[MUSIC] In the first part of the capstone project, as I mentioned in the video for one of your options, my objective was for you to get your hands dirty. To get in there and look at data to become familiar with some of the really good data sources that will help you in the future if you're doing any kind of research or analysis on economic phenomena. And instead of hearing me talk to you about it, to actually download the data, look at it, graph it, makes scatter plots, whatever you want to do. Or just eyeball it and look for the normal relationships we've identified. For the appropriate and inappropriate policies we've identified and then think a little bit about the risks. So you could have chosen Spain in the 2000 to 2008 period, or Spain in the 2009 to 2016 period. And I think this is a fascinating exercise, because it's hard to find a country where two different periods are more starkly contrasted, right? Where the economic situation changed more drastically from one period to the next. So you have selected to do the 2009 to 2016 period. And of course, this is the period, first of the global recession, that was 2009. And then of the Eurozone crisis that starts shortly afterward in the countries that belonged to the Euro within the European Union. So we find in this period a very dismal economic situation for Spain. First of all, I ask you to think about the gaps that you could diagnose from the data. And again, you're using a ready-made indicator, which is a luxury. A ready-made indicator produced by the OECD where they compare how much a country would be capable of producing if all of its resources were fully used and how much it actually produces. And we call this difference the output gap, okay? If it's positive it's an inflationary gap, if it's negative, it's a recessionary gap. Now here we have a large negative gap or a large recessionary gap. In fact, it reaches 12% of potential GDP in the worst year, which was 2013. So this is an economy that is producing 12% less than it it was capable of in that year. But you will notice that during the entire period there is a recessionary gap for Spain. Now we know when there's a recessionary gap, we know how the different indicators should behave. So you would expect inflation to slow down and I ask you in the second question to look at this, does inflation behave as expected. Yes, it does, in fact Spain goes from an inflation rate that was a little too high before to actually a deflationary period and very low inflation. Does unemployment behave as expected? Most definitely, it goes way up, from a low of about 8% before the period you're studying to a high of more than 25% in 2013. And of course we can observe that the larger the output gap, the negative output gap, the more unemployment rises. And this would be a version of what we talked about as Okun's law in understanding having economic policymaking. Although the reaction of unemployment here is much more severe than we usually see. If you made a scatter plot putting inflation on your vertical axis, unemployment on your horizontal axis, you would actually observe a Phillips curve, although it's pretty flat. And we did find that with inflation so low in this period we didn't observe a lot of the Phillips curves we talked about in understanding economic policymaking. But you can see it with Spain. Then I asked you to evaluate whether fiscal policy was appropriate. Well, with fiscal policy we know the normal thing when we go into a recessionary gap is for the fiscal deficit to get larger. And so you looked at it as a percent of GDP and you saw that it got very large. In fact, it went up to almost 12% of GDP, which is a very, very large budget deficit. But it was produced by the recessionary gap and the fact that the country had to bail out banks. And then I asked you to evaluate whether the debt was a risk for this country. Well, one of the questions we ask ourselves is, did the debt rise for the right reasons? And it did rise in the depth of a huge crisis. Like we've said, this is a recessionary gap that lasts the entire period you're analyzing, from 2009 to 2016. So it would be appropriate for the debt to rise. Now, did it rise too much? Well, it almost triples, that's pretty dramatic, isn't it? To go from around 45% of GDP to going above 100%, but, heading towards 120. So, even though it was appropriate for the debt to rise, it reaches a level that's worrisome. It's very high, and so there could be trouble financing that debt, paying for the financing and getting investors to lend you the money to finance it. I also asked you to look at interest payments as a percent of GDP or debt service as a percent of GDP. And here you'll find that the debt service also doubled, so it went from a little under 1.5% of GDP to 3% of GDP. Of course, this becomes a burden on the Spanish government to be able to make these payments. And it took more and more resources, which then made the deficit larger and the debt larger, this is a risk element. An investor might look at a country and say, Spain used to be able to service its debt with 1.5% of its GDP, now it's 3. I might find this country to be risky. If I'm a business person I might say, with that debt service going up so much, that debt going up so much, maybe they'll raise my taxes so that they are able to face those debt payments. So this would be a risk for business as well. And then I ask you to think about whether monetary policy was appropriate. Now remember that Spain in this period had as its monetary authority the European Central Bank, it was not a Spanish Central Bank. So these are the interest rates set by the European Central Bank. And we look at this period and we see that, yes, interest rates were broadly appropriate. They went down as far as they could go during this very large recessionary gap, so that would be the right thing to do. However, once they hit almost zero, which you can see that they reach almost zero and stay there in the latter part of this period, then there's nowhere else to go. Monetary policy can't do anything else to try to bring the economy out of the crisis. So if I'm an investor and I'm evaluating all of this, I say, well, yes, it is normal. To see unemployment go up, to see inflation to go down, to see the fiscal deficit to go up, to see interest rates go to zero. But there are elements of risk there. There's a risk with such a high unemployment rate which could cause instability, dissatisfaction, maybe political turmoil. There's a risk of such a large recessionary gap. My market which I would like to serve as an investor is shrinking, right? There's a risk of that very, very low interest rate, the risk simply being that I can't get it down any further. So monetary policy has reached its end, except for the non-conventional policies that we talked about in understanding economic policy make. Which would be quantitative easing for instance, which Europe eventually did. And then if I'm thinking about the risk of the debt, as we've said, that debt is now at the end of this period very high. The cost of servicing it has become quite high. These are risks for an investor because they don't know what will happen to their taxes in the future. To the confidence of foreigners in the economy in the future. Will interest rates go up further because foreigners are afraid Spain can't pay its debt? So these are some of the elements that you may have noticed as you went through this peer-graded exercise for Spain for the 2008 to 2016 period. [MUSIC]