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the main topic in this part is really

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open economy and uh so we extended the

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eslm mo uh we did not bring in we we

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again shut down price changes so we said

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uh pric is completely fixed no Philips

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curve here so we expanded the eslm model

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to add this open E economy Dimension and

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so we start from the same aggregate

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demand function that we had in close

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economy consumption plus investment plus

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government expenditure but now we have

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to draw a distinction between Demand by

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domestic households companies and the

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government and the demand for

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domestically produced goods and so Z is

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the demand domestically produced Goods

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which is equal to demand plus the demand

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that foreigners have for the goods

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produces at home minus the Imports that

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part of that expenditure that is going

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to Imports that means Goods produced by

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other

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countries um so the new behavioral

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functions here where the export function

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and the import function uh export is

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increasing in foreign output more income

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abroad will lead to more Imports by them

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which means more export for home home

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and the it's decreasing on with respect

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to the exchange rate real exchange rate

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and nominal exchange rate will be the

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same here since we have fully sticky

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prices but

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H if if the real exchange it appreciat

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that means domestic goods are more

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expensive it means exports are less

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foreigners are going to buy less of our

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Goods conversely for imports is like the

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exports of the other country means that

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if domestic output goes up then then

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there will be more purchases of foreign

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foreign er er goods and if the exchange

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is appreciate means also that foreign

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goods are cheaper for us and therefore

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we import more okay so positive so those

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were those were the two new behavioral

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functions in the in the Goods Market

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expanded to include an open economy and

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that had implications for the diagram

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that we had in lecture three or so to

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determine equilibrium output ER you know

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we started from the same demand we had

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in close economy then we had to subtract

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in

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in import and uh and that is shift

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things down because we are now as part

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of the domestic demand that is going to

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foreign Goods not to domestic Goods but

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ER it's also rotates a curve because the

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higher is domestic income the more are

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the Imports uh that we do from the rest

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of the world now to that we have to add

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the export which are not a function of

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domestic output that's that's a parallel

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shift with respect to this curve no we

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go up up and and that gives us the ZZ

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curve which is what we call the demand

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for domestic Le domestically produced

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Goods now notice that the distance

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between the demand for domestically

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produced goods and the domestic demand

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for goods is what is the net export so

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the distance between z z and the D is

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the net export so in this point here for

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example ZZ is higher than DD which means

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that our exports are greater than our

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Imports and that's the reason you have a

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trade surplus at this point they're the

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same and that's the reason the trade

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account is balance and but over here

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Imports exceed exports and that's the

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reason we have a trade deficit

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okay I'm going to go very quickly so you

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you're in charge of stopping me I'm not

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going to ask you question just stop me

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if there's something that you need

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clarifications okay for so that's what

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the demand for domestically produced

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Goods now we're going to determine

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equilibrium output in this open e e omic

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context and that means you know

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aggregate demand has to be equal

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aggregate demand for domestically

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produced good has to be equal to output

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and that's what we do with the 45 degree

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line here and so where the 45 degree

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line intersect with this ZZ curve that's

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our equilibrium output now it happens

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that in this example that leads to a

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trade deficit but there's nothing here

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so we still determine equili output up

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here and then we read in this curve

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bottom curve what is implication for the

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traes deficit or Surplus

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okay H but the equilibrium condition

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important is that output domestically

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produc output has to be equal to the

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demand for domestically produced Goods

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not for total demand it's Dem demand for

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domestically produced Goods okay because

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this is a can model in which output is

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aggregate demand determined but it has

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to be aggregate demand for the things

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you're producing not AG demand for all

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Goods around the world okay good so then

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we did some experiments we said well

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suppose what happens in this open

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economy context if we increase

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government expenditure well the curent

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will shift up in exactly the same way as

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as in the close economy the difference

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will be in the multiplier though because

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as output goes up as a result of the

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expansionary aggregate demand that also

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means that domestic income will go up

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and and that means that Imports will go

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up and that's demand that will go for

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foreign goods and that's the reason the

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z z curve has a lower multiplier it's

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flatter than the DD curve okay still if

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we start for example with a trade

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balance since Imports are going to

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increase as a result of this

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expansionary fiscal policy we going end

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up with a trade deficit and that's the

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reason the response of output is less

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than close economies because part of

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that goes to foreign Goods conversely if

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this other country that is doing a

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expansion in fiscal policy or something

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that leads to higher output abroad wi

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star that's also expansionary for home

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because exports the export function goes

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up no and that leads to an increase in

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output ER still with lower multiplier

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because part of that increase in

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domestic output will go will go to

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Imports but the in this case unlike the

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other ones actually the current the the

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trade balance improves because it's been

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pulled by exports and so we at at impact

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we get a big increase in export which is

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the driver of increasable demand for

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domestically produced Goods and then as

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income goes up we undo some of that but

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you end up with sort of higher high

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higher better trade deficit better trade

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surpluses than than in the case in which

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you induce the the expansion in agre

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demand uh then the last step there was H

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to look at the role of the exchange rate

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and uh where we said is we're going to

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make some assumptions that I promise you

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and and I now read the quiz so I I I I

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guarantee you I honor This Promise H

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nothing weird will happen meaning if if

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our Goods gets more expensive that means

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that net exports will be worse and and

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if if H for two reasons for at least for

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at least one reason but it could be too

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if if if the exchange rate goes up then

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there's going to be less exports at any

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given level of foreign income that will

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worsen the net export and then we were

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going to tend to import more now that

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will be parti should upset for the fact

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that you can buy more with the same

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amount of dollars H but we said we're

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going to impose conditions such that the

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positive the negative effect of an

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appreciation on that export always

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dominates and again in your quiz you're

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going to have a situation like that and

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that will be the

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case so don't think that that we're

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trying to trick you anything this will

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hold okay the the point of this being

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that you know that that uh

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depreciating your

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currency you know making your goods less

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expensive ER is equivalent to will

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produce an a response equivalent to what

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you get here out of an increasing y star

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no because that's export will go

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up and you're going to get all the shift

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net export function will go up that will

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increase aggregate demand and so on so

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that's kind things that countries want

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to typically when they're in a recession

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and so on then that was an introduction

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to the most important lecture in this

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part of

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the course which is the Mandel flaming

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model and I I I promise you that you

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would get 70% at least in the quiz and I

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already read the quiz so I tell you

207
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there is at least 70% of your points

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have to do with this model so you better

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understand it very well you do every

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single comparative Statics that you can

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imagine with this Mo and then you'll get

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70% at least I think you get 73 actually

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but but but that's

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the so what's this well the Mandel

215
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flaming model is simply what I just

216
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showed you is the good market

217
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equilibrium no that's the but with an

218
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endogenous exchange rate and uh so we we

219
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rewrote to say since we're assuming

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compettive sticky prices we can replace

221
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the real Exchange by the nominal

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exchange rate H but now we're going to

223
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endogenize the exchange rate and and and

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for that we're going to use the uncover

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in parity condition this a condition you

226
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should understand very well as well okay

227
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so that tells you essentially that the

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expected Return of the two bonds the

229
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bonds issuing foreign currency and

230
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domestic currency have to be the same

231
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the Spector return have to be the same

232
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okay and this condition ensures that

233
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because if a country for example example

234
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if the domestic interest rate is higher

235
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than the international interest rate you

236
00:10:04,879 --> 00:10:09,439
need to expect a depreciation of the

237
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current currency otherwise the expected

238
00:10:09,440 --> 00:10:14,720
return would not be the same okay and

239
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that's the reason when we add the

240
00:10:14,720 --> 00:10:21,040
assumption that the Spector exchanges is

241
00:10:17,000 --> 00:10:22,480
fixed at least temporarily H then an

242
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increase in the interest rate leads to

243
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an appreciation of the exchange rate why

244
00:10:24,399 --> 00:10:28,078
because that if the exchange rate

245
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appreciate but the expected exchange

246
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rate stays put that that means the

247
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expected appreciation will have to be

248
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undone and that means that leads to

249
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unexpected depreciation okay so that's

250
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very important okay so here you have

251
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therefore you need to understand this

252
00:10:40,519 --> 00:10:45,159
know that forgiv expectation of the

253
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exchange rate and increasing domestic

254
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interest rate appreciates the domestic

255
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currency and and increasing the foreign

256
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interest rate without us matching it

257
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will lead to a depreciation of the

258
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current of of the domestic currency okay

259
00:10:57,639 --> 00:11:01,240
so that's what you have there that's

260
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important

261
00:11:01,679 --> 00:11:06,078
important now notice that if the

262
00:11:03,919 --> 00:11:09,240
expected exchange rate goes

263
00:11:06,078 --> 00:11:12,679
up and the interest rates do not change

264
00:11:09,240 --> 00:11:14,879
then the current exchanger has to go up

265
00:11:12,679 --> 00:11:16,799
because if it didn't then you would have

266
00:11:14,879 --> 00:11:18,879
an expected capital gain out of the

267
00:11:16,799 --> 00:11:21,559
currency and expected appreciation and

268
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that would add to the expected return of

269
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own owning a domestic bones okay

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good so we characterize that interest

271
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parity condition as follows we said well

272
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look this this here we're plotting the

273
00:11:34,440 --> 00:11:38,399
domestic interest rate here we're

274
00:11:36,078 --> 00:11:40,120
putting the current exchange rate and

275
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what we're marking in this picture this

276
00:11:40,120 --> 00:11:45,600
is the curve that traces the uip the and

277
00:11:43,078 --> 00:11:47,519
cover by the condition and naturally

278
00:11:45,600 --> 00:11:49,680
when the domestic interest rate is equal

279
00:11:47,519 --> 00:11:51,120
to International interest rate then it

280
00:11:49,679 --> 00:11:52,599
has to be the case that the exchange

281
00:11:51,120 --> 00:11:55,278
rate is at the same level as the

282
00:11:52,600 --> 00:11:58,079
expected exchange no if that is equal to

283
00:11:55,278 --> 00:12:00,600
that so if we're here then we know that

284
00:11:58,078 --> 00:12:02,719
a point in that curve is that in which

285
00:12:00,600 --> 00:12:05,639
the exchange rate is equal to the

286
00:12:02,720 --> 00:12:08,278
expected exchange rate okay that's what

287
00:12:05,639 --> 00:12:11,200
we have

288
00:12:08,278 --> 00:12:13,439
yeah good so you should understand this

289
00:12:11,200 --> 00:12:15,480
curve and and know what moves it here

290
00:12:13,440 --> 00:12:16,839
it's very clear what moves it no if

291
00:12:15,480 --> 00:12:19,519
there are two things that can move this

292
00:12:16,839 --> 00:12:20,760
this curve here one is a change in I

293
00:12:19,519 --> 00:12:24,440
star the other one is a change in

294
00:12:20,759 --> 00:12:27,000
expected exchange rate if what happens

295
00:12:24,440 --> 00:12:29,880
if the is star goes

296
00:12:27,000 --> 00:12:34,360
up well you know that the new new the

297
00:12:29,879 --> 00:12:36,958
uip will shift but you do know that the

298
00:12:34,360 --> 00:12:38,440
next the The Point equivalent to that

299
00:12:36,958 --> 00:12:40,078
that is one in which exchange rate is

300
00:12:38,440 --> 00:12:41,800
equal to expected exchange rate we have

301
00:12:40,078 --> 00:12:44,439
to have a higher interest rate domestic

302
00:12:41,799 --> 00:12:46,599
interest rate no because if I'm bringing

303
00:12:44,440 --> 00:12:48,240
this up and I want to still look at the

304
00:12:46,600 --> 00:12:51,199
point in which e is equal to expected

305
00:12:48,240 --> 00:12:53,000
exchange rate then I have to move I up

306
00:12:51,198 --> 00:12:55,319
by the same amount and so I know that

307
00:12:53,000 --> 00:12:57,958
this curve when when is Star goes up

308
00:12:55,320 --> 00:13:00,160
this curve moves up or to the left you

309
00:12:57,958 --> 00:13:02,399
pick which way you analyze

310
00:13:00,159 --> 00:13:04,519
okay now what about the expected

311
00:13:02,399 --> 00:13:06,839
exchange rate well if the expected

312
00:13:04,519 --> 00:13:09,560
exchange rate goes

313
00:13:06,839 --> 00:13:11,720
up if the spected exchange goes up and

314
00:13:09,559 --> 00:13:15,039
the international interest hasn't gone

315
00:13:11,720 --> 00:13:17,879
up H so if this moves to to the spected

316
00:13:15,039 --> 00:13:21,240
exchanger moves to the right then and

317
00:13:17,879 --> 00:13:24,759
the and the and the domestic interest

318
00:13:21,240 --> 00:13:27,360
doesn't go up then that means that the

319
00:13:24,759 --> 00:13:32,559
current exchanger will have to also go

320
00:13:27,360 --> 00:13:34,800
up okay so that means H if this goes up

321
00:13:32,559 --> 00:13:36,479
then at an interest rate equal to the

322
00:13:34,799 --> 00:13:38,719
the international interest rate so let's

323
00:13:36,480 --> 00:13:43,320
tra look in this direction then we have

324
00:13:38,720 --> 00:13:45,199
a point around here okay if if that

325
00:13:43,320 --> 00:13:46,680
wasn't the cas case then you would

326
00:13:45,198 --> 00:13:50,439
respecting an appreciation and then

327
00:13:46,679 --> 00:13:54,120
again would be inconsistent with

328
00:13:50,440 --> 00:13:57,240
h the uip then we put things together so

329
00:13:54,120 --> 00:13:59,799
what we did is we replace we use the uip

330
00:13:57,240 --> 00:14:02,240
to replace exchange rate there and now

331
00:13:59,799 --> 00:14:04,758
we get this expression in the net export

332
00:14:02,240 --> 00:14:07,560
function now we the LM is exactly the

333
00:14:04,759 --> 00:14:10,560
same as before we we have

334
00:14:07,559 --> 00:14:12,679
a the Central Bank sets the interest

335
00:14:10,559 --> 00:14:14,958
rate here I'm writing it in terms of the

336
00:14:12,679 --> 00:14:16,359
nominal interest rate I think in the

337
00:14:14,958 --> 00:14:17,758
quiz we wrote it in terms of the real

338
00:14:16,360 --> 00:14:20,360
interest rate but it's the same because

339
00:14:17,759 --> 00:14:21,759
prices is equal to are fixed so real and

340
00:14:20,360 --> 00:14:23,399
nominal interest rate are exactly the

341
00:14:21,759 --> 00:14:27,720
same

342
00:14:23,399 --> 00:14:30,559
yeah is the xais the expected exchange

343
00:14:27,720 --> 00:14:32,519
rate no is the actual exchange rate the

344
00:14:30,559 --> 00:14:36,078
spected exchange rate is in this curve

345
00:14:32,519 --> 00:14:37,679
here that is a parameter okay this

346
00:14:36,078 --> 00:14:39,159
happens to be a value of the current

347
00:14:37,679 --> 00:14:41,198
exchange equal to the spected exchange

348
00:14:39,159 --> 00:14:42,919
rate which is convenient to plot because

349
00:14:41,198 --> 00:14:44,758
that's also when the domestic interest

350
00:14:42,919 --> 00:14:46,198
rate which is what I'm putting here is

351
00:14:44,759 --> 00:14:47,919
equal to International interest rate

352
00:14:46,198 --> 00:14:51,240
that's all that I'm saying and then if

353
00:14:47,919 --> 00:14:55,078
you shift this to the

354
00:14:51,240 --> 00:14:57,639
right exchange rate up the expect exate

355
00:14:55,078 --> 00:15:00,239
up then I know that a new point in this

356
00:14:57,639 --> 00:15:02,600
curve has to have a higher current

357
00:15:00,240 --> 00:15:04,079
exchange rate so that I know I know that

358
00:15:02,600 --> 00:15:05,800
the equivalent to this point a is going

359
00:15:04,078 --> 00:15:08,879
to be to the right if you lower the

360
00:15:05,799 --> 00:15:13,159
foreign interest rate then what I know

361
00:15:08,879 --> 00:15:14,838
is that exactly that that the point at

362
00:15:13,159 --> 00:15:17,039
which exchange it is equal to expected

363
00:15:14,839 --> 00:15:19,199
exchange rate has to have a lower

364
00:15:17,039 --> 00:15:22,639
domestic interest rate so that means

365
00:15:19,198 --> 00:15:24,758
that I know that that that this point a

366
00:15:22,639 --> 00:15:29,120
will be around here which is like a

367
00:15:24,759 --> 00:15:29,120
shift to the right okay

368
00:15:31,039 --> 00:15:37,159
anyway so so as I said I was saying ER

369
00:15:35,360 --> 00:15:39,278
nominal real interest are the same I

370
00:15:37,159 --> 00:15:42,039
think in the in the quiz we wrote are

371
00:15:39,278 --> 00:15:44,600
there but it's the same same

372
00:15:42,039 --> 00:15:47,360
more so now you see that interest rate

373
00:15:44,600 --> 00:15:49,759
have two effects no h one is the

374
00:15:47,360 --> 00:15:52,560
traditional effect affects investment

375
00:15:49,759 --> 00:15:54,240
but it also affects exchange R so H an

376
00:15:52,559 --> 00:15:56,679
increas in the domestic interest rate

377
00:15:54,240 --> 00:15:58,198
now will will be doubly contractional in

378
00:15:56,679 --> 00:16:00,599
the sense that we lower domestic

379
00:15:58,198 --> 00:16:03,599
investment that reduces aggregate demand

380
00:16:00,600 --> 00:16:04,879
but at the same time it will also

381
00:16:03,600 --> 00:16:06,560
appreciate the exchange rate and

382
00:16:04,879 --> 00:16:08,078
therefore it will reduce net exports

383
00:16:06,559 --> 00:16:10,638
okay we're going to import more and

384
00:16:08,078 --> 00:16:13,239
Export less and that's also going to

385
00:16:10,639 --> 00:16:15,919
reduce aggregate demand so that's that's

386
00:16:13,240 --> 00:16:17,639
the those are the two effects so that's

387
00:16:15,919 --> 00:16:20,639
the contribution of the all this

388
00:16:17,639 --> 00:16:23,318
exchange rate block to our islm

389
00:16:20,639 --> 00:16:26,759
framework Mandel flaming is simply islm

390
00:16:23,318 --> 00:16:30,679
plus a a you know a uip condition and a

391
00:16:26,759 --> 00:16:32,680
net export function that's it

392
00:16:30,679 --> 00:16:35,599
so we put out now the two things

393
00:16:32,679 --> 00:16:37,198
together sort of a standard is islm now

394
00:16:35,600 --> 00:16:38,839
with different slope and so on because

395
00:16:37,198 --> 00:16:42,039
we have this net export function and we

396
00:16:38,839 --> 00:16:43,959
have more parameter we have y star is

397
00:16:42,039 --> 00:16:46,399
star and things like that and then we

398
00:16:43,958 --> 00:16:49,318
have the uip there and then then we did

399
00:16:46,399 --> 00:16:51,720
a few experiments no said suppose that

400
00:16:49,318 --> 00:16:56,078
now you have an expansionary monetary

401
00:16:51,720 --> 00:16:58,519
policy okay so an expansion in monetary

402
00:16:56,078 --> 00:17:00,039
policy as before with a slightly

403
00:16:58,519 --> 00:17:02,240
different slopes and so on because of

404
00:17:00,039 --> 00:17:04,480
the net export function will lower

405
00:17:02,240 --> 00:17:05,798
equilibrium output and it will lower it

406
00:17:04,480 --> 00:17:08,318
for two reasons as I said before will

407
00:17:05,798 --> 00:17:10,759
lower it because investment will decline

408
00:17:08,318 --> 00:17:12,279
but also because higher interest rate

409
00:17:10,759 --> 00:17:13,359
means an appreciation of the exchange

410
00:17:12,279 --> 00:17:15,318
rate

411
00:17:13,359 --> 00:17:17,879
today because you have to expect a

412
00:17:15,318 --> 00:17:20,480
depreciation now in the next period and

413
00:17:17,880 --> 00:17:22,959
and that that means also less net

414
00:17:20,480 --> 00:17:24,679
exports okay so interest rate is

415
00:17:22,959 --> 00:17:29,440
contractionary for for two different

416
00:17:24,679 --> 00:17:33,160
reasons here is that clear

417
00:17:29,440 --> 00:17:33,160
yeah raise interest

418
00:17:33,319 --> 00:17:37,558
rate raise interest rate will lower

419
00:17:35,720 --> 00:17:39,160
aggregate demand for the standard reason

420
00:17:37,558 --> 00:17:41,240
but on top of that we're going to get an

421
00:17:39,160 --> 00:17:45,120
appreciation of the exchange rate which

422
00:17:41,240 --> 00:17:47,480
also reduces net exports

423
00:17:45,119 --> 00:17:50,918
okay what about an increase in go

424
00:17:47,480 --> 00:17:52,880
expenditure well H it's the same as

425
00:17:50,919 --> 00:17:54,600
before and nothing changes relative to

426
00:17:52,880 --> 00:17:56,520
before except for the fact that we have

427
00:17:54,599 --> 00:17:58,599
a lower multiplier but it's still the

428
00:17:56,519 --> 00:17:59,918
case that is expansionary but it doesn't

429
00:17:58,599 --> 00:18:01,119
affect the interest rate it doesn't

430
00:17:59,919 --> 00:18:04,080
affect the exchange rate or anything

431
00:18:01,119 --> 00:18:05,678
like that again it's less expansionary

432
00:18:04,079 --> 00:18:08,639
than in closed economy because part of

433
00:18:05,679 --> 00:18:08,640
that energy will go to

434
00:18:08,720 --> 00:18:15,200
inputs then I went to this diagram and

435
00:18:11,319 --> 00:18:17,678
and I play with this uh diagram here I

436
00:18:15,200 --> 00:18:21,840
said well suppose that the expected

437
00:18:17,679 --> 00:18:24,519
exchanger goes up then what which curves

438
00:18:21,839 --> 00:18:26,519
change and the first one that changes is

439
00:18:24,519 --> 00:18:28,558
this one no this one moves to the right

440
00:18:26,519 --> 00:18:30,679
so you get an appreciation today and

441
00:18:28,558 --> 00:18:33,319
that also means that this curve here the

442
00:18:30,679 --> 00:18:36,000
yes will shift to the left okay if the

443
00:18:33,319 --> 00:18:37,678
spected exchanger goes up and you don't

444
00:18:36,000 --> 00:18:39,599
change monetary policy that means

445
00:18:37,679 --> 00:18:41,720
interest rate will go

446
00:18:39,599 --> 00:18:43,119
up sorry and you don't change monetary

447
00:18:41,720 --> 00:18:45,038
policy that means the current exchanger

448
00:18:43,119 --> 00:18:47,798
will appreciate that will reduce net

449
00:18:45,038 --> 00:18:50,720
export and and that's a shift in this

450
00:18:47,798 --> 00:18:53,240
space as a shift in the yes to the left

451
00:18:50,720 --> 00:18:55,480
okay this is a parameter these two

452
00:18:53,240 --> 00:18:58,839
things are parameters now in the ls

453
00:18:55,480 --> 00:19:00,720
diagram okay what about for an output uh

454
00:18:58,839 --> 00:19:03,759
going down well that doesn't affect the

455
00:19:00,720 --> 00:19:07,720
uip condition but it does affect net

456
00:19:03,759 --> 00:19:10,079
export so that moves I to the left okay

457
00:19:07,720 --> 00:19:13,200
and the last thing we did was an

458
00:19:10,079 --> 00:19:16,319
increase in in in isar and an increase

459
00:19:13,200 --> 00:19:18,279
in isar what does is know is that at the

460
00:19:16,319 --> 00:19:19,960
same interest rate then you know that

461
00:19:18,279 --> 00:19:21,480
you need a depreciation of the currency

462
00:19:19,960 --> 00:19:23,519
today because that will lead to an

463
00:19:21,480 --> 00:19:25,360
apprec expected appreciation so that

464
00:19:23,519 --> 00:19:29,519
means that this uip PE curve moves to

465
00:19:25,359 --> 00:19:32,199
the left and the is curve

466
00:19:29,519 --> 00:19:34,000
moves to the right that's an increase in

467
00:19:32,200 --> 00:19:36,759
the interest rate taken as given for an

468
00:19:34,000 --> 00:19:38,000
output okay if for an output also

469
00:19:36,759 --> 00:19:41,200
changes then you have to look at the

470
00:19:38,000 --> 00:19:44,880
combination of the two things okay but

471
00:19:41,200 --> 00:19:46,919
um but taking for an output as given

472
00:19:44,880 --> 00:19:48,520
then this Curve will shift to the left

473
00:19:46,919 --> 00:19:51,440
and that will move the to the right

474
00:19:48,519 --> 00:19:51,440
because the exchanger will

475
00:19:52,599 --> 00:19:56,678
depreciate you said sometimes countries

476
00:19:54,839 --> 00:19:58,399
choose to fix exchange rates and when

477
00:19:56,679 --> 00:20:00,640
you fix an exchange rate well and if

478
00:19:58,400 --> 00:20:02,480
it's credible exchange rate then the

479
00:20:00,640 --> 00:20:03,919
spected exchange rate equal to the

480
00:20:02,480 --> 00:20:06,159
actual exchange rate equal to some

481
00:20:03,919 --> 00:20:07,880
constant then that implies immediately

482
00:20:06,159 --> 00:20:10,120
that the domestic interest rate has to

483
00:20:07,880 --> 00:20:12,159
be equal to International interest rate

484
00:20:10,119 --> 00:20:13,879
okay so that if you fix your exchange

485
00:20:12,159 --> 00:20:15,520
rate to someone else then you give up

486
00:20:13,880 --> 00:20:19,200
your monetary policy the monetary policy

487
00:20:15,519 --> 00:20:19,200
is run by a different country

488
00:20:19,319 --> 00:20:25,759
okay okay good okay so that's a very

489
00:20:22,880 --> 00:20:28,760
important lecture play with it please

490
00:20:25,759 --> 00:20:30,279
well we then we look more carefully at

491
00:20:28,759 --> 00:20:32,879
at at

492
00:20:30,279 --> 00:20:36,000
uh at different exchanger

493
00:20:32,880 --> 00:20:39,200
regimes ER and and the effectiveness of

494
00:20:36,000 --> 00:20:40,960
policy within each of this regime the

495
00:20:39,200 --> 00:20:43,919
flexible exchange rate system which is

496
00:20:40,960 --> 00:20:46,000
the one we were discussing before H you

497
00:20:43,919 --> 00:20:48,038
get sort of you know if a country is in

498
00:20:46,000 --> 00:20:50,759
a recession you can use fiscal policy I

499
00:20:48,038 --> 00:20:52,400
showed you that before it works well ER

500
00:20:50,759 --> 00:20:54,200
and you can also use expansionary

501
00:20:52,400 --> 00:20:56,440
monetary policy which will be very

502
00:20:54,200 --> 00:20:58,960
successful for two reasons one the

503
00:20:56,440 --> 00:21:01,360
traditional one but the second reason is

504
00:20:58,960 --> 00:21:04,640
that it will depreciate your currency

505
00:21:01,359 --> 00:21:06,199
okay good now then we say suppose that

506
00:21:04,640 --> 00:21:08,200
you have a country that that is also in

507
00:21:06,200 --> 00:21:10,240
a recession but you have a a fixed

508
00:21:08,200 --> 00:21:12,240
exchange rate well then you still can

509
00:21:10,240 --> 00:21:14,919
use fiscal policy there's nothing

510
00:21:12,240 --> 00:21:17,240
against that but but you cannot use the

511
00:21:14,919 --> 00:21:18,759
expansion in monetary policy okay so

512
00:21:17,240 --> 00:21:21,759
that's a limitation of fixed exchang

513
00:21:18,759 --> 00:21:21,759
that you lose an important

514
00:21:22,038 --> 00:21:28,359
tool another problem that can arise with

515
00:21:25,359 --> 00:21:30,678
fix fixable exch fixed exchange rates is

516
00:21:28,359 --> 00:21:33,199
is speculative attacks on the currency

517
00:21:30,679 --> 00:21:35,440
sometimes the peg is not credible and

518
00:21:33,200 --> 00:21:37,919
when the peg is not credible you can

519
00:21:35,440 --> 00:21:41,400
imagine that you know that suppose that

520
00:21:37,919 --> 00:21:41,400
people expect your currency to

521
00:21:41,440 --> 00:21:46,679
depreciate depreciate so expected

522
00:21:43,720 --> 00:21:49,558
exchanger goes down and and suppose that

523
00:21:46,679 --> 00:21:50,880
you do want to keep your peg today

524
00:21:49,558 --> 00:21:52,918
that's what typically happens somebody

525
00:21:50,880 --> 00:21:55,200
speculates against your P But Central

526
00:21:52,919 --> 00:21:57,640
Bank resist that for a while but the

527
00:21:55,200 --> 00:21:59,798
only way it can resist that short of

528
00:21:57,640 --> 00:22:03,000
closing the capital account and doing

529
00:21:59,798 --> 00:22:05,440
all sort of things there but you haven't

530
00:22:03,000 --> 00:22:07,359
learned about those so don't worry H the

531
00:22:05,440 --> 00:22:09,038
only tool you have here to defend a

532
00:22:07,359 --> 00:22:10,759
speculative attack on your currency that

533
00:22:09,038 --> 00:22:13,240
is for the exchange not to depreciate

534
00:22:10,759 --> 00:22:14,879
today is by raising interest rate so the

535
00:22:13,240 --> 00:22:16,079
defense of an exchange rate causes a

536
00:22:14,880 --> 00:22:18,559
recession at

537
00:22:16,079 --> 00:22:20,240
home that's another problem that

538
00:22:18,558 --> 00:22:22,720
flexible exchange rate

539
00:22:20,240 --> 00:22:24,240
have and and there are sort of the deal

540
00:22:22,720 --> 00:22:26,200
seems pretty obvious that you don't want

541
00:22:24,240 --> 00:22:28,880
to have a fixed exchange rate and I said

542
00:22:26,200 --> 00:22:30,519
well be careful because flexible

543
00:22:28,880 --> 00:22:31,919
exchange rate are also not a panasa you

544
00:22:30,519 --> 00:22:33,918
may get lots of volatility in the

545
00:22:31,919 --> 00:22:37,840
exchange rate because the role of

546
00:22:33,919 --> 00:22:40,440
expectations is sort of is is very

547
00:22:37,839 --> 00:22:42,000
important um anyways this looks

548
00:22:40,440 --> 00:22:43,960
complicated but it's essentially what we

549
00:22:42,000 --> 00:22:45,599
did later on when we price equity and

550
00:22:43,960 --> 00:22:48,798
things like that we use sort of the same

551
00:22:45,599 --> 00:22:50,399
sort of iterated substitutions of things

552
00:22:48,798 --> 00:22:53,158
this was just meant to say that in a

553
00:22:50,400 --> 00:22:55,038
flexible exchange rate really and if

554
00:22:53,159 --> 00:22:56,720
once you endogenize Spector exchange you

555
00:22:55,038 --> 00:22:58,960
don't take it as a constant it gets to

556
00:22:56,720 --> 00:23:00,240
be very complicated because effectively

557
00:22:58,960 --> 00:23:03,079
The Exchange is spin down by the

558
00:23:00,240 --> 00:23:05,558
expectations of infinite Horizon of

559
00:23:03,079 --> 00:23:07,599
interest rate at home and abroad so so

560
00:23:05,558 --> 00:23:09,519
there's lots of space for creativity and

561
00:23:07,599 --> 00:23:13,158
moving things around and that's the

562
00:23:09,519 --> 00:23:13,158
reason exchanges can be very

563
00:23:14,240 --> 00:23:21,440
volatile okay good so anyway so all that

564
00:23:17,759 --> 00:23:23,038
that was it for ER Mandel flaming plus

565
00:23:21,440 --> 00:23:26,000
okay any question about that because now

566
00:23:23,038 --> 00:23:28,798
I'm going to move to the next part okay

567
00:23:26,000 --> 00:23:31,558
so then then uh The Next Step uh was to

568
00:23:28,798 --> 00:23:34,839
look at the asset prices really and or

569
00:23:31,558 --> 00:23:38,440
valuations of Assets in general that

570
00:23:34,839 --> 00:23:40,199
that have cash flows in the future or or

571
00:23:38,440 --> 00:23:43,480
or and exchange it's a little bit like

572
00:23:40,200 --> 00:23:44,519
that by the way but we talk a lot about

573
00:23:43,480 --> 00:23:48,278
current

574
00:23:44,519 --> 00:23:51,200
events but the key thing was this no we

575
00:23:48,278 --> 00:23:55,000
said okay you know many

576
00:23:51,200 --> 00:23:57,600
things ER many Financial or real assets

577
00:23:55,000 --> 00:23:59,079
actually or even your human wealth we

578
00:23:57,599 --> 00:24:01,399
discuss later on

579
00:23:59,079 --> 00:24:02,678
you know you you you you you you are

580
00:24:01,400 --> 00:24:04,159
receiving some income today but you're

581
00:24:02,679 --> 00:24:07,080
also expecting to receive income in the

582
00:24:04,159 --> 00:24:08,600
future and this part was about how do we

583
00:24:07,079 --> 00:24:10,359
value those things that we receive in

584
00:24:08,599 --> 00:24:12,719
the future those cash flows that come in

585
00:24:10,359 --> 00:24:13,918
the future and so we developed this

586
00:24:12,720 --> 00:24:16,720
concept

587
00:24:13,919 --> 00:24:18,840
of expected present discounted value and

588
00:24:16,720 --> 00:24:20,679
we said well very natural way of

589
00:24:18,839 --> 00:24:23,399
bringing dollars receiving the future to

590
00:24:20,679 --> 00:24:26,440
the present is to discount them by the

591
00:24:23,400 --> 00:24:28,120
interest rate between now and then okay

592
00:24:26,440 --> 00:24:30,640
and and the reason the logic behind that

593
00:24:28,119 --> 00:24:32,479
is because if you give me a dollar today

594
00:24:30,640 --> 00:24:34,480
I can do a lot more than if you give me

595
00:24:32,480 --> 00:24:36,399
a dollar five years from now because I

596
00:24:34,480 --> 00:24:38,519
can invest the dollar today and earn the

597
00:24:36,398 --> 00:24:40,918
interest rate return up to five years

598
00:24:38,519 --> 00:24:42,599
from now so a dollar today is worth a

599
00:24:40,919 --> 00:24:45,159
lot more than five years a dollar five

600
00:24:42,599 --> 00:24:46,719
years from now therefore a dollar five

601
00:24:45,159 --> 00:24:49,120
years from now is worth a lot less than

602
00:24:46,720 --> 00:24:50,880
a dollar today how much less one over

603
00:24:49,119 --> 00:24:53,158
one plus the interest rate over that

604
00:24:50,880 --> 00:24:55,760
period which is

605
00:24:53,159 --> 00:24:58,520
okay so that's what we did then I show

606
00:24:55,759 --> 00:25:00,480
you sort of a general a general cash

607
00:24:58,519 --> 00:25:03,079
flow this is an asset that gives a cash

608
00:25:00,480 --> 00:25:04,880
flow ZT at the beginning of this period

609
00:25:03,079 --> 00:25:07,439
ZT plus one at the beginning of the next

610
00:25:04,880 --> 00:25:09,039
one or at the end of this one something

611
00:25:07,440 --> 00:25:10,720
like that well this one you don't need

612
00:25:09,038 --> 00:25:12,079
to Discount that one you do need to

613
00:25:10,720 --> 00:25:14,159
Discount because you're not receiving it

614
00:25:12,079 --> 00:25:15,839
now you're receiving it a year from now

615
00:25:14,159 --> 00:25:17,679
this when you need it's two years from

616
00:25:15,839 --> 00:25:19,158
now you need to discount it more because

617
00:25:17,679 --> 00:25:21,720
you know it's two years that you could

618
00:25:19,159 --> 00:25:25,720
be earning interest rate and so on so

619
00:25:21,720 --> 00:25:25,720
forth okay this formula you need to

620
00:25:27,079 --> 00:25:31,079
understand uh and I said well that's if

621
00:25:29,599 --> 00:25:33,319
you know the future if you don't know

622
00:25:31,079 --> 00:25:35,079
the future then you just replace the

623
00:25:33,319 --> 00:25:36,678
things you don't know for the respected

624
00:25:35,079 --> 00:25:38,960
value that's what and that's the

625
00:25:36,679 --> 00:25:41,200
approximation in real I mean if you were

626
00:25:38,960 --> 00:25:43,440
to do this formally it's a little more

627
00:25:41,200 --> 00:25:46,000
complicated but for this course that's

628
00:25:43,440 --> 00:25:48,440
all that you do

629
00:25:46,000 --> 00:25:52,079
okay and then I look at some particular

630
00:25:48,440 --> 00:25:53,960
cases this this is a case the same case

631
00:25:52,079 --> 00:25:55,519
but in one in which the interest rate is

632
00:25:53,960 --> 00:25:57,159
constant suppose that you expect the

633
00:25:55,519 --> 00:25:58,798
interest rate to be constant then is a

634
00:25:57,159 --> 00:26:01,480
little simpler expression because rather

635
00:25:58,798 --> 00:26:03,639
than getting these products of one plus

636
00:26:01,480 --> 00:26:06,640
one the interest rates at different

637
00:26:03,640 --> 00:26:08,880
times H you get just powers of one plus

638
00:26:06,640 --> 00:26:10,440
I then another one that is simpler

639
00:26:08,880 --> 00:26:13,640
obviously is one in which all these

640
00:26:10,440 --> 00:26:16,320
expected payments are constant and so on

641
00:26:13,640 --> 00:26:18,278
and then even simpler if you spec if the

642
00:26:16,319 --> 00:26:21,079
con if the interest rate is constant and

643
00:26:18,278 --> 00:26:23,839
the payment is constant H you get some

644
00:26:21,079 --> 00:26:26,199
simple formulas like that simpler

645
00:26:23,839 --> 00:26:28,398
formulas and then cases in which asset

646
00:26:26,200 --> 00:26:31,000
lives forever of that kind then that's

647
00:26:28,398 --> 00:26:32,879
value if you don't pay for if you don't

648
00:26:31,000 --> 00:26:34,240
receive the the First Cash Flow now but

649
00:26:32,880 --> 00:26:35,919
you receive it at the beginning of next

650
00:26:34,240 --> 00:26:38,798
year or at the end of this one then it

651
00:26:35,919 --> 00:26:40,840
gets even simpler like that and I you're

652
00:26:38,798 --> 00:26:42,759
going to get a question of this kind

653
00:26:40,839 --> 00:26:45,639
okay and which you're going to be asked

654
00:26:42,759 --> 00:26:49,319
to compare two different assets that

655
00:26:45,640 --> 00:26:50,440
have a different profiles of cash flows

656
00:26:49,319 --> 00:26:53,759
and you're going to have to compare

657
00:26:50,440 --> 00:26:56,200
between those two okay then we talk

658
00:26:53,759 --> 00:26:57,720
about bonds and bond yields and

659
00:26:56,200 --> 00:27:00,798
essentially we use expected present

660
00:26:57,720 --> 00:27:02,720
discounted value formula just for bonds

661
00:27:00,798 --> 00:27:04,798
and bonds bonds have a very particular

662
00:27:02,720 --> 00:27:07,679
form profile of payment typically some

663
00:27:04,798 --> 00:27:09,398
coupons and some final payment which is

664
00:27:07,679 --> 00:27:12,038
we call it the face value of the bond or

665
00:27:09,398 --> 00:27:14,319
something like that and we said a very

666
00:27:12,038 --> 00:27:17,919
important Concept in bonds is

667
00:27:14,319 --> 00:27:20,359
maturity maturity is the date or the

668
00:27:17,919 --> 00:27:22,679
number of years till the last payment on

669
00:27:20,359 --> 00:27:24,359
that Bond okay doesn't matter whether

670
00:27:22,679 --> 00:27:26,840
you receive lots of little coupons along

671
00:27:24,359 --> 00:27:28,558
the way and one final payment whether

672
00:27:26,839 --> 00:27:31,278
you receive no payment what whatever

673
00:27:28,558 --> 00:27:34,839
until the last date that doesn't matter

674
00:27:31,278 --> 00:27:36,798
the maturity of a bond is the date the

675
00:27:34,839 --> 00:27:38,439
number of years till the last time you

676
00:27:36,798 --> 00:27:41,079
your last payment

677
00:27:38,440 --> 00:27:43,519
okay so we give some examples there a

678
00:27:41,079 --> 00:27:47,599
bond that pays nothing now but pays 101

679
00:27:43,519 --> 00:27:50,480
year from now ER has a has a price is a

680
00:27:47,599 --> 00:27:52,398
pres is discounted value of 100 no one

681
00:27:50,480 --> 00:27:54,000
year divided by one plus the one year

682
00:27:52,398 --> 00:27:57,879
interest rate at time

683
00:27:54,000 --> 00:28:00,440
T um a bond that pays nothing up to two

684
00:27:57,880 --> 00:28:03,159
years and then in the second at the end

685
00:28:00,440 --> 00:28:05,080
then after two years pays $100 then

686
00:28:03,159 --> 00:28:09,120
that's a value the price of that bond

687
00:28:05,079 --> 00:28:11,960
which is 100 discounted by that

688
00:28:09,119 --> 00:28:15,479
okay H then we look at Arbitrage which

689
00:28:11,960 --> 00:28:17,440
is says suppose that you you hold a bond

690
00:28:15,480 --> 00:28:20,240
that that you're considering

691
00:28:17,440 --> 00:28:21,798
investing your money for one year but

692
00:28:20,240 --> 00:28:24,079
you have two options one is to buy a

693
00:28:21,798 --> 00:28:25,759
one-year Bond the alternative is to buy

694
00:28:24,079 --> 00:28:27,879
a two-year Bond now and sell it at the

695
00:28:25,759 --> 00:28:29,079
end of the year those two strategies

696
00:28:27,880 --> 00:28:32,880
should would give you more or less the

697
00:28:29,079 --> 00:28:34,319
same return H well you know if you if

698
00:28:32,880 --> 00:28:37,679
you buy a one-year Bond you're going to

699
00:28:34,319 --> 00:28:40,678
get 1 plus i1t at the end of the year if

700
00:28:37,679 --> 00:28:43,360
you go through the two-year Bond

701
00:28:40,679 --> 00:28:45,200
strategy then H you're going to pay this

702
00:28:43,359 --> 00:28:48,599
today but you're going to you're going

703
00:28:45,200 --> 00:28:51,038
to H ER rece expect you expect to

704
00:28:48,599 --> 00:28:53,719
receive the price of a oneyear bond one

705
00:28:51,038 --> 00:28:56,679
year from now and we said these two

706
00:28:53,720 --> 00:28:59,159
things have to be equal more or less

707
00:28:56,679 --> 00:29:01,919
equal I mean again we're not adding risk

708
00:28:59,159 --> 00:29:03,679
to these things H if there's no risk

709
00:29:01,919 --> 00:29:06,278
consideration of agents at risk neutral

710
00:29:03,679 --> 00:29:08,200
then these two things have to be equal H

711
00:29:06,278 --> 00:29:10,960
that allows you to solve for the price

712
00:29:08,200 --> 00:29:12,919
of a two-year Bond as expected price of

713
00:29:10,960 --> 00:29:14,440
a oneyear bond one year from now divided

714
00:29:12,919 --> 00:29:17,200
by one plus the interest rate but the

715
00:29:14,440 --> 00:29:19,679
expected price of one year bond one year

716
00:29:17,200 --> 00:29:22,600
from now is going to be like a oneyear

717
00:29:19,679 --> 00:29:26,360
bond but one year from now so it's 100

718
00:29:22,599 --> 00:29:28,480
divided 1 + i1 t + 1 expected value I

719
00:29:26,359 --> 00:29:30,278
can stick that in there and I get EX the

720
00:29:28,480 --> 00:29:33,919
same expression okay so these are two

721
00:29:30,278 --> 00:29:38,759
different ways of pricing a

722
00:29:33,919 --> 00:29:40,960
bond or any other asset by

723
00:29:38,759 --> 00:29:43,398
actually and then we Define the yield to

724
00:29:40,960 --> 00:29:46,000
maturity so that's an important

725
00:29:43,398 --> 00:29:51,000
concept yield to

726
00:29:46,000 --> 00:29:53,319
maturity is is is is a is a rate that is

727
00:29:51,000 --> 00:29:57,599
a constant

728
00:29:53,319 --> 00:29:58,639
rate that gives you Thea exactly the

729
00:29:57,599 --> 00:30:00,079
same

730
00:29:58,640 --> 00:30:03,600
that gives you the current price of the

731
00:30:00,079 --> 00:30:07,158
bond okay so we already determined the

732
00:30:03,599 --> 00:30:10,639
the price of a two-year bond is that

733
00:30:07,159 --> 00:30:12,679
okay and now I'm saying well suppose

734
00:30:10,640 --> 00:30:14,519
that let me look for a rate that is the

735
00:30:12,679 --> 00:30:17,440
same in both

736
00:30:14,519 --> 00:30:18,359
periods that gives me the same price and

737
00:30:17,440 --> 00:30:21,080
that's that's the reason I have a

738
00:30:18,359 --> 00:30:25,038
subscript two here at time T so what is

739
00:30:21,079 --> 00:30:29,519
the rate that if I put a constant rate

740
00:30:25,038 --> 00:30:33,599
so I have 1 + I2 T * 1 +

741
00:30:29,519 --> 00:30:36,038
i2t gives me exactly the same price as

742
00:30:33,599 --> 00:30:37,038
the one we already determined okay and

743
00:30:36,038 --> 00:30:40,038
that's what we call the yield to

744
00:30:37,038 --> 00:30:41,558
maturity or the yield or or the end in

745
00:30:40,038 --> 00:30:45,720
this case would be a two-year rate if

746
00:30:41,558 --> 00:30:49,158
you hear what is a two-year rate is that

747
00:30:45,720 --> 00:30:51,759
okay H so so we know what this price is

748
00:30:49,159 --> 00:30:53,480
which is equal to that that's this

749
00:30:51,759 --> 00:30:57,278
expression there so the whole trick here

750
00:30:53,480 --> 00:30:59,079
is to find the 2-year rate at time T

751
00:30:57,278 --> 00:31:01,038
that that gives exactly the same value

752
00:30:59,079 --> 00:31:03,398
that means obviously since 100 is equal

753
00:31:01,038 --> 00:31:07,119
to 100 it means to find the i2t that

754
00:31:03,398 --> 00:31:08,798
gives you this equal to that which would

755
00:31:07,119 --> 00:31:10,599
say is approximate implies that

756
00:31:08,798 --> 00:31:12,960
approximately the twoyear rate is like

757
00:31:10,599 --> 00:31:16,199
an average of the two rate of the two

758
00:31:12,960 --> 00:31:18,079
onee rates okay but this concept you

759
00:31:16,200 --> 00:31:21,038
should know what it

760
00:31:18,079 --> 00:31:23,918
is I said there are two forms of risk in

761
00:31:21,038 --> 00:31:26,038
a bond there one one type of risk is the

762
00:31:23,919 --> 00:31:27,720
fall risk what if the issuer of the bond

763
00:31:26,038 --> 00:31:30,679
doesn't pay you now there's a huge issue

764
00:31:27,720 --> 00:31:32,639
with the US you know Deb ceiling because

765
00:31:30,679 --> 00:31:34,759
if they somehow they don't fix that

766
00:31:32,638 --> 00:31:36,479
there will be a default on some treasury

767
00:31:34,759 --> 00:31:39,759
bonds let's hope that it doesn't happen

768
00:31:36,480 --> 00:31:42,159
but but but that's theault risk is that

769
00:31:39,759 --> 00:31:43,960
whoever issued the debt at the time in

770
00:31:42,159 --> 00:31:47,278
which he should be paying you a coupon

771
00:31:43,960 --> 00:31:49,399
or or the principal the face value it

772
00:31:47,278 --> 00:31:52,960
doesn't pay you that's the fall risk

773
00:31:49,398 --> 00:31:55,558
okay and and and typically US Treasury

774
00:31:52,960 --> 00:31:58,519
bonds don't have the risk so nobody

775
00:31:55,558 --> 00:32:01,398
worries about that at this moment

776
00:31:58,519 --> 00:32:03,798
the default risk price in US bonds for

777
00:32:01,398 --> 00:32:07,359
one month bonds is higher than that of

778
00:32:03,798 --> 00:32:09,558
Mexico the bonds in Mexico or Brazil

779
00:32:07,359 --> 00:32:13,798
that tells you that the kind of things

780
00:32:09,558 --> 00:32:16,000
we have but in any EV so so this is a

781
00:32:13,798 --> 00:32:17,879
temporary default risk I mean nobody

782
00:32:16,000 --> 00:32:20,119
expects in the US that this will not be

783
00:32:17,880 --> 00:32:20,919
eventually repaid but you can cause a

784
00:32:20,119 --> 00:32:24,638
big

785
00:32:20,919 --> 00:32:26,679
mess by just ER delaying a a coupon

786
00:32:24,638 --> 00:32:28,359
payment I mean when when when these

787
00:32:26,679 --> 00:32:31,159
coupons are huge no

788
00:32:28,359 --> 00:32:33,599
and so so that's what's leading to all

789
00:32:31,159 --> 00:32:36,080
this concern but but in any

790
00:32:33,599 --> 00:32:37,439
EV that's one type of risk but we didn't

791
00:32:36,079 --> 00:32:39,599
look at that type of risk a lot the

792
00:32:37,440 --> 00:32:41,200
corporate bonds have a lot of that risk

793
00:32:39,599 --> 00:32:42,798
but we didn't look at that kind of risk

794
00:32:41,200 --> 00:32:45,919
we look at the another kind of risk

795
00:32:42,798 --> 00:32:47,798
which is price risk no if you have a one

796
00:32:45,919 --> 00:32:49,038
you invest in your oneyear bond there no

797
00:32:47,798 --> 00:32:51,038
price risk you're going to get your

798
00:32:49,038 --> 00:32:52,960
coupon your face value of 100 at the end

799
00:32:51,038 --> 00:32:54,919
of the year that's it if you go through

800
00:32:52,960 --> 00:32:56,240
a two-year strategy there's a risk there

801
00:32:54,919 --> 00:32:58,000
because you don't know exactly what the

802
00:32:56,240 --> 00:33:00,319
price of the two oneyear Bond will will

803
00:32:58,000 --> 00:33:03,480
be one year from now and there's a risk

804
00:33:00,319 --> 00:33:06,839
there we are not looking at what risk

805
00:33:03,480 --> 00:33:09,440
Avers cons investors do and so on but in

806
00:33:06,839 --> 00:33:11,558
reality there is such a risk okay and

807
00:33:09,440 --> 00:33:13,798
just the way we mold that is we said

808
00:33:11,558 --> 00:33:16,839
well then if I'm going to go through two

809
00:33:13,798 --> 00:33:19,278
years through a two-year bone route for

810
00:33:16,839 --> 00:33:23,000
a one-year investment then I don't have

811
00:33:19,278 --> 00:33:25,398
to H set this equal to the return I get

812
00:33:23,000 --> 00:33:27,480
in the sh Bond the oneyear bond I have

813
00:33:25,398 --> 00:33:29,079
to add an extra risk premium and then

814
00:33:27,480 --> 00:33:32,440
where right to this formula using the

815
00:33:29,079 --> 00:33:34,240
same steps we said well the one the the

816
00:33:32,440 --> 00:33:37,399
the two-year rate is really the average

817
00:33:34,240 --> 00:33:39,079
of the one expected onee rates plus a a

818
00:33:37,398 --> 00:33:40,239
premium and we call that actually the

819
00:33:39,079 --> 00:33:42,599
term

820
00:33:40,240 --> 00:33:44,399
premium you're more likely to face a

821
00:33:42,599 --> 00:33:45,719
question about the top of this slide and

822
00:33:44,398 --> 00:33:48,518
the bottom of the slide but I don't

823
00:33:45,720 --> 00:33:48,519
remember

824
00:33:48,558 --> 00:33:53,000
fully

825
00:33:50,278 --> 00:33:55,440
ER stock prices and Present Value well

826
00:33:53,000 --> 00:33:56,558
it's the same sort of idea know the only

827
00:33:55,440 --> 00:34:02,360
difference is

828
00:33:56,558 --> 00:34:04,678
that that that uh equities do not have

829
00:34:02,359 --> 00:34:07,479
maturity stocks do not have maturity in

830
00:34:04,679 --> 00:34:10,200
principle a company would last forever

831
00:34:07,480 --> 00:34:12,519
and and and so there's no there's no

832
00:34:10,199 --> 00:34:15,279
maturity and there is also the

833
00:34:12,519 --> 00:34:17,440
commitment of the coupons are a lot

834
00:34:15,280 --> 00:34:19,119
shakier in the sense that you know yeah

835
00:34:17,440 --> 00:34:20,760
compan is likely to give dividends they

836
00:34:19,119 --> 00:34:21,679
may announce a dividend policy but it's

837
00:34:20,760 --> 00:34:24,040
not a

838
00:34:21,679 --> 00:34:26,358
commitment if you know Regional Banks

839
00:34:24,039 --> 00:34:28,279
now are not giving any dividend because

840
00:34:26,358 --> 00:34:30,918
they want to preserve the capital okay

841
00:34:28,280 --> 00:34:32,879
they could but they're not because they

842
00:34:30,918 --> 00:34:34,440
want to build Capital just to be more

843
00:34:32,878 --> 00:34:38,279
resilient

844
00:34:34,440 --> 00:34:40,039
to any fly bad news okay but anyway so

845
00:34:38,280 --> 00:34:42,079
Equity that that means that you always

846
00:34:40,039 --> 00:34:44,440
have this future price floating around

847
00:34:42,079 --> 00:34:46,879
and you can keep substituting this

848
00:34:44,440 --> 00:34:49,720
multiple times and essentially you get

849
00:34:46,878 --> 00:34:51,759
to an expression that says look the the

850
00:34:49,719 --> 00:34:54,118
price of equity is really this the

851
00:34:51,760 --> 00:34:57,000
spected present discounted value of the

852
00:34:54,119 --> 00:34:57,960
dividends H and that includes lots of

853
00:34:57,000 --> 00:34:59,119
uncertainty because because you don't

854
00:34:57,960 --> 00:35:01,000
know exactly where the interest rate

855
00:34:59,119 --> 00:35:03,838
will be in that period and so on and

856
00:35:01,000 --> 00:35:06,480
there's always a a a remaining term out

857
00:35:03,838 --> 00:35:08,799
there which also causes a lot of trouble

858
00:35:06,480 --> 00:35:12,400
in practice

859
00:35:08,800 --> 00:35:13,800
assets equities move a lot more than

860
00:35:12,400 --> 00:35:16,119
than what you can justify with the

861
00:35:13,800 --> 00:35:18,320
Spector present value of

862
00:35:16,119 --> 00:35:20,920
dividends there's a lot of

863
00:35:18,320 --> 00:35:25,200
volatility ER there are bubbles and all

864
00:35:20,920 --> 00:35:28,838
sort of things I told you the story of

865
00:35:25,199 --> 00:35:31,239
Newton and and so on so so this formula

866
00:35:28,838 --> 00:35:33,159
for the bonds those formulas are great

867
00:35:31,239 --> 00:35:35,078
for Equity you're going to be pretty far

868
00:35:33,159 --> 00:35:37,319
off actual prices if you use this type

869
00:35:35,079 --> 00:35:40,359
of formulas still people call this the

870
00:35:37,320 --> 00:35:43,160
fundamental value of equity and then the

871
00:35:40,358 --> 00:35:44,759
rest is sort of more speculative but the

872
00:35:43,159 --> 00:35:47,639
point is that the speculative component

873
00:35:44,760 --> 00:35:49,040
moves at all is is responsible for a

874
00:35:47,639 --> 00:35:51,358
very large share of the volatility in

875
00:35:49,039 --> 00:35:54,079
asset in equity price in any event I'm

876
00:35:51,358 --> 00:35:56,920
not going to ask you about this kind of

877
00:35:54,079 --> 00:35:58,280
yeah for that final equation on the SL

878
00:35:56,920 --> 00:36:02,680
uh there's no

879
00:35:58,280 --> 00:36:06,119
like expression for Q it's here keep

880
00:36:02,679 --> 00:36:08,358
going forever it doesn't stop yeah it

881
00:36:06,119 --> 00:36:09,880
just discounted more and more and more

882
00:36:08,358 --> 00:36:11,880
so you would expect it to be less and

883
00:36:09,880 --> 00:36:15,519
less important but if the thing is

884
00:36:11,880 --> 00:36:18,000
blowing up then you know it maybe it may

885
00:36:15,519 --> 00:36:19,559
dominate the the the the heavier and

886
00:36:18,000 --> 00:36:22,039
heavier discounting because it's further

887
00:36:19,559 --> 00:36:23,960
further out in the future and that's the

888
00:36:22,039 --> 00:36:25,800
way you create theories of bubbles you

889
00:36:23,960 --> 00:36:29,000
can even come up with rational bubbles

890
00:36:25,800 --> 00:36:32,680
into the way but again that's what of

891
00:36:29,000 --> 00:36:34,039
course uh what else ah then we look at

892
00:36:32,679 --> 00:36:36,078
what is the effect of an expansionary

893
00:36:34,039 --> 00:36:38,039
monetary policy on asset prices and we

894
00:36:36,079 --> 00:36:39,200
said well obviously it's going to if

895
00:36:38,039 --> 00:36:41,440
lower interest rate that's going to

896
00:36:39,199 --> 00:36:44,118
increase the value of any asset that

897
00:36:41,440 --> 00:36:45,760
pays in the future returns and so it

898
00:36:44,119 --> 00:36:48,640
typically is typically the case that

899
00:36:45,760 --> 00:36:50,400
that expansion in Monet monetary policy

900
00:36:48,639 --> 00:36:53,920
will lead to an appreciation of all

901
00:36:50,400 --> 00:36:56,720
assets uh most assets but certainly

902
00:36:53,920 --> 00:36:58,159
bonds will go up directly because that's

903
00:36:56,719 --> 00:37:00,279
where the interest rate has the maximum

904
00:36:58,159 --> 00:37:01,639
the clearest effect but it's also the

905
00:37:00,280 --> 00:37:04,119
case that it tends to be bullish for

906
00:37:01,639 --> 00:37:07,559
Equity as well no it's that got interest

907
00:37:04,119 --> 00:37:11,160
rate and that a lot of the response of

908
00:37:07,559 --> 00:37:13,719
equity to news has to do with expected

909
00:37:11,159 --> 00:37:14,960
behavior of the FED in the future do you

910
00:37:13,719 --> 00:37:16,399
think that this will lead them to

911
00:37:14,960 --> 00:37:18,679
increase interest rate or to lower

912
00:37:16,400 --> 00:37:20,280
interest rate and things of that kind

913
00:37:18,679 --> 00:37:22,078
and again I think that's a little too

914
00:37:20,280 --> 00:37:24,319
complicated for you for

915
00:37:22,079 --> 00:37:26,079
now it said what is the effect of an

916
00:37:24,318 --> 00:37:29,800
increase in consumer spending on asset

917
00:37:26,079 --> 00:37:32,200
prices well that depends I mean it's

918
00:37:29,800 --> 00:37:33,800
clear that that if consumers become more

919
00:37:32,199 --> 00:37:36,480
bullish that's going to tend to lead to

920
00:37:33,800 --> 00:37:38,400
more cash flows for the firms so Equity

921
00:37:36,480 --> 00:37:40,519
at least will go up bonds no because

922
00:37:38,400 --> 00:37:42,480
they don't the coupon is set fixed

923
00:37:40,519 --> 00:37:44,440
doesn't depend on whether the econom is

924
00:37:42,480 --> 00:37:47,199
doing better or worse I'm assuming

925
00:37:44,440 --> 00:37:48,720
there's no default risk ER but it

926
00:37:47,199 --> 00:37:51,199
depends a lot of what you expect the FED

927
00:37:48,719 --> 00:37:53,039
to do if the FED if you think that this

928
00:37:51,199 --> 00:37:55,598
is going to trigger a Fed hike then it's

929
00:37:53,039 --> 00:37:58,480
bad news for bonds you know because the

930
00:37:55,599 --> 00:38:00,680
F the bonds do not benefit from the

931
00:37:58,480 --> 00:38:03,000
economic activity and and they get hurt

932
00:38:00,679 --> 00:38:04,799
by higher interest rate so it depends a

933
00:38:03,000 --> 00:38:07,000
lot on what you anticipate the FED to do

934
00:38:04,800 --> 00:38:08,839
or not but again I think this is a bit

935
00:38:07,000 --> 00:38:13,000
more complicated than what you need to

936
00:38:08,838 --> 00:38:16,000
know okay the last step was

937
00:38:13,000 --> 00:38:17,960
to H bring expectations into the aslm

938
00:38:16,000 --> 00:38:20,440
model I said the model we discussed

939
00:38:17,960 --> 00:38:22,400
through the course on the aslm except

940
00:38:20,440 --> 00:38:25,280
for the part where we put the exchange

941
00:38:22,400 --> 00:38:26,720
rate where we you know we we have to

942
00:38:25,280 --> 00:38:28,880
think about the future exchange rates

943
00:38:26,719 --> 00:38:31,000
and things like that it was really

944
00:38:28,880 --> 00:38:33,119
overweight the present in reality

945
00:38:31,000 --> 00:38:35,559
expectations matter a lot for consu

946
00:38:33,119 --> 00:38:37,640
consumers decisions for firm's decisions

947
00:38:35,559 --> 00:38:40,920
and so on probably matters even more

948
00:38:37,639 --> 00:38:46,118
than the future than the present okay

949
00:38:40,920 --> 00:38:49,159
ER and so so what we did is we expanded

950
00:38:46,119 --> 00:38:51,800
H the islm to include expectation we see

951
00:38:49,159 --> 00:38:54,799
well consumers not only worry about

952
00:38:51,800 --> 00:38:57,318
disposable income this part will show up

953
00:38:54,800 --> 00:38:59,440
in your test so so you should understand

954
00:38:57,318 --> 00:39:02,318
what what the eslm model is and do the

955
00:38:59,440 --> 00:39:04,920
comparative Statics that correspond to

956
00:39:02,318 --> 00:39:06,800
this model so what we did here is as

957
00:39:04,920 --> 00:39:09,480
well consumers not only worry about the

958
00:39:06,800 --> 00:39:11,318
current disposable income H they also

959
00:39:09,480 --> 00:39:13,719
worry about the income they receive in

960
00:39:11,318 --> 00:39:15,960
the future through financial asset

961
00:39:13,719 --> 00:39:17,719
Financial wealth or through their future

962
00:39:15,960 --> 00:39:19,800
labor income that's what we call human

963
00:39:17,719 --> 00:39:21,959
wealth but the point is that

964
00:39:19,800 --> 00:39:24,160
expectations about the future matter for

965
00:39:21,960 --> 00:39:27,079
consumption in the first part of the

966
00:39:24,159 --> 00:39:28,879
course we we summarize all that in that

967
00:39:27,079 --> 00:39:31,000
little parameters c0 which said

968
00:39:28,880 --> 00:39:32,960
consumers can be bullish or not but a

969
00:39:31,000 --> 00:39:35,519
lot of what happens here is what shifts

970
00:39:32,960 --> 00:39:37,880
c0 in the first part of the of the

971
00:39:35,519 --> 00:39:40,559
course and and this also highlight an

972
00:39:37,880 --> 00:39:42,480
important concept which is typically if

973
00:39:40,559 --> 00:39:45,199
you expect something to have only a

974
00:39:42,480 --> 00:39:47,519
temporary transitory consequence it will

975
00:39:45,199 --> 00:39:49,159
move consumption little relative to when

976
00:39:47,519 --> 00:39:52,039
you expect that change to be permanent

977
00:39:49,159 --> 00:39:53,960
so you expect current income to be up

978
00:39:52,039 --> 00:39:55,838
but but future income to go back to a

979
00:39:53,960 --> 00:39:57,960
lower level that's not going to change

980
00:39:55,838 --> 00:39:58,960
current consumption a lot however if you

981
00:39:57,960 --> 00:40:01,440
think there's a change that will

982
00:39:58,960 --> 00:40:03,400
increase in consumers income permanently

983
00:40:01,440 --> 00:40:05,400
up well that will increase not only this

984
00:40:03,400 --> 00:40:07,000
but also wealth human wealth and that

985
00:40:05,400 --> 00:40:08,960
will lead to a much larger response of

986
00:40:07,000 --> 00:40:11,280
consumption

987
00:40:08,960 --> 00:40:13,039
okay we did more or less for the same

988
00:40:11,280 --> 00:40:15,519
for investment obviously what matters

989
00:40:13,039 --> 00:40:17,960
for investment is the is future cash

990
00:40:15,519 --> 00:40:20,199
flows and and there we talk about the

991
00:40:17,960 --> 00:40:21,800
concept of depreciation but really was

992
00:40:20,199 --> 00:40:24,358
this was expected present discounted

993
00:40:21,800 --> 00:40:28,280
value of the cash flow generated by by

994
00:40:24,358 --> 00:40:30,559
an extra unit of capital so expected per

995
00:40:28,280 --> 00:40:34,079
Val discounted value

996
00:40:30,559 --> 00:40:36,000
formula so we said you know we we in the

997
00:40:34,079 --> 00:40:38,240
first part of the course we just look at

998
00:40:36,000 --> 00:40:39,719
an investment function that has output

999
00:40:38,239 --> 00:40:40,959
here and then we have an interest rate

1000
00:40:39,719 --> 00:40:43,559
here where now we have something that's

1001
00:40:40,960 --> 00:40:45,519
more complicated has future output which

1002
00:40:43,559 --> 00:40:47,639
has appr proxim for future cash flows

1003
00:40:45,519 --> 00:40:50,119
but also current and future interest

1004
00:40:47,639 --> 00:40:52,679
rates because those affect the value of

1005
00:40:50,119 --> 00:40:53,838
those future cash flows H in terms of

1006
00:40:52,679 --> 00:40:56,919
today's

1007
00:40:53,838 --> 00:40:59,480
dollars and we put all of this together

1008
00:40:56,920 --> 00:41:03,599
and we ended up with an expanded

1009
00:40:59,480 --> 00:41:05,838
aggregate demand in which ER you know in

1010
00:41:03,599 --> 00:41:09,920
which we had the same parameters that we

1011
00:41:05,838 --> 00:41:12,719
had ER when we did the static

1012
00:41:09,920 --> 00:41:15,838
model without expectations but now we

1013
00:41:12,719 --> 00:41:18,279
get sort of the same things repeated

1014
00:41:15,838 --> 00:41:20,078
here one year ahead because it it

1015
00:41:18,280 --> 00:41:22,160
matters not only for aggregate demand

1016
00:41:20,079 --> 00:41:24,720
not only the income the consumers are

1017
00:41:22,159 --> 00:41:26,358
receiving today or the sales that firms

1018
00:41:24,719 --> 00:41:29,318
are making today but also what they

1019
00:41:26,358 --> 00:41:31,000
expect to have next year here it matters

1020
00:41:29,318 --> 00:41:32,400
what the taxes they're paying today but

1021
00:41:31,000 --> 00:41:35,119
also what they expect to pay in the

1022
00:41:32,400 --> 00:41:37,000
future the interest rate matters not

1023
00:41:35,119 --> 00:41:38,519
only today but also what they expect the

1024
00:41:37,000 --> 00:41:42,440
interest rate to be in the future and so

1025
00:41:38,519 --> 00:41:45,800
on okay so the bottom line is that we if

1026
00:41:42,440 --> 00:41:47,679
we now look at the slm model I said now

1027
00:41:45,800 --> 00:41:48,960
we have lots of more parameters all

1028
00:41:47,679 --> 00:41:50,199
these things that happen in the future

1029
00:41:48,960 --> 00:41:54,039
are new

1030
00:41:50,199 --> 00:41:57,838
parameters H I said notice notice that

1031
00:41:54,039 --> 00:41:59,440
also this curve now is a lot steeper

1032
00:41:57,838 --> 00:42:01,880
why is that well because if you change

1033
00:41:59,440 --> 00:42:03,838
the interest rate today without without

1034
00:42:01,880 --> 00:42:07,119
changing the interest rate in the future

1035
00:42:03,838 --> 00:42:10,838
then that has a small effect okay and so

1036
00:42:07,119 --> 00:42:12,358
I said now this is becomes very steep

1037
00:42:10,838 --> 00:42:14,880
but the equivalent to what we did the

1038
00:42:12,358 --> 00:42:16,880
static model is a is a situation where

1039
00:42:14,880 --> 00:42:18,280
you cut the interest rate today say the

1040
00:42:16,880 --> 00:42:20,838
Central Bank cuts the interest rate

1041
00:42:18,280 --> 00:42:22,559
today but it also convinces the public

1042
00:42:20,838 --> 00:42:25,039
that they will also keep the interest

1043
00:42:22,559 --> 00:42:27,880
rate low in the next period that is not

1044
00:42:25,039 --> 00:42:30,279
only you move along the SAS but you also

1045
00:42:27,880 --> 00:42:32,079
persuade the public that the interest

1046
00:42:30,280 --> 00:42:34,880
rate will be lower in the future that

1047
00:42:32,079 --> 00:42:35,839
will shift yes to the right and then

1048
00:42:34,880 --> 00:42:37,800
therefore therefore you're going to get

1049
00:42:35,838 --> 00:42:40,480
a much larger kick out of monetary

1050
00:42:37,800 --> 00:42:42,800
policy and pol monetary policy is a lot

1051
00:42:40,480 --> 00:42:44,318
about forward guidance is that you know

1052
00:42:42,800 --> 00:42:46,000
you cut interest rate today but you're

1053
00:42:44,318 --> 00:42:48,039
also telling there's always a speech

1054
00:42:46,000 --> 00:42:50,318
after they they take the policy action

1055
00:42:48,039 --> 00:42:52,239
which they talk about how they see

1056
00:42:50,318 --> 00:42:54,558
interest rates going in the future and

1057
00:42:52,239 --> 00:42:57,759
all of that that's because you want to

1058
00:42:54,559 --> 00:42:59,079
have maximum power okay if you if if you

1059
00:42:57,760 --> 00:43:00,160
just tell the market I'm going to change

1060
00:42:59,079 --> 00:43:02,079
the interest rate for now and then

1061
00:43:00,159 --> 00:43:04,679
nothing else that's going to have a very

1062
00:43:02,079 --> 00:43:06,720
limited impact to have a large impact

1063
00:43:04,679 --> 00:43:08,358
out of monetary policy you have to

1064
00:43:06,719 --> 00:43:11,039
convince them that you will also affect

1065
00:43:08,358 --> 00:43:13,799
the interest R path in the

1066
00:43:11,039 --> 00:43:16,239
future same sort of situation here the

1067
00:43:13,800 --> 00:43:18,960
other parameters is what happens if for

1068
00:43:16,239 --> 00:43:21,759
example you expect future output to go

1069
00:43:18,960 --> 00:43:23,920
up H well that's going to shift a yes to

1070
00:43:21,760 --> 00:43:25,200
the right that's yet another reason why

1071
00:43:23,920 --> 00:43:27,559
convincing people that you're going to

1072
00:43:25,199 --> 00:43:29,000
cut interest rate in the future as well

1073
00:43:27,559 --> 00:43:31,839
they going to keep them low in the

1074
00:43:29,000 --> 00:43:33,199
future shift yes even more because if

1075
00:43:31,838 --> 00:43:34,679
you're going to keep the interest rate

1076
00:43:33,199 --> 00:43:36,919
low in the future that means probably

1077
00:43:34,679 --> 00:43:38,358
the future output will be higher and

1078
00:43:36,920 --> 00:43:40,440
since future output is higher that

1079
00:43:38,358 --> 00:43:43,358
increases human wealth and that means

1080
00:43:40,440 --> 00:43:46,920
consumption will tend to go up okay but

1081
00:43:43,358 --> 00:43:49,279
do play with this and and again the the

1082
00:43:46,920 --> 00:43:51,440
it's important to have this distinction

1083
00:43:49,280 --> 00:43:54,440
between the impact of temporary things

1084
00:43:51,440 --> 00:43:56,079
which is much smaller and and the the

1085
00:43:54,440 --> 00:43:57,720
impact of permanent things which is

1086
00:43:56,079 --> 00:44:00,680
bigger because it affect

1087
00:43:57,719 --> 00:44:00,679
wealth

1088
00:44:01,400 --> 00:44:08,760
okay oh that's an example okay so

1089
00:44:04,199 --> 00:44:10,318
monetary policy again ER that's just if

1090
00:44:08,760 --> 00:44:11,359
if you don't persuade the public that

1091
00:44:10,318 --> 00:44:12,960
you're going to change the interest rate

1092
00:44:11,358 --> 00:44:16,440
in the future then it just a movement

1093
00:44:12,960 --> 00:44:19,639
along but if you also convince them that

1094
00:44:16,440 --> 00:44:22,400
you will remain sort of H lose monetary

1095
00:44:19,639 --> 00:44:24,118
conditions in next year then that that

1096
00:44:22,400 --> 00:44:25,639
effectively shift the yes to the right

1097
00:44:24,119 --> 00:44:29,920
for for a variety of Reon for two

1098
00:44:25,639 --> 00:44:32,078
reasons at least that's much more

1099
00:44:29,920 --> 00:44:34,400
expansionary the last thing we did is

1100
00:44:32,079 --> 00:44:36,160
fiscal policy I said well fiscal policy

1101
00:44:34,400 --> 00:44:39,079
fiscal policy today is contraction and

1102
00:44:36,159 --> 00:44:40,799
there's no doubt of that but it can have

1103
00:44:39,079 --> 00:44:43,359
but there are episodes and I show you

1104
00:44:40,800 --> 00:44:45,720
the Irish episode in which actually may

1105
00:44:43,358 --> 00:44:47,480
end up going the other way around in

1106
00:44:45,719 --> 00:44:49,318
which you cut expenditure today which is

1107
00:44:47,480 --> 00:44:51,599
contractionary but you end up actually

1108
00:44:49,318 --> 00:44:54,039
having an expansion but for that the

1109
00:44:51,599 --> 00:44:55,838
only way that can happen is that if

1110
00:44:54,039 --> 00:44:58,079
somehow you affect expectations in a

1111
00:44:55,838 --> 00:45:01,279
very significant way so that's what I

1112
00:44:58,079 --> 00:45:04,079
said if if you ever get sort of a a a

1113
00:45:01,280 --> 00:45:06,119
strange correl response to to a policy

1114
00:45:04,079 --> 00:45:09,039
announcement is probably because there

1115
00:45:06,119 --> 00:45:10,480
has been a big effect on expectations so

1116
00:45:09,039 --> 00:45:12,480
I show you the case of Ireland because

1117
00:45:10,480 --> 00:45:14,119
there a case that was famous in which

1118
00:45:12,480 --> 00:45:16,119
all the people talk about there was a

1119
00:45:14,119 --> 00:45:18,480
fiscal deficit as the big drug in the

1120
00:45:16,119 --> 00:45:21,000
economy that there was going to be a big

1121
00:45:18,480 --> 00:45:23,199
Day of Reckoning and that you and so on

1122
00:45:21,000 --> 00:45:25,358
so forth so once they dealt with it sort

1123
00:45:23,199 --> 00:45:27,000
of expectations they realize they could

1124
00:45:25,358 --> 00:45:30,159
cut interest rates then they could

1125
00:45:27,000 --> 00:45:31,760
realiz that that that also that that

1126
00:45:30,159 --> 00:45:33,558
this Malay and the economy was going to

1127
00:45:31,760 --> 00:45:35,400
go away so people became optimistic

1128
00:45:33,559 --> 00:45:38,200
about the future and so on and they end

1129
00:45:35,400 --> 00:45:41,280
up with an expansion okay that shows you

1130
00:45:38,199 --> 00:45:44,358
how important expectations are so

1131
00:45:41,280 --> 00:45:46,359
economic policy in general you the the

1132
00:45:44,358 --> 00:45:48,519
direct immediate effect is what we have

1133
00:45:46,358 --> 00:45:51,119
been discussing throughout the course

1134
00:45:48,519 --> 00:45:53,920
but a lot of its power and even the sort

1135
00:45:51,119 --> 00:45:55,800
of perverse or or or or good synergies

1136
00:45:53,920 --> 00:45:58,519
that you get out of them has to do with

1137
00:45:55,800 --> 00:46:01,519
what you do to with expect patience okay

1138
00:45:58,519 --> 00:46:01,519
good