so, we may be able not to create a

999
00:37:16,800 --> 00:37:21,080
big mess here because these other

1000
00:37:18,920 --> 00:37:22,680
factors are moving in the right right

1001
00:37:21,079 --> 00:37:24,119
direction.

1002
00:37:22,679 --> 00:37:26,079
Some of those factors are as I said,

1003
00:37:24,119 --> 00:37:28,400
other measures of of labor market

1004
00:37:26,079 --> 00:37:29,799
tightness and and hiring, the flows.

1005
00:37:28,400 --> 00:37:31,160
Remember I showed you flows between

1006
00:37:29,800 --> 00:37:33,240
employment and unemployment, out of

1007
00:37:31,159 --> 00:37:35,000
employment and so on. Those flows look

1008
00:37:33,239 --> 00:37:36,799
extremely tight and now they're

1009
00:37:35,000 --> 00:37:38,920
improving. So, the gaps in those

1010
00:37:36,800 --> 00:37:40,960
dimensions are better. And the other one

1011
00:37:38,920 --> 00:37:42,559
is the what's a big cost push component,

1012
00:37:40,960 --> 00:37:44,519
which is what I said before, the supply

1013
00:37:42,559 --> 00:37:46,320
chains and so on created extra

1014
00:37:44,519 --> 00:37:48,400
inflation, abnormal inflation like

1015
00:37:46,320 --> 00:37:49,280
increasing markups, like M was very

1016
00:37:48,400 --> 00:37:50,800
high.

1017
00:37:49,280 --> 00:37:53,040
And some of that is subsiding as well.

1018
00:37:50,800 --> 00:37:54,800
So, so there are dynamics that suggest

1019
00:37:53,039 --> 00:37:56,119
that inflation is declining even without

1020
00:37:54,800 --> 00:37:58,160
unemployment.

1021
00:37:56,119 --> 00:38:00,039
But, I would say

1022
00:37:58,159 --> 00:38:02,519
the medium voter

1023
00:38:00,039 --> 00:38:04,320
in this space of, you know, forecast of

1024
00:38:02,519 --> 00:38:06,759
inflation and so on,

1025
00:38:04,320 --> 00:38:08,760
thinks that that that we will need some

1026
00:38:06,760 --> 00:38:11,120
some adjustment through this this part

1027
00:38:08,760 --> 00:38:15,040
as well. Okay.

1028
00:38:11,119 --> 00:38:17,440
My main concern I I think that

1029
00:38:15,039 --> 00:38:19,759
the the Fed the the path the Fed is

1030
00:38:17,440 --> 00:38:21,720
forecasting is feasible,

1031
00:38:19,760 --> 00:38:22,760
but a very narrow path. I mean, it may

1032
00:38:21,719 --> 00:38:24,879
happen.

1033
00:38:22,760 --> 00:38:26,880
And and to me, whether it they're

1034
00:38:24,880 --> 00:38:29,358
successful at not creating a big mess

1035
00:38:26,880 --> 00:38:31,960
here, I mean, bringing unemployment very

1036
00:38:29,358 --> 00:38:34,159
high in order to bring inflation down,

1037
00:38:31,960 --> 00:38:35,880
has a lot to do with whether

1038
00:38:34,159 --> 00:38:37,920
somehow we manage to keep expected

1039
00:38:35,880 --> 00:38:39,960
inflation anchored.

1040
00:38:37,920 --> 00:38:41,599
And there there was some evidence, I

1041
00:38:39,960 --> 00:38:42,840
think I said that a few lectures ago,

1042
00:38:41,599 --> 00:38:45,519
there was some evidence that in the

1043
00:38:42,840 --> 00:38:45,519
summer of

1044
00:38:45,800 --> 00:38:50,720
uh summer of 2022, I'm from the southern

1045
00:38:49,199 --> 00:38:52,559
hemisphere, so I get always confused

1046
00:38:50,719 --> 00:38:55,279
with summers and and so on.

1047
00:38:52,559 --> 00:38:57,400
So, the in in the summer of 2022, US

1048
00:38:55,280 --> 00:38:59,200
summer of 2022, inflation was becoming

1049
00:38:57,400 --> 00:39:01,200
very unanchored. This guy

1050
00:38:59,199 --> 00:39:04,439
one year expected inflation was creeping

1051
00:39:01,199 --> 00:39:07,159
up to 6% and that was very scary. Okay?

1052
00:39:04,440 --> 00:39:10,200
Because think what happened. If if if

1053
00:39:07,159 --> 00:39:12,039
you get expected inflation at 6%,

1054
00:39:10,199 --> 00:39:13,599
then it's not enough to bring

1055
00:39:12,039 --> 00:39:15,358
unemployment to the natural rate of

1056
00:39:13,599 --> 00:39:17,400
unemployment to get inflation back to

1057
00:39:15,358 --> 00:39:19,519
the 2% we like because you need to bring

1058
00:39:17,400 --> 00:39:22,320
expected inflation down now. And that

1059
00:39:19,519 --> 00:39:24,199
means you need to sort of bring the

1060
00:39:22,320 --> 00:39:26,160
unemployment rate very very high in

1061
00:39:24,199 --> 00:39:28,119
order to re-anchor expectations. So,

1062
00:39:26,159 --> 00:39:29,559
that's a very scary situation. They were

1063
00:39:28,119 --> 00:39:32,480
very persuasive though at the end of the

1064
00:39:29,559 --> 00:39:33,320
summer with very hawkish speeches and so

1065
00:39:32,480 --> 00:39:35,719
on

1066
00:39:33,320 --> 00:39:37,160
and they managed to re-anchor expected

1067
00:39:35,719 --> 00:39:38,719
inflation. So, expected inflation very

1068
00:39:37,159 --> 00:39:41,519
quickly came down to two two and a half

1069
00:39:38,719 --> 00:39:43,199
percent one year out to

1070
00:39:41,519 --> 00:39:44,960
But, now it been picking up again and

1071
00:39:43,199 --> 00:39:47,239
now we are around 3% again, so it's a

1072
00:39:44,960 --> 00:39:49,199
little bit scary for where we are. So,

1073
00:39:47,239 --> 00:39:51,199
to me this is going to be very important

1074
00:39:49,199 --> 00:39:53,679
in that. So,

1075
00:39:51,199 --> 00:39:55,919
if inflation keeps lingering around 6%

1076
00:39:53,679 --> 00:39:57,679
and so on, and eventually the expected

1077
00:39:55,920 --> 00:39:59,519
inflation becomes an anchor, then

1078
00:39:57,679 --> 00:40:02,039
there's almost no way around but to have

1079
00:39:59,519 --> 00:40:04,239
a recession to get out of that.

1080
00:40:02,039 --> 00:40:06,279
If that doesn't happen, if they succeed

1081
00:40:04,239 --> 00:40:07,599
convincing a ton of people that that,

1082
00:40:06,280 --> 00:40:09,519
you know, they're very serious about

1083
00:40:07,599 --> 00:40:11,719
about this stuff and they they re-anchor

1084
00:40:09,519 --> 00:40:14,239
expectation expected inflation, then we

1085
00:40:11,719 --> 00:40:15,599
don't need to create a large recession.

1086
00:40:14,239 --> 00:40:17,599
Still they may create it, cause it

1087
00:40:15,599 --> 00:40:20,599
because, you know, accidents happen, but

1088
00:40:17,599 --> 00:40:22,799
but but but they don't need to.

1089
00:40:20,599 --> 00:40:24,119
But they will need to if this guy gets

1090
00:40:22,800 --> 00:40:26,320
an anchor.

1091
00:40:24,119 --> 00:40:28,359
Actually, maybe I can use even this

1092
00:40:26,320 --> 00:40:30,400
expression here

1093
00:40:28,360 --> 00:40:31,920
to explain what I'm trying to say and I

1094
00:40:30,400 --> 00:40:33,880
realize that this is again, this is

1095
00:40:31,920 --> 00:40:35,360
material really for

1096
00:40:33,880 --> 00:40:36,920
for the next lecture.

1097
00:40:35,360 --> 00:40:38,480
What I'm trying to say is that if they

1098
00:40:36,920 --> 00:40:42,840
manage

1099
00:40:38,480 --> 00:40:43,960
to keep this theta very close to zero,

1100
00:40:42,840 --> 00:40:46,960
okay?

1101
00:40:43,960 --> 00:40:50,280
Then, in order to bring inflation back

1102
00:40:46,960 --> 00:40:52,280
to their target of pi bar, 2% or so,

1103
00:40:50,280 --> 00:40:53,680
all that they really need to do is to

1104
00:40:52,280 --> 00:40:55,200
sort of bring unemployment to the

1105
00:40:53,679 --> 00:40:57,399
natural rate of unemployment. So, they

1106
00:40:55,199 --> 00:40:59,119
only need to really

1107
00:40:57,400 --> 00:41:01,280
uh

1108
00:40:59,119 --> 00:41:03,719
fix this gap.

1109
00:41:01,280 --> 00:41:05,760
Okay? They need to raise unemployment so

1110
00:41:03,719 --> 00:41:06,959
so it closes that gap. But it's a small

1111
00:41:05,760 --> 00:41:09,480
change.

1112
00:41:06,960 --> 00:41:12,599
That's if they succeed keeping expected

1113
00:41:09,480 --> 00:41:15,679
inflation at around 2%.

1114
00:41:12,599 --> 00:41:15,679
If they don't,

1115
00:41:16,559 --> 00:41:19,679
say suppose that that

1116
00:41:18,719 --> 00:41:24,119
that

1117
00:41:19,679 --> 00:41:25,759
theta becomes very far from from zero,

1118
00:41:24,119 --> 00:41:28,319
then we have a problem because then

1119
00:41:25,760 --> 00:41:30,760
expected inflation is above the target,

1120
00:41:28,320 --> 00:41:32,240
no? Because we have 6%, so suppose theta

1121
00:41:30,760 --> 00:41:33,760
is equal to one, we have 6%, then

1122
00:41:32,239 --> 00:41:35,679
expected inflation

1123
00:41:33,760 --> 00:41:38,320
is 6%.

1124
00:41:35,679 --> 00:41:40,039
That means that if you if your expected

1125
00:41:38,320 --> 00:41:41,280
inflation

1126
00:41:40,039 --> 00:41:43,000
is

1127
00:41:41,280 --> 00:41:44,560
6%,

1128
00:41:43,000 --> 00:41:47,000
then in order to bring bring the

1129
00:41:44,559 --> 00:41:48,320
inflation if you bring unemployment just

1130
00:41:47,000 --> 00:41:50,159
to the natural rate of unemployment, so

1131
00:41:48,320 --> 00:41:52,120
the red line to the blue line, you

1132
00:41:50,159 --> 00:41:53,559
haven't made a lot of progress. All that

1133
00:41:52,119 --> 00:41:55,559
you have done is

1134
00:41:53,559 --> 00:41:58,920
you have brought down inflation

1135
00:41:55,559 --> 00:42:00,599
to 6%, which is expected inflation.

1136
00:41:58,920 --> 00:42:03,200
So, if you are have expected inflation

1137
00:42:00,599 --> 00:42:05,279
of 6%, you need to bring unemployment

1138
00:42:03,199 --> 00:42:07,519
much higher than the natural rate of

1139
00:42:05,280 --> 00:42:10,320
unemployment in order to bring inflation

1140
00:42:07,519 --> 00:42:11,759
back to the target of 2%.

1141
00:42:10,320 --> 00:42:13,039
That's the reason I say

1142
00:42:11,760 --> 00:42:15,440
to me

1143
00:42:13,039 --> 00:42:18,320
the fight will be

1144
00:42:15,440 --> 00:42:21,159
the battle will be won or lost

1145
00:42:18,320 --> 00:42:23,320
on that term there.

1146
00:42:21,159 --> 00:42:23,319
Yep.

1147
00:42:23,360 --> 00:42:26,519
How much

1148
00:42:24,639 --> 00:42:28,920
of this current like inflationary

1149
00:42:26,519 --> 00:42:30,440
pressure is caused by unemployment? How

1150
00:42:28,920 --> 00:42:31,639
much of it is caused on the supply side?

1151
00:42:30,440 --> 00:42:33,880
Cuz it feels like a lot of this stuff

1152
00:42:31,639 --> 00:42:35,400
like CPI going up, energy prices going

1153
00:42:33,880 --> 00:42:36,760
up, it's like how much can the Fed keep

1154
00:42:35,400 --> 00:42:40,079
control of something like Well, it

1155
00:42:36,760 --> 00:42:41,560
varies a little from different

1156
00:42:40,079 --> 00:42:42,719
This is around the world, but but in the

1157
00:42:41,559 --> 00:42:44,440
US,

1158
00:42:42,719 --> 00:42:47,159
uh for a while a big component of

1159
00:42:44,440 --> 00:42:49,360
inflation was all that stuff.

1160
00:42:47,159 --> 00:42:51,000
Uh you know, bottlenecks in the ports

1161
00:42:49,360 --> 00:42:52,960
and and stuff like that.

1162
00:42:51,000 --> 00:42:54,599
That's almost all gone.

1163
00:42:52,960 --> 00:42:56,039
There's very little of that left. So,

1164
00:42:54,599 --> 00:42:57,880
now is

1165
00:42:56,039 --> 00:42:59,000
is aggregate demand. People feel very

1166
00:42:57,880 --> 00:43:00,599
rich

1167
00:42:59,000 --> 00:43:01,960
for a variety of reasons, they're

1168
00:43:00,599 --> 00:43:04,039
spending a lot and that's the reason

1169
00:43:01,960 --> 00:43:05,840
unemployment is very low.

1170
00:43:04,039 --> 00:43:07,880
It's not unemployment per se, it's just

1171
00:43:05,840 --> 00:43:09,039
the aggregate demand is very high.

1172
00:43:07,880 --> 00:43:10,760
You know?

1173
00:43:09,039 --> 00:43:12,199
Uh and that translates into very low

1174
00:43:10,760 --> 00:43:13,800
unemployment and that feeds into

1175
00:43:12,199 --> 00:43:15,559
inflation this way

1176
00:43:13,800 --> 00:43:17,080
through wages and so on.

1177
00:43:15,559 --> 00:43:18,880
But

1178
00:43:17,079 --> 00:43:20,759
in the US, the component of aggregate

1179
00:43:18,880 --> 00:43:22,880
demand is much larger than in Europe. In

1180
00:43:20,760 --> 00:43:25,400
Europe, those supply side factors are

1181
00:43:22,880 --> 00:43:29,440
much more important. So,

1182
00:43:25,400 --> 00:43:29,440
you know, around the

1183
00:43:29,599 --> 00:43:36,000
Yeah, the summer of 2022, you could say

1184
00:43:33,199 --> 00:43:37,799
both both Europe and the US had about

1185
00:43:36,000 --> 00:43:41,159
the same amount of excess inflation.

1186
00:43:37,800 --> 00:43:44,039
They were all with about 10% inflation.

1187
00:43:41,159 --> 00:43:45,199
But in the US was 2/3 excess aggregate

1188
00:43:44,039 --> 00:43:48,039
demand,

1189
00:43:45,199 --> 00:43:49,399
while in Europe was 2/3 problems on the

1190
00:43:48,039 --> 00:43:51,079
supply side, especially because of the

1191
00:43:49,400 --> 00:43:51,720
war and stuff like that.

1192
00:43:51,079 --> 00:43:52,840
Okay?

1193
00:43:51,719 --> 00:43:54,959
So,

1194
00:43:52,840 --> 00:43:56,519
so but it for the US today is mostly an

1195
00:43:54,960 --> 00:43:57,960
aggregate demand problem. We're not

1196
00:43:56,519 --> 00:43:59,480
going to get a lot of

1197
00:43:57,960 --> 00:44:01,039
Obviously, if the war stops, that's

1198
00:43:59,480 --> 00:44:02,920
going to help,

1199
00:44:01,039 --> 00:44:04,239
but it's not going to be enough. We we

1200
00:44:02,920 --> 00:44:05,920
we need to

1201
00:44:04,239 --> 00:44:07,799
just the economy is too hot. It's too

1202
00:44:05,920 --> 00:44:09,119
much aggregate demand out there.

1203
00:44:07,800 --> 00:44:11,480
That's the that's the fundamental

1204
00:44:09,119 --> 00:44:13,799
problem. Yeah.

1205
00:44:11,480 --> 00:44:16,519
Can you explain again why an increase in

1206
00:44:13,800 --> 00:44:19,519
Z would increase the natural rate of

1207
00:44:16,519 --> 00:44:20,880
unemployment? An increase in Z? Yeah.

1208
00:44:19,519 --> 00:44:21,960
So,

1209
00:44:20,880 --> 00:44:23,599
uh

1210
00:44:21,960 --> 00:44:25,920
um

1211
00:44:23,599 --> 00:44:27,960
for that the basis the previous slide

1212
00:44:25,920 --> 00:44:30,280
diagram, but remember what Z does.

1213
00:44:27,960 --> 00:44:33,440
Actually, let me go to

1214
00:44:30,280 --> 00:44:33,440
this equation here.

1215
00:44:34,159 --> 00:44:39,079
So, we can figure out in this in this

1216
00:44:36,039 --> 00:44:40,400
two equations here. If Z goes up, that

1217
00:44:39,079 --> 00:44:42,880
means for any given level of

1218
00:44:40,400 --> 00:44:45,119
unemployment

1219
00:44:42,880 --> 00:44:49,960
and expected inflation,

1220
00:44:45,119 --> 00:44:49,960
wages go up. Workers demand higher wage.

1221
00:44:50,000 --> 00:44:55,119
But

1222
00:44:51,559 --> 00:44:56,199
remember that that the firms

1223
00:44:55,119 --> 00:44:58,000
uh

1224
00:44:56,199 --> 00:44:58,919
So, so let me let me let me we're

1225
00:44:58,000 --> 00:45:00,760
talking about the natural rate of

1226
00:44:58,920 --> 00:45:02,480
unemployment, so let me replace this PE

1227
00:45:00,760 --> 00:45:03,359
for P first of all.

1228
00:45:02,480 --> 00:45:05,320
Okay?

1229
00:45:03,358 --> 00:45:09,880
So, I'm going to divide

1230
00:45:05,320 --> 00:45:12,240
W by P both sides. So, I get

1231
00:45:09,880 --> 00:45:14,800
if if Z goes up, the workers want a

1232
00:45:12,239 --> 00:45:17,439
higher real wage.

1233
00:45:14,800 --> 00:45:20,880
No? If because

1234
00:45:17,440 --> 00:45:23,200
if Z goes up, then W over P, I'm

1235
00:45:20,880 --> 00:45:25,680
dividing by P both sides, goes up.

1236
00:45:23,199 --> 00:45:27,439
Workers demand a higher wage.

1237
00:45:25,679 --> 00:45:29,879
But the firms, from here you can see

1238
00:45:27,440 --> 00:45:32,400
that I can divide by P both sides, W

1239
00:45:29,880 --> 00:45:35,200
over P that the firms offer is equal to

1240
00:45:32,400 --> 00:45:37,760
1 over 1 + M.

1241
00:45:35,199 --> 00:45:40,159
Okay? So, the the firms are not going to

1242
00:45:37,760 --> 00:45:42,440
offer a higher real wage. The workers

1243
00:45:40,159 --> 00:45:43,480
want a higher real wage.

1244
00:45:42,440 --> 00:45:45,400
The only thing that can restore

1245
00:45:43,480 --> 00:45:47,519
equilibrium that the workers end up

1246
00:45:45,400 --> 00:45:49,358
demanding the same real wage as the

1247
00:45:47,519 --> 00:45:51,719
firms are willing to pay

1248
00:45:49,358 --> 00:45:53,920
is that somehow the hands of the worker

1249
00:45:51,719 --> 00:45:56,480
gets weakened. And the only variable

1250
00:45:53,920 --> 00:45:58,559
here that can weaken their hand is a

1251
00:45:56,480 --> 00:45:59,358
higher unemployment.

1252
00:45:58,559 --> 00:46:00,799
Okay?

1253
00:45:59,358 --> 00:46:03,719
So,

1254
00:46:00,800 --> 00:46:03,720
let me put it all in

1255
00:46:05,679 --> 00:46:10,358
So, at the natural rate,

1256
00:46:07,599 --> 00:46:13,319
I know that PE is equal to P.

1257
00:46:10,358 --> 00:46:16,239
So, that means the wage setting equation

1258
00:46:13,320 --> 00:46:19,120
the wage setting equation implies

1259
00:46:16,239 --> 00:46:22,479
W over P

1260
00:46:19,119 --> 00:46:22,480
equal F U Z.

1261
00:46:22,920 --> 00:46:28,440
Okay?

1262
00:46:24,800 --> 00:46:28,440
From the price setting equation,

1263
00:46:28,480 --> 00:46:32,079
I have that

1264
00:46:29,840 --> 00:46:35,160
W over P

1265
00:46:32,079 --> 00:46:37,000
is equal to 1 over 1 + M.

1266
00:46:35,159 --> 00:46:38,399
So, in this very simple model, this is

1267
00:46:37,000 --> 00:46:40,440
given.

1268
00:46:38,400 --> 00:46:42,400
If this guy goes up,

1269
00:46:40,440 --> 00:46:43,800
these guys want a higher real wage, but

1270
00:46:42,400 --> 00:46:45,240
that cannot happen because that would be

1271
00:46:43,800 --> 00:46:48,039
inconsistent with the price setting, so

1272
00:46:45,239 --> 00:46:49,759
you need to bring down this guy down.

1273
00:46:48,039 --> 00:46:52,039
The only thing that can bring it down is

1274
00:46:49,760 --> 00:46:54,080
for unemployment to go up.

1275
00:46:52,039 --> 00:46:56,119
And that's at P, we call that the

1276
00:46:54,079 --> 00:46:58,199
natural rate of unemployment.

1277
00:46:56,119 --> 00:46:58,199
Okay.

1278
00:46:59,880 --> 00:47:03,800
Yeah.

1279
00:47:01,320 --> 00:47:07,720
So, like last lecture we talked about

1280
00:47:03,800 --> 00:47:10,640
the labor force participation rate. Um

1281
00:47:07,719 --> 00:47:12,839
is there like any reason to try and like

1282
00:47:10,639 --> 00:47:15,679
increase that to increase Oh,

1283
00:47:12,840 --> 00:47:15,680
fantastic. Yes.

1284
00:47:16,880 --> 00:47:21,160
Well, I mean

1285
00:47:19,039 --> 00:47:22,119
there are sort of negative policies as

1286
00:47:21,159 --> 00:47:24,519
well.

1287
00:47:22,119 --> 00:47:25,960
You know, Z reduction in a sense does

1288
00:47:24,519 --> 00:47:28,079
that because

1289
00:47:25,960 --> 00:47:30,480
the the was a emergency unemployment

1290
00:47:28,079 --> 00:47:32,920
benefits and emergency

1291
00:47:30,480 --> 00:47:34,599
income supplements and so on as a result

1292
00:47:32,920 --> 00:47:36,480
of the pandemic that are disappearing

1293
00:47:34,599 --> 00:47:39,400
slowly. And that's very naturally so

1294
00:47:36,480 --> 00:47:41,159
it's it's going to bring

1295
00:47:39,400 --> 00:47:43,519
uh participation back up and it is

1296
00:47:41,159 --> 00:47:46,079
beginning to pick up. So,

1297
00:47:43,519 --> 00:47:48,079
so yeah, you need to incentivize return

1298
00:47:46,079 --> 00:47:48,920
to work. And now there are some people

1299
00:47:48,079 --> 00:47:50,880
that

1300
00:47:48,920 --> 00:47:52,480
there's nothing that

1301
00:47:50,880 --> 00:47:54,320
they've retired essentially or, you

1302
00:47:52,480 --> 00:47:57,199
know, they have health problems and they

1303
00:47:54,320 --> 00:47:58,480
they just cannot return. We lost that.

1304
00:47:57,199 --> 00:48:00,399
And the other margin which is very

1305
00:47:58,480 --> 00:48:01,840
important is immigration. So, that's a

1306
00:48:00,400 --> 00:48:03,440
big issue

1307
00:48:01,840 --> 00:48:05,440
because immigration obviously that we

1308
00:48:03,440 --> 00:48:07,119
lost I think in the US, I'm not a labor

1309
00:48:05,440 --> 00:48:09,280
economist, but we lost

1310
00:48:07,119 --> 00:48:11,559
I think a flow of the order of the order

1311
00:48:09,280 --> 00:48:13,519
of 500,000 people a year

1312
00:48:11,559 --> 00:48:15,920
during COVID.

1313
00:48:13,519 --> 00:48:17,320
And and and that's that's a big chunk of

1314
00:48:15,920 --> 00:48:19,119
the decline in

1315
00:48:17,320 --> 00:48:21,640
in the labor No, what you need is more

1316
00:48:19,119 --> 00:48:23,279
employment. That's going to that puts

1317
00:48:21,639 --> 00:48:25,159
downward pressure on wages for the same

1318
00:48:23,280 --> 00:48:28,240
amount of aggregate demand.

1319
00:48:25,159 --> 00:48:29,440
And that's what you need, but but

1320
00:48:28,239 --> 00:48:31,000
Yeah, we're taking that's a very good

1321
00:48:29,440 --> 00:48:33,559
point. We're taking all that as given

1322
00:48:31,000 --> 00:48:36,480
here. Remember, we're fixing all that,

1323
00:48:33,559 --> 00:48:38,119
but but if you don't, then then you

1324
00:48:36,480 --> 00:48:40,679
other terms will start appearing in this

1325
00:48:38,119 --> 00:48:42,480
expression and so on.

1326
00:48:40,679 --> 00:48:43,480
Good.

1327
00:48:42,480 --> 00:48:45,880
Obviously, I'm not going to start the

1328
00:48:43,480 --> 00:48:48,920
review. We have only 1 minute, but so in

1329
00:48:45,880 --> 00:48:52,480
the next lecture I I'll just review

1330
00:48:48,920 --> 00:48:52,480
uh the material for the quiz.