 Okay, thanks a lot. It's a great honor to be here to honor you. I would like to resonate very much what President Mario Draghi said about your abilities, your interest, your curiosity in macro finance, in particular financial stability and our discussions we had over the years. I value them very much. In particular, remember when we once walked on the banks of the River Rhine and we talked about various things in particular one particular issue. And it also showed you open-mindedness and your curiosity in the intellectual exchange. I really value this and I hope you can stay in touch afterwards. What I want to talk today, I want to talk about financial frictions in macro models. I think that's one of the themes Constancia was pushing very much so within the ECB and the ECB actually was doing a lot of progress in these dimensions. But I would like to go a little beyond that. Also go into tokens and blockchains and inside money creation. Because once you think of financial frictions, money has a particular role and then actually new forms of money might interplay with that. And so the talk will be in two parts. One is on the macro models and the second part will be on the models of money in the digital age. And I will also touch upon some currency competition which some things I'm recently interested in. But the first part is on macro models and essentially I would like to say one aspect which came up before is a shift away from impulse response functions much more to a risk dynamics or resilience view of the macro economy. So additionally what we did in macro economics essentially we have a one-time shock and the one-time shock hits the economy like say here and then it propagates over time so it will last even though it's a one-time shock it will last long and it might be amplified because it feeds back and so it might be amplified much more today as well. So there's a persistent element to it and there's an amplification. The famous models Benaki Götler-Gerlich risk, Kiotaki Moore and so forth who have pushed this line. But importantly that they return to the steady state is actually deterministic. So once you have a shock you for sure everybody in the economy knows that you walk back. There's no uncertainty how long the recession will last and how risky it will be subsequently. And that's essentially what was the predominant few before the crisis. And with financial frictions risk matters a lot because essentially finance is mostly about risk and the question is how to capture more risky, more rich environment which captures the resiliency of the system and whether we drop off to a lower growth path or whether we return back to the existing growth path. So what the macro literature has done since the crisis is very much focused on non-linearities saying there's not a linear effect so it can be very different once you move further away from the steady state so things amplify much more dramatically. And this if you put it in a model even though the shock itself has no fat tails so it's let's say a normally distributed shock then the outcome in the economy has fat tails because the non-linearities translate a normal shock into a shock with fat tails. And you get skewness or downside shocks act very differently from upside shocks and with financial frictions that's very natural because a downside shock comes with capital constraints and other liquidity constraints which amplifies in downside but not might not amplify so much in the upside. So you get skewness in the macro dynamics. And what I would like to stress is this endogenous volatility dynamics. So the volatility might change dramatically and is time varying. So it's not always the same suddenly volatility we go in a much more volatile environment and things move around. So what I've plotted here is just if you have a state variable you have a drift which is given by this so the state variable is essentially at the steady state at this point because the drift is zero so it doesn't here the drift is negative so the system drifts back and here the drift is positive it drifts to this and you end up in this stochastic steady state but it's never the case that you're in this steady state because the system is constantly shocked and the volatility itself is also much higher. So in this range the volatility is just given by the fundamental volatility but in that range below the steady state you have the total volatility because it's the fundamental volatility plus some amplification some endogenous volatility which makes the total volatility much higher. So new macro will reflect all this stochastic volatility environments and makes us a much richer environment. And what does it mean to have this stochastic volatility? The precautionary motive plays a very important role because if the world becomes more uncertain people shift into different assets to behave differently they're safe more and everything feeds back and makes the whole world and again more stochastic. Okay that's essentially what this does and two paradox we essentially I would like to emphasize and stress here is the volatility paradox. The volatility paradox says if the current volatility is very low if you measure the volatility is very low then the risk is building up in the background and be aware that's actually when the times are most risky. So that's essentially low measures of volatility is actually a danger rather than a sign of a great moderation. And the second one is this paradox of prudence and I will come back to this. Essentially what's micro prudent is not necessarily macro prudent it's most likely macroimprudent. Okay that's essentially very close to Keyneson's paradox of drift just applied to the risk space rather than the consumption saving space. So that's essentially what I wanted to stress and the second component which essentially comes more from the finance literature which entered a macro if you focus on traditional macro if you saw how the asset prices how they affected, how a long jump on price affected they're most affected by exchange in cash flows. If you change the interest rate there will be less interest rates down the road but the reason literature is actually shown that actually this stochastic this con factor matters much more and the stochastic this con factor reflects risk premia. So essentially risk premia met a much more news about the confidence and risk premia met a much more than the cash flow news itself. And that's empirically well documented in the failure of the expectations hypothesis the expectations hypothesis essentially saying that future risk, future interest rate matter for understanding long jump on prices but empirically what matters is much more the change in the risk premia. The same is true for the uncovered interest repairity and other puzzles, empirical puzzles which all point to a time varying risk premia as a key driver in the macro economy. Of course it makes the whole modeling way more challenging because we have to go away from a stock and a flow analysis much more to a risk and a risk premium analysis and that's a much more difficult animal to handle especially if it's moving around if it's time varying. So that's essentially the shift in macro models away from stock flow to more risk perspective and a resilience perspective. Then I would like to go once you go to this risk perspective to say oh the markets are imperfect the financial markets are imperfect and then a natural role for money emerges because you would like to hold some money because there's a risky world out there and hopefully money is less risky and people rush into money. Okay so where's the traditional models and the old G model which is traditional way to justify money but there's also money as a store of value or as a safe asset where the beauty model, you know, money essentially is the way to save in a safe form and you have some idiosyncratic endowment shocks you have some labor income suddenly the unemployment uncertainty is much going up then you would like to save more and then demand for money is growing up. I've worked with Ulyssanikov on a different type of model there's also idiosyncratic risk but idiosyncratic risk comes with investment so physical capital investments have become much more risky in recessions and then you would like to shift your portfolio more into less risky money rather than investing in capital so everybody shifts away from physical capital investments towards much less risky money investments and then there's of course the money as a medium of exchange and money has a lower transaction cost and that's essentially models of outside money where there's no big role for the financial sector and of course then what you want to do is you want to create a financial sector which should be core of any macro model which creates this money inside money not only the outside money but also inside money and banks play a particular role not only a monitoring role but also diversifying a way some of this idiosyncratic risk you have in various models and they can absorb and diversify a way the syncratic risk and if the banks under capitalized they cannot do this job anymore and they push idiosyncratic risk back to the households and that leads to even more money demand more banks that create some inside money and the inside money that will come back to this might be even better than outside money as a medium of exchange and we will come back in future types of money it might be that there might be new forms of money where the banks or IT firms play a more important role so let me just say to this the second idea essentially that if you look back in history we have different forms of money this is a yab stone which was the unit of account it's a fixed supply, it's hard to forge and you can see one of this outside monies it's a good unit of account but it's not a good medium of exchange you can try it and lift it and see whether you can pause it onto somebody else so typically what you would like to have here is essentially pause on this medium of exchange to somebody else and if you can't pause it on what you derive claims from this thing so as somebody comes along I give you a token or a piece of paper which gives you a claim on this type of stone and then this piece of paper is traveling around when you make payments that's essentially creating inside money and I will come back new forms of money in form of tokens, electronic tokens will do the same thing gold is the same thing but the interesting is typically new forms of money like bitcoin and cryptocurrencies are criticized for being a bad store of value and for being bad mediums of exchange because it can't handle the transaction volume but Visa card and other electronic forms of money inside money do but the same it could have been said to gold in the olden days whenever there was a new discovery of a new gold source suddenly the value of gold changed dramatically or whenever a new ship came from the new world to the old world and suddenly gold supply tripled so you could have said the volatility was very high so you could have criticized gold as a good source of outside money as well and there's this famous paper by Tom Sarge and François Valdes saying the big problem is small change so the problem is essentially if you have gold coins it's they're too valuable to pay little things okay and that was a big problem so it was not a gold itself was not an ideal way to do the role of medium of exchange either so in a sense there is you know for different forms of outside money like gap stones or gold are not the ideal form either and this is a way we should see in the context of new cryptocurrencies and how this, the things will play out so essentially we will always end up most likely with a two tier financial system with fractured reserve banking and as was mentioned before the initiative in Switzerland which will be voted upon on two 10s is along this line to get rid of this fractured reserve banking so you will have an anchor currency this gold or the gap stone which will serve as a unit of account and you will have some currency which is essentially not a claim to anybody but then you have deposits which essentially is inside money on these anchor currencies and that serves mostly as a medium of exchange and then you have credit and you have this triangle here where the anchor is typically a very small supply but then the credit is expanding and the triangle is expanding essentially at the bottom up and down and the banking of this initial anchor could be commodity like gold could be less liquid credit claims or it could be just data so it might be just some data control by certain IT firms so let me go back to this two tier financial system and emphasize this is from my work with Unisonicov essentially how such a fractured reserve banking system is prone to things we have seen and Victor has experienced during the crisis so you have essentially banks which have some risky claims let's say some credit and loans to one sector in particular and this sector is also holding some money and the bank is issuing inside money there will be some outside money that's in form of reserves which is held by the banking sector and let's see what happens if you have a negative shock to one sector in the economy for which the banking sector is very exposed to so it could be some housing sector whatever sector it is and let's dissect the whole shock the implications of the shock into four steps so the first step essentially is that there will be some losses in the assets but because the banks have exposure to this sector the banks will suffer too and of course they can diversify across these sectors so there will be some average of some assets will lose more others will lose less and the banks diversify across this but there will be an overall loss if it's a sector-wide shock or a macro-economy-wide shock the banks will suffer and their net worth is going down and if these risky claims go down by 5% because of leverage the net worth will go down by much more than 5% by 40% and this way after the loss the banks will be way more levered than there are before and what is the micro-bruden response to that the micro-bruden response to this is to shrink a balance sheet so that's what triggers the whole thing now if you can just say let's stop here and the banks keep on doing and diversify all the cities and got a risk from the sector away things will be fine but now they shrink the balance sheets and they're de-lever so essentially they extend less credit to this and this extending less credit means this sector has to shrink the balance sheets too and they have to fire sell some of the assets and this fire selling of these assets will actually lead to this liquidity spirals and depressed the asset price even further which lowers the asset value of this sector as well lowers the risky claims which hurts the banks again so if there would be one monopolistic bank it wouldn't do that but if they're competing banks they don't internalize this fires externalities and that's why it translates into more losses for the other banks and that's where this paradox of prudence comes in so if you think of every bank on its own is acting micro prudent they say after the shock I was way more levered I have to bring back my leverage ratio again and that's actually a prudent thing to do but by doing this you fact all the asset prices and that makes the whole thing on the macro scale much more dangerous and much more risky because you lose them further on the assets of the sector you lose risky claims value and this actually brings losses down further and that's essentially what is micro prudent might not be micro prudent it's the same thing as what Keynes said in the saving space if everybody starts to save at a higher rate if I save more than I spend less and your income is less and hence the total income is going down it's and we ultimately save in dollar terms or in euro terms we save less so the interesting thing is also that when the banks still ever not only on the asset side there's this fire sellers going on but there are also great less inside money when there's a great less inside money total money supply shrinks so the inside money so outside money supply is still fixed but the inside money is shrinking so total money supply is shrinking and that leads to disinflationary pressures and lower inflation and that lowers this increases the real value of this liabilities for the banks which shrinks the net worth even further so I might say what's about money demand what happens money supply shrinking but money demand is actually expanding why? because the banks that take out idiosyncratic risk and the economy diversified away and if they're not active anymore the idiosyncratic risk has to be held back by the households and as the households have to hold more idiosyncratic risk they shift away from physical investments into more money holding so the portfolio choice which let's say was 70-30 before will now be 60-40 so they want to ask more money so you have a shrinkage in money supply and expansion in money demand and both forces essentially lead to lower inflation and to less activity in the real economy and so forth and this essentially you would like to stop that's where the central bank comes in and essentially as the inside money shrinks you expand the outside money and contrast that and this might also be done just through stabilizing the financial banking system now let me go back to this essentially you can think of this triangle you can think as inside money expands and shrinks and holding outside money fixed you can think of this triangle essentially going together in the recession and expansion expands further and that's essentially the way you can think this outside money and not inside money kicking in now in a world with a digital economy we have to rethink money the way it is but we essentially we don't have to rethink so much we just go back to the foundations and there will be some new elements to it so what's the role of cash and reserves what forms of money will emerge you know what should central banks endorse and fight should they fight digital money or central bank digital currencies should they endorse cryptocurrency or the blockchain technology more generally and how does it affect the competition among currencies and that's essentially what I want to focus in and then I talk at the end about tokenization so that's basically what paper I've done with Joseph Abadi so the first thing you might ask you know how does the old system was we always had a centralized ledger and it was controlled by some intermediaries that keep track of the banking accounts and all this and the way you incentivize a bank from not lying and from not distorting the facts is through a franchise value so you give them in dynamic incentives over time if they're lied, they lose the franchise value and then you know the value goes away in a blockchain environment you have many people who keep track of the same ledger so it's distributed it's distributed and you keep essentially you lose the centralized franchise value because there's free entry so everybody can become a miner or write on a blockchain and so you don't have this franchise value so this dynamic incentivization is gone you essentially need some static incentivization so essentially you can classify this in things so if you have the traditional setting you have one monopolist let's say and he has a franchise value or a few players he has a franchise value you can incentivize this monopolist to do the right thing by giving him some franchise value you have some carrots over time he doesn't want to ruin his future in profits so he will actually do the right thing on the other hand if you have a blockchain you don't have the dynamic incentivize free entry so you have many potential writers and you need a different incentive scheme and the way you can characterize blockchain so the private existing system is very much centralized intermediaries who keep track of things on a ledger or on a central record keeping device and blockchains with a public blockchain are down there permission blockchains are in between so as a permission blockchains are essentially settings like Ripple who are actually a few players have the right to write on this ledger and not many of them I mean nobody can there's no free entry so in between okay so the last thing I would like to emphasize is the fork so once you have a blockchain a blockchain consists of a chain of blocks that's why it's called blockchain so you have different blocks and then at some point some people might say oh that's what we want to write as a true history of transaction of payments or others might disagree and split in some different framework or it might also be that in this blockchain we have implemented a certain monetary policy rule so the monetary policy rule might say 5% inflation and others say no we don't like this we want to fork off or fork away from this blockchain and go for 2% inflation okay so you can have through this blockchain you can have competition across different monetary policy rules where some fraction of minus or writers decide okay we go for a different rule and then depends whether the users of this cryptocurrency will come along to this new framework or not so essentially there are two forms of competition so one form of competition is this free entry that makes this blockchain this public blockchain different and as I mentioned before the restricted entry leads to this permission blockchains but the other difference in competition is this ability to fork okay and what makes this ability to fork so different from existing competition the ability to fork once you fork you carry all information on the blockchain with you okay so one if let's suppose there's a currency out there and I want to create a new currency I don't know who has much in what wallet and all this it's very hard to carry over to a new currency but in blockchain technology I can just fork the whole blockchain and all the information which was on the existing branch of the blockchain will carry over to the new branch okay this makes competition way more fierce among these currencies well let me put it differently if you look at the old-fashioned Hayekian currency competition so there's cash which you can think of imaginary ledger or each of you has some money in their wallets and if I write everything down I would have this imaginary ledger and nobody really knows the distribution of this cash of this cash and if I want to propose a new currency it will be very hard to coordinate over and bring to this new currency on the other hand if I have a cryptocurrency I can propose a new fork, a new branch branching away and all the information which was an existing branch will be carried over to the new branch so it's way easier to start up a new currency and say okay I will propose a currency with a lower inflation rate over the different monetary rule and of course I have to coordinate many people which I have to do at the moment right now but it's more and more easy okay so this reminds me of some analogy of 1922 increase and I see that Yanis is here there was actually a forking going on in 1922 when at some point what's nice about the Greek currency at that time is that you had it it was always written five minute here and five minute here and there was a law where you can cut the money into two parts and then you can use both parts and one part you can convert was supposedly converted into a bond and the other one was back in circulation and essentially this way it's like a fork competition because you don't need to know who has how much money but all the information is actually kept and I fork it nicely off so let me jump over that let me just keep to the final point was that I talked about this inside money but you can think of a system where essentially the unit of account and the initial transaction among the banks is done in a cryptocurrency way but what really happens on the private issues when people pay on the iPhone back and forth these are just tokens from some IT companies and that's what you see in China in another Asian countries evolving and coming up so essentially it will be less of the crypto side so the crypto side will be much more the outside money side and will be the interbank market might do on a permission blockchain some crypto transactions but the private transactions will happen much more on token basis because the banks or some people or some entities which are part of this interbank market Tencent, Alipayaba and so forth they will issue tokens and then people pay with these tokens and this can be done at much higher frequency than compared to what the blockchain technology allows one so let me conclude so we have macro models I think we moved away from the simple response function world to an endogenous volatility dynamics the paradox of prudence I think is very important here and then we have various money models and because of financial frictions and this leads combined with EDIS and GRIDIS leads to endogenous demand for money and that's essentially can expand and shrink depending how the volatility moves around over the cycle money in a digital age we will hear I think next more in the next panel traditional way is to have a centralized monopolist ledger new ways to have this decentralized ledgers but I think the interesting thing in terms of currency competition is this fork competition where the competition can be much more powerful because it requires much less coordination compared to existing currency competition so it's way more powerful than an Hayekian competition and then we will have this tokenization by social media firms and payment firms like Tencent, Alipay, Amazon and Apple there it will be very similar to the free banking era in the 19th century in the US the inside money will be the tokens the outside money will be a cryptocurrency potentially and perhaps we need some digital money after all because machines will have to pay each other rather than humans so I stop with this futuristic thought thanks again I'm trying this thank you so I'm certainly very delighted to be here on our invitor and to me one of the titans that essentially kept the eurozone together I see many of them here but you were certainly very centra in all these and as Mario mentioned you certainly had to deal with many, many shocks and I learned today that you did that while holding an enormous number of office hours to my co-panelists here so I admire you for that, Vitor so let, Marcus sent me three papers last Friday all of them fascinating as always with his work and I invite you to, I recommend that you actually read them I will focus on one of the topics the one that relates to what he calls they call the eye theory of money I think it's a great framework to study the interaction between price stability and financial stability it's just to remind you what it does it's a framework within complete markets households essentially have projects but they cannot sell claims on these projects intermediaries play the role of absorbing the part of the idiosyncratic risk generated by households' projects and at the same time they supply inside money which they used to provide here is money in the Samuelson sense of sort of value but it's a way of diversifying your portfolio making your portfolio a little safer given that you're so invested in these projects with idiosyncratic risk now when the balance sheet of intermediaries become impaired then both functions essentially are heard and that I think is the point that I like the most of all this work work that Julian and Marcus have done which that produces an imbalance in the risk market essentially agents need to demand more money because they now need to absorb too much risk and they don't want to hold that risk and that's what leads to this downward spiral that he described now in that role monetary policy then when you look at monetary policy from that perspective really what it's trying to do is to try to help again the agents to absorb the risk that the productive structure needs to generate in order to function and but what he highlights as well is that well if money is distracted in doing this you know in helping with the risk markets then you are likely to generate more hazard and you need to have another tool to deal with that so very naturally complementary you have monetary policy and macro potential policy sort of operating together when risk markets are the focus of analysis so I think this again I love every single paper they have written together not only for the messages of the individual papers but I think again it aligns very well at least with something that I think is very core for macroeconomics and I think their work is very instrumental in shifting a bit macro into what I something I like to characterize as recent macroeconomics and let me summarize it with this very simple diagram the way we normally think about macro models regular macro models and ones we use for everyday recessions and the ones we write in papers typically is mostly about sort of the upper boxes there a productive capacity when it expands capital generates output and we need to find the demand for that output and monetary policy is a lot about finding the demand and fiscal policy about finding the demand for that output but when output expands when an economy grows it also generates risks there are new risks that arise and we also need to find the demand for that risk and lately when at least we will get significant financial events actually the imbalance is much larger in the bottom panels than in the top panel so the key game is how do we generate demand for the risk that the productive structure very naturally generates and that obviously what matters is not the risk is generated but also the risk that is perceived by economic agents so at times like this the red box that comes from the supply side looks enormous to economic agents and the red box that is on the demand side looks very small and we can think about monetary policy conventional monetary policy is just increasing the appetite for that risk if you lower interest rate for any given expected return capital gains that you may have on risky assets then by lowering the interest rate you increase the sharp ratio of risky assets and that induces sort of an increase in demand for risk now in a good significant financial event like the one you had to deal here with that's not gonna be enough that you can expand a little bit that red box to the right but it's never gonna be enough to absorb sort of all the risks that you have on the left and if you're not able to do that then asset prices collapse that relates to what Roger was talking about asset prices collapse that fits into aggregate demand and then that contaminates immediately the goods markets and so you can think about QE policies especially when they have a credit component and so on is really about adding appetite for risk somehow either or is about shrinking a little bit the supply of assets by absorbing that into the balance sheet of somebody that is not as sensitive to risk as households and investors are so I see their work very much as moving us in the direction of thinking about macro more in these terms I've done some work and it's easier when you receive the papers very late to talk about your own work along these lines in fact I like so much this idea of recent that that's in the title of the paper that seems like an I wrote recently and it's really a much more traditional macro mode but with this perspective so we call it a recent models for aggregate demand recessions and there too macro potential policy will play a very important complementary role and the basic idea is very simple I have no idea how much time so I will tell you the story three times five minutes words and so on five minutes okay well so let me tell you once the story and probably I will give you to daily twice so what happens here is occasionally risk rises dramatically risk perception rises risk premium rises it could be because of problems in balance sheets intermediaries or something else and that if it is sufficiently high then the central bank will try to relax monetary policy lower interest rate but at some point is not enough we hit the zero lower bound and that triggers a traditional recession now one of the points of this work is that that feed that is a feedback in fact and we were talking about causality with Royer but really what happens is they feed into each other because the risk premium you know leads to a decline in interest rate when that's not enough to balance the risk markets then asset prices collapse but when asset prices collapse demand collapse demand collapse the dividends collapse and profits collapse and therefore asset prices collapse and there's a downward spiral that develops and how deep that downward spiral is well the only thing that can balance that is some hope that you're gonna get out of this situation and then when asset prices decline well that gives you a big expected capital gain but for that you need to hope that you get out of the stuff very soon because if not there's no capital gain to be had and so the degree of pessimism you have is very important in stabilizing an economy and in that context speculation during the good time is particularly damaging because speculation by its very natural makes the economy extrapolative in good times the optimists do very well in bad times the pessimists do very poorly so to the extent that you have a speculation you're gonna have the wrong selection of individuals dominating the asset pricing at the time in which you fall into a deep crisis and the anticipation of this even can produce even larger and larger effects okay so the reason for macro-prudential regulation here is different from the one that Marcos highlighted but it's related it's not a model of moral hazard and so on but it's a matter it could be complemented by moral hazard it's a matter of an aggregate demand externality is the fact that you will need optimists when things go wrong you need people that can value high-lead assets banks because they can leverage and so on are those type of agents okay it's not about believing that they're not necessarily but it's about agents that can value things highly and you need somebody that supports asset markets when things go very wrong because of an aggregate demand externality it's not a model of a pecuniary externality it's a model in which there's an aggregate demand externality which you need to offset with if you don't have monetary policy to dilute that's what triggers the aggregate demand externality macro-prudential regulation helps you because it protects the wealth of those agents that you need very much in our session am I pointing at the right place or oh okay so I have very little time clearly but let me explain the equations I think where Roger was trying to say and John as well so the model really is two equations the first equation is really good market equilibrium and there's lots of shocks going around everything is normalized so all that they have there in the left-hand side is capacity utilization and the right-hand side is consumption as a function of asset values Q and Q theory investment as a function of Q and what you see from that equation is that you need high asset prices in order to support aggregate demand so you can have full capacity utilization but that means that asset prices are really locked into this goal into this role you need an asset prices are sufficiently high at Q star in order to have full employment and the question then becomes well how do I ensure they have enough wealth price house house prices stock markets and so on how do I ensure that I can support that wealth that this economy needs in order to have full employment well for that I need to look at the risk market condition what is happening in the risk market in the red box that they had at the bottom that's what the second equation does on the left-hand side you have the supply of risk that the economy has the volatility of the economy the perceived volatility and on the right-hand side is a complicated way of writing the sharp ratio what is a proxy for the demand for risk in the economy so the issue is well suppose that the risk premium rises dramatically the perception of volatility rises well that immediately shift the am I pointing at well anyways it shift the left-hand side up immediately and it also shift the right-hand side down because for any expected return given more risk there is a demand for that risk and so the role of monetary policy said earlier on is really to I'm having a ball here with this stuff there's a lag talking about PLLs and so on in evidence so so interest rate policy will try to offset that but is the jump in volatility sufficiently high is not enough and then asset prices will drop but when asset prices drop there in order to generate an excess return no I expected capital gain but when that happens that brings an aggregate demand and you get excess capacity so here you had two scenarios one in which there's a low risk premium environment in which interest rates are positive and that's enough to ensure that asset prices the amount of wealth that you need to support full employment interest rates are positive another one is a high risk premium estate in which the interest rate becomes binding and then asset prices collapse that generates a recession and so on so the only one thing I want to say is that now pessimism matters a lot both for good times and bad times to be a pessimist in good times mean that you think that it's very likely that you may go into this high volatility high risk premium environment and it does the case it's easy to see in the formula which is there at the bottom at the top that the equilibrium interest rate starts declining in the good estate not necessarily because now you're afraid that when things go wrong you're not going to have the interest rate to deal with that asset prices will have to collapse and therefore you have to you need a lower interest rate to compensate for the expected capital gain that now takes place when you go into high vol regime I'm almost done and then in the bad estate well then pessimism matters a lot because as I said before when asset prices falls if you keep dividends constant asset prices fall that immediately makes an excess return an increase in excess return but if dividends come along or expected profits come down because the demand is coming down then that doesn't work and in fact in our mall what happens is the economy implodes the more asset prices drop the more profits demand drops the more profits drop the more asset prices drop and there's no end to that the economy implodes the only thing that saves you is optimism and what is optimism optimism is is say okay look this stuff is gonna end in the near future and if it ends in the near future then a sufficiently large drop in the in asset prices gives you an after for capital gain that that stabilizes the economy okay I'm done it's a good conclusion anyway huh? yeah I'm almost done it's a fantastic conclusion anyway I'm almost done Timism will save us well you need enough optimism that's an economy you know that they say you can see how as economy becomes more and more pessimistic the whole feedback sort of starts going worse and worse and I'm not gonna be able to say anything about speculation but the blue line shows for the same level of wealth of distribution of level of wealth for the same level of pessimism collective pessimism when you have more speculation more heterogeneity in beliefs the drop in asset prices the feedback is more negative and that's the reason you need to do macro-prudential regulation here and you do wonderful things with macro-prudential policy but in any event so let me let me conclude here so these are both views that I call recentric they have differences but they have something in common and that's what I want to finish with it's a very recent perspective of macro that highlights wealth effects and I think everyone in the panel has done that and the key question is how does the economy absorb the risk being generated by the productive extractory and how to integrate monetary and macro-prudential policies to make that absorption process a smoother so it doesn't contaminate the real side of the economy this is a variety of models now new models that really think about the world about macro in these terms so let me end here thank you very much Ricardo so for the audience there will be a quiz on Ricardo's model