I'm the dean of the School of Humanities, Arts and Social

Sciences here at MIT.

And it is my pleasure to welcome you to the afternoon session.

I want to say how delighted I am that our school is

one of the co-hosts of this terrific event.

And before I say more, I want to just make

a couple of thank-yous, first of all to David Mindell

and to the 150th Committee, who have conceived

of the idea of having these six symposia to highlight

the scholarly and really practical

aspects of research and education

at MIT over the last 150 years.

They've done a fantastic job, and I thank them very much.

I want to thank also Jim Poterba for his remarkable

organizational skills, his sense of humor,

his powers of persuasion-- which many of you

have experienced-- his sense of humor, and his grace.

He has really been the mind behind this,

and he's just done a fabulous job as well.

Economics is one of 10 departments

in the School of Humanities, Arts, and Social Sciences.

It is the largest department.

It has the most faculty.

It has the largest undergraduate majors.

And it has the largest number of graduate students.

It also has the most Nobel Prize winners

of all of the departments in my school, oddly enough.

All 10 departments in the School are

dedicated to the education of MIT students.

Each student at MIT-- each undergraduate--

is required to take eight classes in these fields,

humanities, arts, and social sciences,

which is quite high by peer standards.

And so we see a lot of undergraduates in our school.

From all fields across the board,

MIT undergraduates tend to gravitate

to the Economics Department, drawn

by its illustrious faculty as well

as by the rigor of the classes that they encounter.

MIT students, in my experience, tend

to scoff at material that is not very difficult.

And they find in economics a more than adequate challenge

to their considerable abilities.

I want to note too that there are a lot of MIT undergraduates

and graduate students in the audience today.

And I'm really delighted that you were able to join us.

Today we're honoring not only the economics

field and the Economics Department

but also, as this program indicates--

as you see the graduation dates of many of the speakers--

we're also honoring the extraordinary students who have

graduated from this department.

Like their faculty mentors, these graduates

have exerted an impact on the profession

and on the world that is really, I

think, unmatched, transforming the domains of scholarship,

of policy, and of business all over the world.

As this symposium makes clear, while there's

a lot to celebrate today in the world of economics,

there do remain many challenges in this sphere.

And these are challenges that I believe MIT intends to meet.

So again, I want to welcome you to the symposium.

And I will now turn things over to Ricardo Caballero.

Thank you.

[APPLAUSE]

CABALLERO: Thank you, Deborah.

The afternoon is slightly different from the morning.

The idea is to discuss policy challenges.

And the first of the two panels will

be about macroeconomic policy.

The timing of this panel, weather aside,

couldn't be better, no?

The developed world is still struggling

with the aftershocks of an extremely severe

financial crisis.

In the US, the debate is whether stimulus is still needed

or whether the time has arrived to shift

the focus to long-term sustainability issues.

In Europe, the risks run deeper, and even the future

of the euro itself is sometimes doubted by markets--

not by the IMF, but by markets, certainly.

These realities of the developed world contrast sharply

with those of emerging markets in China and India

in particular, where output gaps have closed

and inflation and overheating concerns have reemerged.

To illuminate us on these decoupling

issues and other fascinating macroeconomic policy issues,

we have assembled a superb panel.

They have in common to be world-renowned academics

and policy makers, and to be also graduates

from the best economics PhD program in the world.

They need no introduction.

They'll speak in almost nearly alphabetical order.

Olivier Blanchard will first give us a global perspective.

And then we'll get into specific issues--

emerging markets-- by Pedro Aspe, PhD '68.

Do I have it right, Pedro?

ASPE: '78.

CABALLERO: '78.

Oops, sorry.

I knew something was wrong.

I knew something was wrong.

And Olivier was PhD '77.

Then Bob Gordon, who is replacing Alan Blinder,

is a PhD '67.

Paul Krugman, who is not here but should be online,

is a PhD '77.

Greg Mankiw, PhD '84, and Christina Romer, PhD '85.

So without further ado, Olivier, the world is yours.

BLANCHARD: I wish.

[APPLAUSE]

Good.

Let me first say how happy I am to be back here,

if only for one day.

It's a very special feeling.

Given my current job, as most of you--

I've been the chief economist at the IMF

now for two years and a half.

I was asked to give you a sense of the global landscape.

And that's particularly easy for me to do at this point

because two days ago, we published the World Economic

Outlook update.

So I still remember the numbers, which

I will have forgotten probably by next week.

So the headline, if it has to be short,

is the global economic recovery continues.

And on the surface, the numbers actually look quite good.

For example, global growth, growth for the world economy,

is forecast to be at 4.5% this year,

2011, which is a fairly high number.

But below the headline, the reality is quite different.

The global number is a bit misleading.

What we have is what we have called,

and many others as well, a two-speed recovery,

depending on where you are in the world.

If you look at emerging market countries,

and I'm sure Pedro will say much more about this,

then they are doing very well.

The growth rate that we forecast for 2011

is 6.5% for the group of emerging and developing

economies.

And as you know, if you go, for example, to China,

the forecast is now of 10%.

If you go to India, the forecast is of 9%.

Now, it's not only that.

It is that this is a statement about the growth

rate, the rate at which countries' GDP goes up.

But there's also the question of how close we are to potential

and why, in the crisis, they went away from potential.

Output was lower than potential.

They are now, for many of them, not all-- for example,

not Mexico yet.

But for many of them, they are basically

back very close to potential.

And some of them seem to be crossing the line

at fairly high speed, so that the challenge

for these countries is really just to limit overheating,

slow down so as to maintain growth

which is consistent with what they can do.

In the medium term, their challenges

are going to be how to limit inflation, asset price

bubbles, and so on.

Now, if you turn to the advanced countries,

there the picture is much worse.

The growth rate for the set of advanced countries for 2011

is 2.5%.

That was actually one of the themes in Davos yesterday.

I was not in Davos, but I read the newspaper.

It was that within that 2.5%, there are actually two numbers.

There's the US, which is growing at 3%.

And there's the Euro Zone, which is expected to grow at 1.5%.

These are very low numbers.

And again, these are not only low numbers.

They're basically more or less normal

growth rates for those countries in the sense of what

we had seen earlier.

But these countries have a very large output gap.

And they are operating very far below potential.

Unemployment is very high in some countries,

as you know, close to 10% in many countries.

And given the kind of forecast we have,

this implies that the unemployment rate

is going to remain very high for many, many years to come,

far beyond the technical horizon, for example,

of the World Economic Outlook, which is two or three years.

And that's going to be, I think, a very, very big issue.

So this is the general landscape.

And I thought I would pick a few issues which are both very

hot and very important.

And I've chosen two.

Another one, which I will not mention

but I suspect Pedro may, is that of capital flows.

But that I'll leave aside in the interest of time.

The two big issues I see-- the first one you're all aware of--

is what's happening in what's known

as periphery Europe, which is a set of countries typically

in the Euro.

And there, [INAUDIBLE] trouble.

I'll come back to it.

And then the other issue I want to take up

is not the fight, but the tensions between China

and the US, and see what it is based on and where it's going.

So on periphery Europe, I think an important point to make

is that the countries which are in trouble-- so just

to be explicit, surely Ireland and Greece,

and Portugal and Spain being not very far from it--

would have been in trouble had there been no global crisis.

Basically what happened is that when they got into the Euro,

and indeed in some cases before they got into the Euro,

they thought that their future was very, very bright.

First, these are countries which used

to be able to borrow at very high rates because

of a large risk premium.

The fact that now they were going to be members of the Euro

meant that they suddenly were able to borrow

from the rest of the world at a very low interest rate.

And then they had been told by economists

that when you join a common currency area,

your productivity growth just jumps up,

and the future is very bright.

And it turned out that was not true,

that basically they entered, and their productivity growth did

nothing.

In some cases, it actually decreased.

So in all of these countries, what happened is at some point,

they could continue to borrow.

But they realized that the assumptions

under which they had borrowed were no longer satisfied.

And there was a retrenchment of spending in some countries--

private spending-- in other countries, public spending.

But basically just a fairly major recession.

As a result of this recession, on top of a global crisis,

then there was a fiscal problem which basically appeared.

In most of these countries, the fiscal problem

is really the result of the macro adjustment

rather than something separate.

There is one country where clearly there

was fiscal misbehavior even before the crisis.

That's Greece.

So Greece is combining both a true fiscal problem

to start with and a macro problem,

which makes it much worse.

Now, this is history.

The question is, what happens now?

And it's clear that the markets are

worried about whether the governments of these countries