In economics, probably the most important concept is that of opportunity cost. In my first undergraduate classes, I must admit that I found it difficult to fully grasp, despite the efforts of my introductory course professor, Hernán Burdiles. I had a hard time understanding that everything had an alternative cost, that there was a "price" for everything. Humanists may be alarmed, but rest assured, it does not refer to what you are thinking. The "price" of something is not always, in fact, most of the time, monetary. In a simple example, the price of reading these lines is the second most important thing you gave up to take a look at my column: reading another one, checking your emails, sleeping, eating, running, etc. In fact, most opportunity costs have to do with time, given its linearity (as far as we know), which is very easy to understand by reading Borges and his "Library of Babel."

This micro-level issue can reach any level of complexity you want. From deciding what to have for lunch to prioritizing one public policy over another (yes, even if some people don't believe it, public resources are scarce). For better or worse, my professional training makes me evaluate my rational decisions in this way in all areas of life, thinking about what I am giving up in order to do what I am (or want to) do.

This week, the Central Bank published its Financial Stability Report for the second quarter of 2021, which, among other things, analyzes the causes behind the abrupt movements in financial assets in recent months. On this occasion, for reasons of length, I will refer to only two of them, although they are not the only ones and others could be just as important or even more so. First, local interest rates have risen significantly, especially in the longer maturities, which is not good news for those who are thinking of buying property or have invested their savings (voluntary or mandatory) in more conservative funds. From February to date, the rate on 10-year sovereign bonds in pesos has risen by just under 400 basis points, which is at the upper end of a sample of not only OECD countries, but also emerging and Latin American countries. When we try to break down this increase using statistical tools, we find that about 100 basis points have been caused by increases in the risk-free rate, and the rest by term premiums. In other words, uncertainty. Unfortunately, that is not all, because in addition to the increases in level, there has also been a significant increase in their volatility (in absolute and relative terms), making them riskier. Why have rates risen and mortgage credit conditions worsened? Here is a very relevant reason.

Secondly, the peso has been one of the hardest hit currencies recently, even considering the extremely high copper prices, the sale of dollars by the Treasury and pension fund administrators in the local market, and the increases in the MPR. Using fundamental explanatory models, we find that, from February to date, of the nearly 10% exchange rate depreciation during the period, 4% has been explained by changes in unfavorable macroeconomic conditions, which are almost completely offset by favorable macroeconomic conditions (higher copper prices and interest rate differentials). In other words, without idiosyncratic uncertainty, our exchange rate would be almost 10% below current levels.

Therefore, when you hear talk of the "costs to the country" of one policy or another, think about measuring it in units such as those I have mentioned, thanks to the work of the Central Bank, in these lines. Or perhaps the inability of someone to access an apartment, or the additional costs that an importer had to incur, or something that may be affecting you directly.

Nathan Pincheira

Chief Economist at Fynsa