Guest lecture – Klaas Knot

Tail event
IS-LM equilibrium

The higher the borrowing cost, the less spending will take place
Conclave curve  Look up

LM curve = equilibrium in money market

Phillips Curve= relationship between unemployment and inflation

Models are useless, but modelling is essential

Severe scenario would e.g. be the case when the Vaccins did not work at all.

Inflation is a different story. More a shock than in previous slide.

Bottlenecks in supply  lack of container capacity, Chinese harbour problems.

Negative demand shock  lower inflation, lower demand

Negative supply shock  Higher inflation,

If the supply shock was higher than the demand shock we would expect higher inflation.
During Covid, there was immediately a shock in demand.  Less vacation, diners
Supply shock became clear after a while.
Inflation partly due to the raise in energy prices. The Dutch bank expects the inflation to go back to
2%.
If the energy prices stabilize, the effect on inflation will disappear. If energy prices raise further the
inflation will raise again. But since inflation is measured respectively to the last year’s price. So on
aggregate raise in energy prices are a one shock.

This might be an end of the monetary policy of buying assets, negative interest rates.

A lot of contracts are made on inflation in financial markets.

Dark part is that expects inflation to be below 1,5% again. Light part expect inflation to stay 2,5%. The
smallest part is what the CB wants the inflation to be between 1,5 – 2,5%
So if you look at this the graph the inflation outlook which is set by the market looks pretty consistent
around 2%.

Stock market prices the future. Because stocks are priced on future earnings.
Calm returned in 2021, but partly because of the policy.
The dotted circle indicates that the volatility is rising because of omikrom, but in relation to the huge
spike in Jan 2020 we can say that it is not a macro event.

Saving rate increased.

- Because of uncertainty
- Because of forced saving, because it was not possible to go to Restaurants, vacations etc
No incomes for corporates, but costs. So there was a huge demand for additional credit.
Banks might be less willing to lend, because of the increased risk profile.

Cash is an alternative to bank deposits.

Effective lower bound
Term Premium  For bonds around 10 years.
Corporate borrow for 5 year
Consumers mortgage borrower for 10-15 years.
End pandemic emergency purchase programme in march 2022. (Pepp)
Pepp had less jurisdictions and was flexible. If there was more stress in Italy than Germany, they
would by Italian Bonds.

Bonus question
Current spike in inflation
Demand Shock
Supply shock
demand shock will press inflation down, and that was instant, and supply shock will press inflation
up, and that was with a small delay. That is the answer right

Goal of CB is inflation of 2% over the medium turn.

Inflation might be constant because the goods that are in the basket that determines the inflation
use a lot of energy.
Temporary inflation to constant inflation depends on wages.
Klaas thinks that wages will increase. Wages in the Netherlands are only 2% up. But workers still find
it acceptable.