90  80  80  70  70  60  60  50  50  40  40  30  30  20  20  10  10  0  0  Jan.06  Jul.06  Jan.07  Jul.07  Jan.08  Jul.08  Jan.09  (*) Corresponds to volatility index VIX. Source: Bloomberg. BIS Review 76/2009  9  Figure 5 Projected world growth (annual change, percent) Subprime crisis erupts  4.0 3.5  2 1 0  2.5  -1  2.0 1.5  Lehmann, AIG, etc. 3  Lehmann, AIG, etc. 3.0  Bear Stearns goes bankrupt  4  Bear Sterns goes bankrupt  -2 07  May Sep. 08  May Sep. 09  -3  May  08  (a) Projections for 2008  Apr. Jul. Oct.  09  Apr. (b) Projections for 2009  Source: Consensus Forecasts. Figure 6 Projected growth for Chile (annual change, percent) 6  Subprime crisis erupts  5  Bear Sterns goes bankrupt  Bear Stearns goes bankrupt  6 5  Lehmann, AIG, etc. Lehmann, AIG, etc. 4  4  3  3  2 1  2  0  1  -1 07  May  Sep.  08  May  Sep.  (a) Growth projectoins for 2008  08  Apr. Jul. Oct.  09  Apr. (a) Growth projectoins for 2009  Source: Economic Expectations Survey, Central Bank of Chile.
But in the current crisis, which has no precedents in many decades, to look at simple correlations based on normal periods can be very misleading. From my standpoint, it is more important to conceptualize what is happening today, in order to analyze the prospects of the economy and draw policy conclusions. To address this subject I will use some basic economics that will allow us to understand the synchrony and severity of the current crisis. These arguments have been present for many years in the profession and have gained enormous importance today. The first refers to the existence of multiple equilibria and the effect of failed coordination. The second deals with the effect of uncertainty on economic decision making. These two elements help us understand how the confidence crisis that swept the world aggravated the output contraction, hitting hardest the demand for industrial goods. In the next section I will describe the main  BIS Review 76/2009  1  ideas that clarify the impact of the confidence crisis, and then analyze the international scenario in the following section. Some basic ideas The objective here is to account for the basic ideas behind the coordination failures, multiple equilibria and how uncertainty affects aggregate demand. Coordination failures Let us assume a very simple economy 1 with a large number of consumers. Each consumer demands D units of a manufactured good, which we can think of as a durable good (e.g., car, house, appliance, electronic device).