José De Gregorio: Macroeconomics, economists and the crisis Speech by Mr José De Gregorio, Governor of the Central Bank of Chile, at the Annual Meeting of the Society for the Chilean Economy (SECHI), Antofagasta, 4 September 2009. I thank Luis Felipe Céspedes, Eduardo Engel, Pablo García and Mariana García for valuable comments. *  *  *  This is certainly a great opportunity to speak about a subject that has triggered more than a few reflections in me recently, and that was probably best said by Queen Elizabeth’s famous question, made when she was visiting the London School of Economics last year: Why did nobody notice it? As someone who has dedicated his professional life to academic activities and policy making, the question is surely unsettling. The current global financial crisis and recession, whose depth is unprecedented in recent decades, has cast doubts about the work of macroeconomists, the usefulness of their theories, and their capacity to anticipate and deal with crises. These are the issues I will discuss today. Macroeconomics Over the past few decades, macroeconomic theory has evolved, on the one hand, as a discipline whose purpose is solving problems similar to engineering, and, on the other hand, whose purpose is to explain phenomena embodied in economic reality, similar to science (Mankiw, 2006). In fact, macroeconomics was created to solve the problems of the Great Depression. In its beginnings, it was devoted to building large models to evaluate macroeconomic policies in the tradition of engineering.
Another aspect making a big difference is the performance of emerging economies. Latin America, excluding Chile, posted an average annual fall of 4.2% between 1930 and 1932, while Chile, where the crisis compounded with the downfall of the nitrate industry, fell an average of 17.6%. For the three-year period 2009-2011, private forecasts indicate that Latin America will grow by an average of 1.2%, while Chile will grow by 2.1%. These are just projections, not definitive figures, but data released so far this year indicates that the effects of the crisis, although far from negligible, are much milder than they were in the 1930s. This is an encouraging fact. Usually, whenever developed countries go into a recession, its effects are amplified into our region. That has not been the case this time; on the contrary, our region today is outperforming the developed economies. That the current crisis did not turn into a Great Depression proves that lessons have been learned. Economies are much stronger, and also the policies applied have gone in the proper direction of mitigating the tremendous financial shock of last year. For one thing, the task of stabilizing the financial system was assumed decisively, which prevented its collapse. Uncertainties remain, but are more focused and less dramatic than at the end of last year.