January 26, 2021
MFR Program launches manifold version of upcoming book on “A Monetary and Fiscal History of Latin America, 1960-2017”
The Monetary and Fiscal History of Latin America Project was launched in 2013 by the University of Chicago’s Lars Peter Hansen in his former capacity as the Director of the Becker Friedman Institute and as part of its fiscal policy initiative. Upon the advice of Thomas Sargent, New York University, and former Distinguished Fellow of the BFI, and Fernando Alvarez, University of Chicago, the Institute provided funding and other support for this vibrant project initiated and led throughout by the University of Minnesota’s Timothy Kehoe and the Minneapolis Federal Reserve Bank’s Juan Pablo Nicolini. In supporting and hosting this project, the Institute envisioned an intensive research program to produce a comprehensive monetary and fiscal history of the ten largest countries of South America plus Mexico since 1960. Under Kehoe’s and Nicolini’s leadership, and with the extensive efforts of a large number of scholars with expertise on the macroeconomic experiences of Latin American countries, this project delivered with great success on its initial ambition. The authors of the chapters are country experts who participated in numerous meetings over six years to discuss and receive feedback on their findings that were framed in ways to facilitate comparisons and open the door to novel insights applicable more broadly. Along with the scholarship represented in this book, these economists worked with BFI to create a dynamic database for the eleven Latin American countries under review (https://mafhola.uchicago.edu/), which will inform and inspire scholarship for years to come.
January 6, 2021
MFR Program Launches New MFR-China Website
Visit the new MFR-China website here.
January 5, 2021
MFR Program Launches New Macro-Financial Modeling (MFM) Project Website
Through the generous funding support from the Alfred P. Sloan Foundation, the Macro Finance Research Program (MFR) has launched the new Macro Financial Modeling (MFM) project website aimed at showcasing the research and output from this nine-year project.
Since its beginning in 2006, the MFM Project has enhanced macroeconomic models to include how the financial sector influences and poses risks to the economy and to improve economists’ ability to define, measure, and manage financial sector activities. The effort is not purely an academic exercise. Better macro-financial models can improve the tools available to policy makers—such as central banks, which now include financial stability among their priorities and are considering pursuing macroprudential policies. To address these policy objectives without a better understanding of macro-finance linkages is like shooting in the dark.
Throughout the years, the MFM project has addressed a wide range of topics including systemic risk measures, intermediary asset pricing, liquidity and segmented markets, comparative valuation dynamics, housing and credit markets, fintech, machine learning and AI, Bitcoin economics, financial crises, and Chinese financial markets. Many of these topics are motivated by the challenges faced by regulators and policy makers. Through regular structured conferences, targeted research support, and disseminating its open access findings on its website. This year, the MFM project has been busy nurturing a community of fruitful engagement and scholarly research.
October 23-24, 2020
MFR Program Co-Sponsors 16th Annual Macro Finance Society (MFS) Workshop
The 16th Annual MFS Workshop was organized by Lars Peter Hansen, Mikhail Chernov, Wenxin Du, and Niels Gormsen.
January 27, 2020
Hansen’s MFR Program to organize virtual conference on “Expectations in Macroeconomic and Financial Models” on June 25-26, 2020
There has been a recent surge in research that explores how expectations and uncertainty impact financial markets and the macroeconomy. This conference will explore some of the latest research on modeling and measuring expectations and their resulting implications for economic dynamics. Researchers will explore the role of memory, information acquisition, and uncertainty as contributing factors to forecasting and decision making in dynamic settings. This conference is a part of the Behavioral Implications of Uncertainty in Macroeconomics Project (BUMP) generously sponsored by the Alfred P. Sloan Foundation under the Macro Finance Research Program of the Becker Friedman Institute.
January 10, 2020
Hansen’s MFR Program Announces MFR Summer Session for Young Scholars – July 28-31, 2020
The Macro Finance Research Program (MFR), under the auspices of the Becker Friedman Institute (BFI), is hosting an MFR Summer Session for PhD students looking to write a dissertation at the interplay of macroeconomics and finance. The MFR Summer Session is a 4-day program held on July 28-31, 2020. Local housing accommodations and travel funding will be covered by the MFR Program for selected participants.
The MFR Program is led by Lars Peter Hansen, the David Rockefeller Distinguished Service Professor in Economics, Statistics, and the Booth School of Business, and the recipient of the 2013 Nobel Prize in Economics. Throughout the four days of this summer session, faculty from the Kenneth C. Griffin Department of Economics and the Booth School of Business will survey and discuss recent research on a variety of topics in the macro-finance field, including:
- Cryptocurrencies and Blockchains
- Housing Debt
- Uncertainty Spillovers for Markets
- Financial Tools for Social Valuation
- Global Financial and Capital Markets
We anticipate providing the opportunity for advanced students to present their current research during structured poster sessions each day of the program. There will be lectures by University of Chicago faculty, including:
- Wenxin Du on “The Role of the US Dollar in Global Capital Markets”
- Lars Peter Hansen on “Uncertainty Spillovers for Markets”
- Zhiguo He on “Intermediary Asset Pricing: Theory and Evidence”
- Anil Kashyap on “Macroprudential Regulation”
- Ralph Koijen on “A Demand System Approach to Understand Global Financial Markets”
- Yueran Ma on “Expectations in Finance and Macroeconomics”
- Amir Sufi on “Inequality and Indebted Demand”
- Harald Uhlig on “Cryptocurrencies and Central Bank Digital Currencies”
APPLICATION REQUIREMENTS FOR PHD STUDENTS
- Two recommendations, including one from the student applicant’s dissertation advisor. Applicants are responsible for coordinating the agreement with the individuals writing the recommendation letters on their behalf, but must indicate that they should be sent directly and confidentially to email@example.com.
- Short Statement of Interest (minimum length: one paragraph, double spaced, 12-point font, maximum length: one page, double spaced, 12-point font)
Application materials must be submitted to firstname.lastname@example.org by March 31, 2020.
This story originally appeared on the Becker Friedman Institute website.
November 8, 2019
Heckman co-organizes UChicago Policy Forum on the Pension Crisis
Many states and municipalities, especially Illinois and Chicago, face huge public pension obligations and other spending commitments. The problem is all the more acute because the locales are already carrying a substantial debt. Against this backdrop, the University of Chicago Policy Forum: Building on the Chicago Approach to Economics, under the leadership of Lars Peter Hansen and James Heckman, brought together experts in the field to explore the pension crisis before a full house on November 8, 2019 at University of Chicago’s Swift Hall. The event was co-sponsored by Hansen’s Macro Finance Research Program (MFR) and Heckman’s Center for the Economics of Human Development (CEHD). C. Eugene Steuerle (Urban Institute), Carol Portman (Taxpayers’ Federation of Illinois), and Byron Lutz (Board of Governors of the Federal Reserve System) gave opening presentations, setting the stage for an engaging dialogue and debate that included Edward Glaeser (Harvard University), Joshua Rauh (Stanford University), and Heckman, with Hansen serving as moderator. Steuerle led things off by documenting the rising fraction of committed expenditures at local and national levels. These commitments give future governments limited leeway to address important problems that will likely emerge in the future and will make it particularly difficult to initiate new productive investments in education, infrastructure, and health. Portman presented the stark situation in Illinois. Lutz gave a more optimistic account of the problem by working through some budgetary arithmetic. He noted that low interest rates make it easier to “roll-over-the-debt” into the future. This view was challenged by Rauh, who thought Lutz’s calculations were premised on an inaccurate depiction of the potential borrowing costs and rates of return on pension funds that state and local governments might experience in the future. The panel explored a variety of hard questions. For instance, states and municipalities that seek to raise taxes in the future run the risk of losing current and new businesses and reducing job opportunities. While there are good reasons for governments to restructure or buy out existing pension contracts, the costs to the public are far from clear. While governments can, at least implicitly, default on nominal commitments through inflation, states and municipalities do not control monetary policy and pensions are often indexed, blunting this tool. The seductive impact of short-term interest rates can provide a misleading characterization of the long-term financing challenges in face of an uncertain future. Trimming back pension funds and moving from defined benefit plans to defined contribution plans has proved politically costly in many states—most notably in Kentucky where an incumbent governor was defeated in part because of the unpopularity of such reforms. Reducing the number of government units with tax and spending power could be a productive step forward, and as Portman noted, Illinois has the most independent governmental units in the country, even compared to Texas or California. Glaeser gave a blunt account of how local politics often prevent reform because of the inability of taxpayers to directly influence expenditure and tax decisions. Instead they rely on representatives who often have special interest considerations and lack incentives to take a long-term perspective. Promising pensions in the future is a seemingly cheap short-run response to intransigent public sector unions. But this approach imposes a crippling burden on the future generations in those localities. The discussion at the forum explored a wide range of political and economic challenges facing cities and states limited by mandated social entitlement and pension commitments. The audience participated by proposing questions to panelists, along with extemporary remarks. All participants emerged with a deeper understanding of the problems and possibilities and an appreciation for the Chicago tradition of using rigorous thinking and hard evidence to probe important social problems.
Background Reading Materials
- The Sustainability of State and Local Government Pensions: A Public Finance Approach, by Jamie Lenney, Byron Lutz, and Louise Sheiner
- Congress is supposed to decide how the U.S. spends money. Soon, it won’t be able to, by Eugene Steuerle
- Fiscal Democracy in the States: How Much Spending is on Autopilot?, by Tracy Gordon, Megan Randall, C. Eugene Steuerle, Aravind Boddupalli
- Public Pension Simulator
- Urban Institute State and Local Employee Pension Plan Database
- The State of Retirement: Grading America’s Public Pension Plans
- Build Your Own Pension Plan
- Evaluating Retirement Income Security for Illinois Public School Teachers, by Richard W. Johnson and Benjamin G. Southgate
Event VideosIntroduction with James J. Heckman Fact Session with Eugene Steuerle, Urban Institute Fact Session with Carol Portman, Taxpayers’ Federation of Illinois Fact Session with Byron Lutz, Board of Governors of the Federal Reserve System Panel Discussion:
December 12-13, 2019
MFR Program Holds Conference on the Macroeconomy and Finance in China in Beijing, China
The interplay between finance and macroeconomics in China provides a fascinating opportunity for new research. While financial markets are still fast growing and expanding their territory in China, the Chinese economy has been very innovative in advancing financial technologies. The special role of the Chinese government at both the local and national levels in financial activities has broad-reaching implications for macroeconomic performance and growth prospects in the future. This conference, hosted at the Tsinghua University School of Economics and Management in Beijing, China brought together elite scholars to explore the extent of our current understanding and the challenges for future research related to Chinese financial markets and their applications more broadly.Agenda
Thursday, December 12, 2019
Sessions held in Shunde Building, Room 418 unless otherwise noted.
Friday, December 13, 2019
October 14, 2019
Hansen’s MFR Program Co-Sponsors the UChicago Policy Forum on The Pension Crisis: State and Local Pension Challenges
Participants: Edward Glaeser (Harvard University), Byron Lutz (Board of Governors of the Federal Reserve System), Carol Portman (Taxpayers’ Federation of Illinois), Joshua Rauh (Stanford University), and C. Eugene Steuerle (Urban Institute)
Hosted by Lars Peter Hansen and James Heckman
The Macro Finance Research Program (MFR), Center for the Economics of Human Development (CEHD) hosted the second installment of the University of Chicago Policy Forum on November 8, 2019. This second forum focused on the topic of, “the Pension Crisis: State and Local Pension Challenges.”
This forum was intended to inform the debate on the state and local pension crisis, its dimensions, economic ramifications and potential solutions. We hope to address various issues including the scope and magnitude of the fiscal challenges, the role of property taxes and their implications for property values, the continued need to encourage new businesses while addressing the necessity for more revenue in the future, and a better understanding of the political environment and process that gave rise to the challenges faced in the city of Chicago, the state of Illinois, as well as in other states and municipalities around the country.R
August 21, 2019
Reflection: Working Paper on Pricing Uncertainty Induced by Climate Change
I have repeatedly asked myself, “Why did you write this paper?” It is hard to dispute the social importance of environmental questions. As I, and others, have argued elsewhere, purely evidence-based policy is a misnomer in general, and most certainly for this particular problem. Theory and evidence have to be equal dance partners.
Quantitative storytelling is a credible way to conduct policy analysis in dynamic settings. It combines so-called “stylized modeling” with empirical evidence. We purposefully consider multiple stories, with carefully worked-out narratives that are formally captured as models, which have different ramifications for the environment and the economy. For dynamic problems such as this one, multiple “stories” are virtually impossible to dismiss on either theoretical or empirical grounds. I have little doubt that this multiplicity is germane to many policy problems. So, perhaps the answer to my own question should be obvious.
This analysis has attracted much more attention than most of my recent papers. For me, it has been both challenging and rewarding. My co-authors, Mike Barnett, William “Buz” Brock and I pushed ourselves to bring together tools from decision theory, asset valuation and control theory to confront uncertainty outside of the usual confines of risk analysis typically focused on in economics and finance. So why did I pose the question at the outset? In part, perhaps in large part, this contribution is a “proof-in-concept” paper for informing policy in the face of uncertainty. Thus, we designed the framework to be a template for future research, including by ourselves and other researchers. But we also deliberately chose climate economics as our featured example.
Because our specific analysis is both novel and novelistic, I feel it needs some explanation. While we use the social cost of carbon to explore the impact of uncertainty, our reported numbers are merely our first step for this type of analysis. These numbers are not ready to be posted on the Environmental Protection Agency (EPA) website, which is mechanically embraced by “green books” for policy analyses. We did not write this to provide soundbites for media coverage. In our quantitative application, we show that the social cost of carbon could become very large without additional forms of mitigation, technological change, adaptation and/or policy intervention. We abstract from regional and developmental heterogeneity, which should be part of a more full accounting. Of course, these limitations should be explored and they will alter the implied social cost of carbon. We are actively engaged in revealing extensions that will allow us to confront some of these shortcomings along with more ambitious climate inputs.
In summary, this paper is not meant as the answer, but as our initial step in incorporating broad notions of uncertainty in a formal policy analysis while avoiding overstated claims of our current knowledge base.
I am continually haunted by the warning in Hayek’s Nobel address:
“Even if true scientists should recognize the limits of studying human behavior, as long as the public has expectations, there will be people who pretend or believe that they can do more to meet popular demand than what is really in their power.”
While those social scientists interested in quantitative policy analysis should not just throw in the towel, they should remain cognizant of the limits to their knowledge and understanding.
Lars Peter Hansen is the Director of BFI’s Macro Finance Research Program and the David Rockefeller Distinguished Service Professor in Economics and Statistics and the Booth School of Business. This reflection was originally posted on the Becker Friedman Institute website.
June 27, 2019
MFR Program Launches Latin America Early-Career Scholar Program
The Macro Finance Research Program (MFR)-Latin America Early Career Scholar Program will offer financial support for current doctoral students and PhD graduates of up to four years after receipt of a degree in economics or other fields who are pursuing innovative work on understanding how monetary and fiscal policy impact overall economic performance and societal well-being. The proposals should draw on existing evidence on the experiences of the various Latin American economies. Proposals will be accepted on a rolling basis and funding will be available starting in August of 2019.
The program is rooted in the Monetary and Fiscal History of Latin America (MAFHOLA) Project, launched in 2013 to analyze economic data from 11 of the largest Latin America economies, to produce a comprehensive monetary and fiscal history of the region. The papers generated by the project use a common conceptual framework and a comparable data set to narrate the economic histories of 11 Latin American countries since 1960. The authors are country experts who participated in numerous meetings over five years to discuss and receive feedback on their findings. The working papers were released at an event co-hosted with the Central Bank of Chile on August 24 in Santiago, followed by an event co-hosted with the Inter-American Development Bank (IDB) on September 24-25 in Washington, DC.
The project was organized and managed by the University of Chicago’s Fernando Alvarez and Lars Peter Hansen, the University of Minnesota’s Timothy Kehoe and Juan Pablo Nicolini, and New York University’s Thomas Sargent, also a Senior Fellow with University of Chicago’s Department of Economics. The findings of this project offer valuable lessons for future policy design in Latin America and other regions of the world. Germane to this funding, the project also provides monetary and fiscal macro performance data that may be used as proving ground for alternative economic models and as a starting point for a deeper probe into varying Latin American experiences. The unique data set, along with chapters devoted to each individual country, is available on the project website. Additional funding for related conference participation will be provided as needed.
Early career scholars interested in examining fiscal and monetary histories in Latin America are encouraged to submit research funding proposals (with a six-page minimum) for future related research applying the findings and datasets generated by the Monetary and Fiscal History of Latin America project.
The proposals should contain:
- an introduction (or abstract), motivating facts and background,
- a discussion of the model mechanisms,
- next steps or future research plans,
- potential implications of the research, and
- a list of key references.
Proposals should connect explicitly to the written material available on the project website, with a clear statement of how the project builds on or extends this previous body of posted research on the project website.
The funding level of each proposal will depend on the scope of the research and can range between $5,000 and $15,000. For any questions regarding submissions, please contact Diana Petrova, Associate Director of the Macro Finance Research Program at email@example.com or email firstname.lastname@example.org.
May 8, 2019
Call for Papers: Conference in Financial Regulation
The Macro Finance Research (MFR) Program is now accepting submissions for the Conference on Financial Regulation to be held at the University of Chicago on May 8-9, 2020.
After the financial crisis, there was a reexamination of critical role of financial intermediaries, their regulation and governance structure. New regulations and market forces have changed the structure and quantities of financial products and services. The objective of this conference is to bring together leading academics to discuss recent research on the regulation of financial intermediaries and markets, with broader implications for practice and policy.
All related areas of research are appropriate, both theoretical and empirical. A few examples include the effect of capital and liquidity requirements on intermediaries and markets, including the household sector, macroprudential regulation, internal and external governance responses to financial regulation as well as remaining gaps, and political economy considerations that are shaping rules and their enforcement. This conference is a sequel to one organized in October 2015.
Please submit your paper for consideration by December 15, 2019, by emailing email@example.com and attaching your paper (preferred) or abstract.
April 4, 2019
Nobel Laureates bring UChicago-style debate to new economics policy series
Too often, the results of academic research are elevated over the process. Two Nobel-winning economists are trying to shift that conversation—and to further the University of Chicago’s tradition of intense, scholarly debate.
On April 25, 2019, Profs. Lars Peter Hansen and James Heckman will launch the University of Chicago Policy Forum, a new quarterly series in which they will moderate debates on economic policy with top scholars from around the world.
“What we ought to be talking about is an intellectual environment that nurtures better social science going forward, but which doesn’t necessarily produce immediate answers,” said Hansen, one of the world’s leading macroeconomists.
The inaugural event will assess the contributions of behavioral economics to the field, while future forums could tackle topics ranging from climate change to migration to the implications of big data. Hansen and Heckman hope their series prompts deeper thinking both on campus and among curious laypeople.
“There’s a missing link in the chain of ideas from pure academic research to public policy,” said Heckman, a world-renowned expert on the economics of human development.
This month’s panel will feature economists Colin Camerer (California Institute of Technology), Michael Woodford (Columbia University) and Itzhak Gilboa (Tel Aviv University). The forum is co-sponsored by the Harris School of Public Policy—which will host the first event at the Keller Center—as well as Hansen’s Macro Finance Research Program and Heckman’s Center for the Economics of Human Development.
“There’s a missing link in the chain of ideas from pure academic research to public policy.”
—Prof. James Heckman
“We want to understand what we know, but also what we don’t know,” said Hansen, the David Rockefeller Distinguished Service Professor in Economics, Statistics and the Booth School of Business. “That can help inform future research, and also better policy. You can have much healthier social sciences, as well as a much better framing of policy questions.”
Many academic conferences focus on subfields within disciplines, or center around more recent research. With this forum, Hansen and Heckman hope not only to collapse those intellectual enclaves, but to provide a stage for top scholars to address big questions—teasing out overlooked nuances, or questioning assumptions too often held as fact.
“Here at Chicago, we have a very strong social science tradition,” said Heckman, the Henry Schultz Distinguished Service Professor in Economics and the College. “That will allow us to create a basis for understanding the policy, and then understand the likelihood of success or failure. We’re trying to get at a deeper understanding of what’s going on.”
Profs. James Heckman and Lars Peter Hansen want their discussion series to prompt people to think more deeply about economic policy.
The “give and take of debate,” he added, is something that has long been essential to UChicago’s scholarly approach.
“You let the tectonic plates grind together,” Heckman said. “They may produce volcanoes, but they may also produce continents and Hawaiian Islands.”
Heckman and Hansen also plan to invite scholars from other disciplines to future events. A discussion on the economics of climate change, for example, wouldn’t be very productive without the presence of a climate scientist.
Hansen also noted that policymaking too often hinges on advocacy, which requires scholars to project their expertise to sway those in Washington. That approach can inhibit honest intellectual exchange, and limit the sort of perspectives that spur scholars to rethink ideas over time.
“We want to knock down boundaries, not create a wall around economics,” Hansen said.
That’s one aspect of policymaking that the two economists hope to change. The University of Chicago Policy Forum, Hansen insisted, isn’t about showing off debating skills. “It will be an important opening for discussions,” he said, “but not the closure of them.”
Added Heckman: “The aftermath will probably be much more important than the event itself.”
February 21, 2019
Macro Financial Modeling Winter 2019 Meeting Event Recap
Reflections From MFM 2019 Winter Meeting
By Allison Schrager
The 2007-2009 financial crisis started a period of reckoning for many economists. The crisis and the recession that followed it ended decades of economic stability, known as the Great Moderation. Prior to the crisis, it was widely believed that with existing macroeconomic policies, advanced economies were largely immune from financial crises. Leading up to the crisis, economists expressed concern about the amount of leverage in the financial system. But they were unaware of the extent of a system wide vulnerability, or the risk that disruptions within the financial sector would spill over to the macroeconomy in a prominent way. And as the years since the crisis have made clear, not only can financial frictions cause major disruptions, they can also change the channels of how macroeconomic policy is supposed to work.
From an intellectual standpoint, it was problematic that financial economists and macroeconomists have traditionally been fairly siloed in their research. In 1984, Stanley Fischer and Robert C. Merton urged researchers to incorporate financial markets into macro models in a more than passive way. And though some progress had been made since then, the 2007-2009 financial crisis proved that these efforts have not come far enough.
The Macro Financial Modeling (MFM) Project endeavors to bridge these gaps by bringing together elite scholars in macro and finance from all over the world, junior scholars at the start of their research careers, policy makers, and leaders from the financial industry. The project is sponsored by the University of Chicago’s Becker Friedman Institute under its Macro Finance Research Program (MFR) in collaboration with MIT’s Laboratory for Financial Engineering. The project is led by Lars Peter Hansen, David Rockefeller Distinguished Service Professor and Director of the MFR Program at the University of Chicago, and Andrew W. Lo, the Charles E. and Susan T. Harris Professor of Finance at the MIT Sloan School of Management.
The aim of the project since its beginning in 2006 has been to enhance macroeconomic models to include how the financial sector influences and poses risks to the economy and to improve economists’ ability to define, measure, and manage financial sector activities. The effort is not purely an academic exercise. Better macro-financial models can improve the tools available to policy makers—such as central banks, which now include financial stability among their priorities and are considering pursuing macroprudential policies. To address these policy objectives without a better understanding of macro-finance linkages is like shooting in the dark. Throughout the years, the MFM project has addressed a wide range of topics including systemic risk measures, intermediary asset pricing, liquidity and segmented markets, comparative valuation dynamics, housing and credit markets, fintech, machine learning and AI, Bitcoin economics, financial crises, and Chinese financial markets. Many of these topics are motivated by the challenges faced by regulators and policy makers. Through regular structured conferences, targeted research support, and disseminating its open access findings on its website, the MFM project has been busy nurturing a community of fruitful engagement and scholarly research.
The MFM project also organized three consecutive MFM Summer Session for Young Scholar camps in 2016, 2017, and 2018, which have served as a model for introducing graduate students and post-doctoral students to cross-disciplinary research at the intersection of macro and finance through structured presentations by established researchers and industry leaders. By organizing these intensive three-day summer camps, the MFM project fostered a network of young scholars who were exposed to frontier research in this area and provided them the opportunity to engage with elite researchers. Some of the elite participants engaged by the MFM project throughout the years include many of the elite executive committee members as well as innovative younger scholars including some with MFM research support. In addition, the project has engaged prominent people from the private and public sectors, including Leo Melamed, CME Group; Tobias Adrian, IMF; Lisa Emsbo-Mattingly, Fidelity; Blu Putnam, CME Group; Laura Kodres, IMF; Tao Wang, UBS; Richard Sandor, American Financial Exchange; and Beverly Hirtle, NY Fed. The MFM camps also provided an opportunity for young scholars to present their own early-career research findings and gain valuable feedback from these established scholars through structured talks and poster presentations.
Additionally, the MFM project has awarded 81 dissertation fellowship awards to exceptional young scholars working at the intersection of macro and finance. Some of these MFM dissertation fellowship awardees presented their findings at MFM events including our recent capstone. Some of these students moved on to work at the World Bank, the International Monetary Fund, the Federal Reserve and other state Federal Reserve banks.
The project has convened regular meetings since 2012 so scholars could present research, discuss and critique macro models that capture aspects of financial markets. The last seven years culminated in a capstone meeting on February 21 and 22 in New York City, featuring presentations about findings from the MFM project’s executive committee members who received MFM funding to pursue innovating work on macroeconomic models with financial sector linkages or related topics in this area. The MFM’s capstone event brought together leading academics, policy makers, and top finance industry executives to acknowledge the advances to date in our understanding and to better appreciate remaining challenges. The papers presented illustrated different ways to incorporate uncertainty and financial frictions into macro models using a variety of different empirical and theoretical approaches.
Two papers looked at the role of credit.
Chris Sims took an empirical approach to probe a correlation long taken for granted: that credit increases economic growth. This relationship on its surface makes intuitive sense, but is still not well-understood. For example, what conditions must exist for a credit expansion to become contractionary, as it did in 2008? Most macro models assume more credit means more growth, but this is clearly not always true. His paper uses a Vector Auto-Regression to detangle the relationship between credit expansion and economic growth. His inclusion of real estate prices captures how the macroeconomy responds to various shocks, for example shocks to real estate or commodity prices. He estimates that credit is indeed expansionary. Even in instances when a credit expansion eventually leads to a decline in GDP, the growth that precedes the recession and the recovery that follows suggest that credit is a net positive.
Andrea Prestipino presented a paper co-written with Mark Gertler and Nobuhiro Kiyotaki that develops a model in which banking crises are caused by credit booms. However, as in the data, in their model, many credit booms do not result in banking crises. They use this model to study macroprudential regulation and argue that the cost of a damaging crisis is large enough to justify policies that avoid crises by preventing large credit booms.
Two papers focused on how systemic risk can arise in the credit default swap market. Bernard Herskovic’s paper, which contained a model of systemic risk within the over-the-counter CDS market, demonstrates how, when markets are thin, a single seller of risk that takes on a large position can pose risk to the system. Robert Engle illustrated this hypothesis with a real-life example of a major dealer exiting the market, the Lehman bankruptcy in 2008. By mining bankruptcy records to measure different spreads using bankruptcy, Engle shows how expensive a systemic risk event can be when a major dealer exits the markets.
Previously unseen frictions
Anna Pavlova presented a paper co-written with Anil Kashyap, Natalia Kovrijnykh, and Jian Li that models how benchmarking distorts capital markets. Asset managers are judged based on how they perform relative to their benchmarks, normally an index of similar assets. As a result, corporations included in a benchmark (often firms large enough to be included in the S&P 500) enjoy lower costs of capital because asset managers buy up those companies’ stocks to ensure they don’t underperform the benchmark. Not only could benchmarking distort the price of capital, it could also encourage large firms to take more risk exposure.
Another friction lies in short-term interest rates. Many macro models assume that the short rate is under central bank control. Standard models also assume the short rate influences the macroeconomy through certain channels, such as whether individuals consume or invest and in valuing equity. A paper presented by Moritz Lenel, co-written with Monika Piazzesi and Martin Schneider, models how and why short rates diverge from the remainder of the term structure, what they call the “short rate disconnect.” Since short-term risk-free assets are mainly held by financial intermediaries that use these assets as collateral, short rates fall when demand for collateral increases—which is exactly what happens towards the end of a credit boom. The existence of the means the channels through which monetary policy operates may also be more complex than standard models predict.
Harald Uhlig presented a paper co-written with Dirk Krüger that introduces idiosyncratic wage risk into a standard neo-classical growth model. They tweak the standard model to accommodate a world in which workers protect themselves against their idiosyncratic labor income risk by buying insurance. The economists derive the conditions, depending on the interest and discount rate, when insurance is optimal. The presence of an insurance market also influences the market rate of interest. The long-term goal is to imbed this structure in DSGE models. This can allow economists to explore worker/firm and banker/borrower relationships more accurately in a DSGE framework, which can help policy makers understand how certain parameters impact the economy in the presence of risk.
Antoinette Schoar’s paper, co-written with John Parker, Duncan Simester, and Maarten Meeuwis, uncovers an example of heterogeneity in investing. Economists generally assume differences in information or risk preferences separate investors. But their paper finds other factors can influence risk taking when a shock occurs. They study investor stock allocation, following an unforeseen shock – the victory of Donald Trump in the 2016 US presidential election. It seems that investors have different outlooks depending on their interpretation of the same information and that this variation in behavior can show up in geographic clusters.
Macro and financial economists also have better tools to capture macro-financial linkages. Fabrice Tourre presented new software he developed with Lars Peter Hansen and Paymon Khorrami. It is a DSGE model that includes financial frictions. The software is freely available online for download. It will empower researchers and policy makers to better understand how financial frictions impact macro and financial outcomes.
The 2019 MFM Capstone conference also included a panel discussion with policy experts, including Nellie Liang, Brookings Institution; Tobias Adrian, IMF; Richard Berner, NYU Stern School of Business; and Wilson Ervin, Credit Suisse Group. While much has been learned since the financial crisis in 2008-2009, the group shared their perspectives on the current modeling challenges and existing knowledge gaps. The panel discussion, moderated by MFM project co-director, Andrew W. Lo, focused on a number of different topics and questions, including:
• How effective are alternative macroprudential tools?
• How should macroprudential policy respond to macroeconomic and financial market indicators?
• What are some of the successes and failures of the Office of Financial Research (OFR)’s methods of data collection?
• What hope remains for monitoring and managing financial stability in the future?
Since MFM’s inception seven years ago, the field of economics has made much progress in building models that better capture macro-financial linkages and frictions that traditional models tend to overlook. The models presented at the group’s 2019 meeting are a testament to how far economists have come since the crisis. These efforts have deepened our understanding of how monetary policy tools are transmitted across a diverse economy with heterogeneous agents. These insights can help policymakers better understand vulnerabilities of the financial sector as they explore how best to design and implement policies in the future.
Throughout its seven-year history, the MFM project produced:
• Hundreds of papers and an online compendium of research related to better measurement of systemic risk
• Innovative and improved software tools for macroeconomic modeling,
• New knowledge in the form of dissertations and journal articles that explore linkages between economic sectors
• A network of prominent scholars and innovative early-career researchers actively working in this field.
But there is still work to be done—a point underscored by Robert Merton in his keynote speech. A longtime advocate of enhanced macro-financial integration, Merton urged young scholars to use the tools from finance to measure and gauge risk, pioneer new ways to diversify risk, even the presence of new frictions like capital. He also offered new insights on an often-neglected area of finance, personal finance, or how people save and invest for retirement.
Many areas of research remain unexplored, and more will emerge as the economy continues to evolve. An understanding of how to approach risk and uncertainty will be more critical than ever.
Going forward, the MFM project will retain certain components of its activities, while eliminating others due to a lack of funding. The group will work to invest in a cross-linked MFM online presence across multiple entities with overlapping research aims to construct a better platform for demonstrating the tools and information generated by the MFM Executive Group projects. In addition, the project will potentially continue to hold semi-regular summer sessions targeted toward young scholars, as this has proven to be a fruitful endeavor.
The group will continue to maintain its research advances, tools and software on its website and will further engage elite scholars in its community in future converging efforts such as research conferences and other engagements. In addition, research entities with overlapping interests in macro economics and finance at the University of Chicago, MIT, Princeton, NYU Stanford and elsewhere will continue collaborative efforts and will engage other entities such as the Macro Finance Society to continue to nurture innovative research.
By raising the level of dialogue on important policy challenges triggered by macro finance linkage, funding a total of 81 dissertation fellowship awardees, and gathering hundreds of contributors at its regular events and conferences over its seven-year-history, the MFM project has played a vital role in nourishing a vital community of scholars dedicated to producing frontier research in this arena.
The Winter Macro Financial Modeling Meeting is a research project supported by a generous grant from the Alfred P. Sloan Foundation, CME Group Foundation, and Fidelity Management & Research Company.
Read the full event recap and watch videos from the 2019 Macro Financial Modeling Winter conference here.
February 18, 2019
MFR Program Launches MFR Suite, a collection of Python modules for conducting analysis in Macro-Finance
The MFR Suite provides a collection of Python modules for conducting analysis in macro-finance. In particular, it provides the model solution to the framework developed in Hansen, Khorrami, and Tourre (2018). In addition, it provides two independent modules to compute stationary density and shock elasticities (see Term Structure of Uncertainty in the Macroeconomy and Shock Elasticities and Impulse Responses).
To report issues or suggest improvements for the MFR Suite team, submit feedback here.
We would like to thank project associate Joseph Huang for developing the MFR Suite. We would like to gratefully acknowledge the Macro Financial Modeling project through the generous financial support from the Alfred P. Sloan Foundation and Fidelity Investments and to thank Amy Boonstra, former MFM Executive Director, for her unconditional support. For their feedback, we thank Yu-Ting Chiang (University of Chicago), Jian Li (University of Chicago), Simon Scheidegger (HEC Lausanne), Elisabeth Proehl (University of Amsterdam), and conference participants at the 2nd MMCN, PASC18, University of Zurich, Northwestern University, and participants at the Economic Dynamics Working Group at the University of Chicago. We also would like to thank the Research Computing Center at the University of Chicago for their guidance on high performance computing, in particular Peter Carbonetto and Hossein Pourreza.
Two different University of Chicago entities, the Research Computing Center (RCC) and the Macro Finance Research Program (MFR) are establishing a formal bridge to coordinate computational efforts and overlapping aims. The Macro Finance Research Program, led by University of Chicago’s David Rockefeller Distinguished Service Professor, Lars Peter Hansen, has had a long-standing goal to compare and contrast implications of dynamic stochastic economic models with financial frictions through the study of their non-linear transmission mechanisms. The models of focus for the MFR program are continuous-time stochastic models with financial intermediaries and heterogeneous productivity, market access and aversion to risk on the part of households and experts. Nonlinearities are induced by the restrictions on the market opportunities. The types of comparisons result in macroeconomic quantity implications, asset pricing implications and the design of regulatory policy.
The Research Computing Center (RCC), under the leadership of Hakizumwami Birali Runesha, is dedicated to providing the University of Chicago community a full-service high- performance computing (HPC) center, including visualization resources, access to software, workshops, one-on-one consulting with domain experts, and complete data-management strategies to researchers across all departments and divisions.
RCC director, Hakizumwami Birali Runesha, and MFR director, Lars Peter Hansen, meeting to discuss collaboration.
While these two research entities have different interests, each can learn from the other in terms of problems of interest and numerical solutions to those problems. The two teams have been collaborating to enhance the potency of the computational efforts. Specifically, under RCC’s guidance, the MFR Program successfully set up and used PARDISO (Parallel Sparse Direct Solver) for large-scale matrix decomposition, using multiple processors on midway clusters. Furthermore, RCC pointed the MFR team to gradient methods, such as conjugate gradient (CG), to solve linear systems. The RCC also provided valuable suggestions to the MFR team pertaining to the use of preconditioners in improving performance, as the MFR team tackles the curse of dimensionality.
The RCC helped immensely with the software development of the MFR Suite, a collection of Python modules used for the macro-finance analysis, the core of which is written in C++. Realizing that C++ is not widely used, the MFR team, under RCC’s guidance, developed Python wrappers and a graphic user interface, such that the researcher can analyze models without coding at all. With RCC’s help, the MFR Program packaged its code into user-friendly software and launched it free to the public on February 18, 2019. Two and a half months after its launch, the MFR Suite has 118 subscribers. The MFR Suite was also presented at the 2019 Macro Financial Modeling (MFM) Winter Capstone Conference and was recently used in an online course taught across eight universities, including Chicago and Princeton, among others, taught by Lars Peter Hansen, Markus Brunnermeier, Yuliy Sannikov, Fabrice Tourre and Paymon Khorrami.
Going forward, the MFR and RCC will meet regularly to establish overlapping efforts and to help increase the efficiency of MFR’s computational projects. At the same time, the MFR program will put forward new computational challenges on the radar of the RCC. Through this formal bridge, the two entities will work to come up with innovative and user-friendly software packages that will be disseminated to a broad research community within economics and finance.
RCC and MFR team meeting to discuss collaboration.
December 4, 2018
MFR Program Announces 13 Previous MFM Fellowship Awardees are Currently on the Job Market
These doctoral students were awarded dissertation fellowships funded from the Alfred P. Sloan Foundation, CME Group Foundation and Fidelity Management & Research Company for their exceptional work on pursuing work on macroeconomic models with financial sector linkages.
This research venture works to construct better, more comprehensive models for assessing systemic risk stemming from activities in the financial sector that can impact the economy as a whole. To encourage new research in this area, we are funding relevant dissertation proposals that examine:
- Macroeconometric models and methods with financial sector constraints
- Approaches to defining, measuring, and monitoring systemic risk
- Modeling and measuring the impacts of macroprudential regulation
- Fiscal challenges from the public sector
- The role of accounting in financial stability
The MFM fellowship awardees currently on the job market are the following:
July 9, 2018
Lars Peter Hansen Reflects on the 2018 MFM Summer Session for Young Scholars at Cape Cod, MA
On June 17- 21, 2018, we held our third summer camp for the Macro Financial Modeling (MFM) project at Wequassett Resort and Golf Club at Cape Cod, MA. We again attracted a high-quality and energetic group of young scholars interested in the connections between macroeconomics and finance.
In 2000, the National Research Council (NRC) published a report on how to nurture linkages between mathematics and the sciences. Lars served on this committee and was intrigued by one of the featured recommendations:
“Increase the number of specialized summer institutes … organized around a core of committed senior scientists and mathematical scientists, and aimed at fostering linkages between the sciences and mathematical sciences. The Geophysical Fluid Dynamics Program at Woods Hole (incidentally Woods Hole is located at Cape Cod and administered by the University of Chicago), … could serve as a model for introducing senior scientists, graduate students, and postdoctoral fellows to cross-disciplinary research and for sustaining their interest in and commitment to such research. … Such institutes (programs) would foster the prolonged interactions necessary to establish meaningful cross-disciplinary collaborations, provide researchers opportunities to network with colleagues from other disciplines, and help a core group of researchers establish a sufficient understanding of each other’s disciplines to recognize promising research opportunities at the disciplines’ interface.”
This idea percolated over the years and was in part a motivator for our summer camps aimed at exploring linkages, not just between mathematics and the sciences, but between the important fields of finance and macroeconomics. With Andy Lo’s complementary vision, Amy Boonstra’s unbounded energy, and the willingness of key elite scholars to attend and participate, the six-year-old MFM project and our community is now a well-established entity with wide ranging participation. This year we had 41 new attendees, 10 previous summer session attendees, 19 posters, 10 lightening talks by student presenters, 3 keynote speeches, 11 scholarly tutorials on a wide range of topics and one interactive panel discussion. In addition, we had two of our earliest MFM Fellowship awardees, Aaron Pancost, University of Texas McCombs School of Business, and BFI Research Fellow, Moritz Lenel, share their experiences with preparing for the job market, allowing our younger scholars to ask questions and seek advice. This is a new component to the summer session that we implemented, and we received great feedback from students reporting that the exchange was valuable in their own preparations for the job market.
This year fintech, financial innovation and investment, and economic challenges in China were included among subjects that were explored. We were treated to a panel with Beverly Hirtle, Executive Vice President Director of Research at the NY Fed with experience in financial market oversight and stress testing, Tao Wang, Head of China Economic Research, UBS Investment Bank with a particular expertise in macroeconomics and finance in Asia, and Richard Sandor, Chairman and CEO of the American Financial Exchange and Professor at the University of Chicago, who has had vast experience in the creation of financial markets.
Equally important was the more informal networking that took place between sessions, over meals and during a boat tour. Young scholars with overlapping interests got to know one another and engaged in conversations with more senior scholars. Often, it is actually the informal exchanges that spark new ideas, new approaches to problems or new perspectives on important challenges. The casual nature of these exchanges allow students to feel more confident seeking feedback from their peers and from the more senior, elite participants. One of the most fascinating aspects of the summer camp is the relentless dedication these students display to fully take advantage of this time given to them to discuss research with their peers, even as the bus returns from a late night dinner and an exhausting day.
While it is difficult to measure the long-term benefits to such a program, we are confident that they are very high. We believe that the most important aspect of the MFM project is the network and community of exceptional scholars that we have successfully created which will ultimately nurture important advances decades into the future. After the summer camp experience, our “campers” were more than happy to share their perceptions of the summer program benefits. Some of the student testimonials are included within this piece.
This year, we invested more time into recording some of the most substantial highlights from the 2018 MFM Summer Session, and we look forward to sharing videos and other coverage soon!
May 23, 2018
Lars Peter Hansen Reflects on MFR’s Two-Day Conference on Taxation and Fiscal Policy
One of the principle aims of the original Milton Friedman Institute, continued with the expanded Becker Friedman Institute, is to provide an intellectual destination for the assessment of the best frontier research in economics. One, and arguably the most important, way this is achieved is through targeted research conferences which bring scholars together with common interests but possibly diverse approaches to exchange ideas and critically assess new research. The exchange of ideas nurtures new research and the critical assessment improves existing research or research in progress. Researchers or small groups of researchers can write working papers on their own, but exposure of this research to the critical eyes of other scholars is a vital part of research production.
On May 18 and 19, 2018, the MFR program, within the Becker Friedman Institute brought an elite group of scholars to the University of Chicago to explore taxation and fiscal policy. The conference was organized by my colleague, Mikhail Golosov, along with Stefanie Stantcheva who is a professor at Harvard University. The aim of this research conference was different from op-ed debates in the media conveying tax policy opinions informed in part by a stock of knowledge drawing on a variety of previous studies. While conveying informed opinions can be socially valuable in structuring politically feasible policy changes, this conference chose instead to take a longer term and a broader attack on the taxation challenges divorced from the political arena.
The conference continued a series of conferences that the BFI has hosted on taxation, debt and monetary policy. At this conference, researchers asked a range of critical questions, including:
- Could capital taxation influence socially productive investments in research and development?
- What are the costs and benefits to making marginal tax rates depend explicitly on the age of the person paying taxes?
- What are the social costs and gains to imposing constraints that limit how fiscally irresponsible governments are allowed to be on a period-by-period basis?
- What are the implications for tax policy when model builders relax the benchmark rationality specifications commonly used in economics?
These are just some of the intriguing questions that were explored over a day and half event. The “output” from such a conference is not a set of fully convincing answers to all of these questions embraced by a complete consensus of researchers. Instead the intellectual engagement and feedback is a vital part of enhancing our understanding of important policy relevant questions and exposing remaining gaps in our knowledge.
Addressing the first question requires both modeling and empirical inputs and invariably leads to more questions. How do we best model the impact of private sector research today on both private and social economic benefits in the future? How are large are the social benefits to private investment in research? What other policy tools might be used to better nurture the social returns to investment? The conference paper helps to open the door to a variety of important research tasks.
In terms of the second question, while I do think of income taxation as typically being age dependent, the broader tax system including, say social security, certainly contains taxes and subsidies that are age dependent. It becomes valuable to step back and ask to look more broadly at tax policy as this paper does.
For the third question, governments are often tempted to push problems down the road as we have seen in recent congressional bills. There is an age old problem of how to design better rules that limit how much “can kicking down the road” governments are allowed to do.
The fourth question might look esoteric in nature. In fact, there is a variety of research looking at how to model decision making in complex environments. These prior advances set the stage for this paper. It opens the door to some hard questions. In these more complex settings, how do we imagine decision makers change their behavior when the policy environment is altered? While this paper focuses on private sector behavior responses, it would seem perhaps equally if not more important to ask about such responses on the part of the government. There is often a naïve call for the implementation of policies correcting private sector distortions when ignoring challenges posed by governmental implementation.
These are just some of the fascinating questions that conference participants were exposed to. To conclude, not only do such conferences help to assess the new flow of ideas on important policy questions, but they also help us re-evaluate the stock on knowledge that has accumulated over time.
May 31, 2018
The Macro Finance Research Program Awards Funding to 16 Graduate students to Advance Their Dissertation Research
To encourage innovative new research developing macro models with financial linkages, the Becker Friedman Institute’s Macro Financial Modeling project under the Macro Financial Research Program awarded fellowships to sixteen promising graduate students to advance their dissertation research.
With generous support from the Alfred P. Sloan Foundation and the CME Group Foundation, the MFM project provides research support to doctoral students in economics and finance pursuing innovative work connecting macroeconomics and finance. This, in turn, advances the project’s goal to work toward identifying more reliable quantitative models better suited for policy analysis that supports stability in the financial sector and nurtures more productive investment in the overall economy.
Students funded for the 2018-2019 year include:
- Igor Cesarec, New York University
- Julia Fonseca, Princeton University
- Violeta A. Gutkowski, Brown University
- Priit Jeenas, New York University
- Gustavo Joaquim, Massachusetts Institute of Technology
- Pierre Guillaume Mabille, NYU Stern School of Business
- Maarten Meeuwis, Massachusetts Institute of Technology
- Fernando Mendo, Princeton University
- Roxana Mihet, NYU Stern School of Business
- Stefano Pegoraro, University of Chicago
- Alessandra Peter, Stanford University
- Ishita Sen, London Business School
- Jincheng Tong, University of Minnesota
- Olivier Wang, Massachusetts Institute of Technology
- Yiyao Wang, The University of Chicago
- Christian Wolf, Princeton University
In order for graduate students to benefit from these fellowship opportunities, the MFM project requires generous support. If you’d like to donate to the MFM project and fund future doctoral research conducted by exceptional students, please contact Diana Petrova, Assistant Director of MFR, at firstname.lastname@example.org
April 27, 2018
Professor Douglas W. Diamond and MFR Program Advisory Committee Member wins the Onassis Prize in Finance
“Doug is a terrific choice for this Prize. He has made truly fundamental contributions to the impact of banking on economic activity and to the field of corporate finance more generally. He is a truly creative researcher, and a penetrating scholar who has provided a very thoughtful perspective on economic policy in the wake of the financial crisis.” — Lars Peter Hansen
Feb 13, 2018
State vs. Shadow
Researchers explore new avenues to investigate the complex relationship between state-owned and private firms in China’s economy
When the Shanghai Composite Index fell nearly 30 percent at the end of July 2015, the Chinese government reacted with a number of policies meant to protect the market from such shocks in the future. These policies, together with those released right after the 2008 global financial crisis, tended to favor state owned institutions over those in the private or shadow sector, and in so doing raised important questions about their impact on the broader Chinese economy. One broad issue is whether the Chinese government’s effort to stabilize financial markets and to restrict shadow banking activity could hinder economic growth by constraining credit access for businesses.
Questions raised by the Chinese government’s response to the 2015 stock market crash—as well as the state’s previous attempts to jump-start the economy following the financial crisis of 2007-08—are of increasing interest to researchers and policymakers, in large part because of the influential role of China’s economy on the world stage. Recently, economists from around the world gathered in New York to address those questions and offer insights into the Chinese banking sector, including the outsized role that the government plays in credit and equity markets. This event was on the occasion of the 2018 Macro Financial Modeling (MFM) group’s winter meeting.
The MFM Project was developed initially in the wake of the Financial Crisis of 2007-08 as a collaborative venture among elite scholars from around the world to provide modeling tools to address the concerns of central banks and others engaged in financial market oversight. Since that time the project has created a network of young scholars and nurtured their entrance into this field of inquiry. This project by BFI’s Macro Finance Research Program in collaboration with MIT’s Laboratory for Financial Engineering.
The overall aim of this project is to conduct policy-relevant research to develop and assess enhanced macroeconomic models that better account for important financial sector influences on the economy. For the first time since its inception in 2012, the MFM Project turned its analytical lens on China, with papers that pushed the boundaries of existing research and raised further issues for analysis.
“One of the important benefits of a conference like this is that it introduces new problems to some of the best scholars in the world,” said Lars Peter Hansen of the University of Chicago, who leads the MFM Project along with Andrew W. Lo, director of MIT’s Laboratory for Financial Engineering. “These papers address challenging and important questions, and while we certainly can’t provide definitive answers at this point, we can help develop a research agenda that offers promises for the future.”
Crashes, Credit, Fire Sales, and Contagion
Following the financial crisis of 2007-08, the Chinese government engaged in fiscal and monetary policies to increase economic growth, much like many other countries. China’s plan had two main components:
• a government spending increase of 4 trillion RMB – or 12.6 percent of China’s GDP in 2008 – over two years, aimed at infrastructure projects and social welfare policies; and
• a set of credit expansion policies – including lower bank reserve requirements and lower benchmark lending rates – meant to increase lending to the real economy by Chinese banks.
However, as noted above, the Chinese economy includes both state-owned enterprises (SOEs) and private firms, within the financial sector. Because of this, the benefits of such policies often skewed toward the SOEs, according to Jacopo Ponticelli of Northwestern University, a presenter at the conference, and his co-authors (“Credit Allocation under Economic Stimulus: Evidence from China”).For example, SOEs experienced more bank credit growth than private firms, which was a reversal of the pre-stimulus years. Further, within private firms, less productive firms experienced larger credit growth than more productive firms,which the authors conjecture may be due to political connections.
Such inefficiencies were exacerbated by the actions of state-owned banks, Ponticelli says, which did not respond to the monetary stimulus policies at rates greater than private banks, as otherwise expected, given that they received preferential treatment. In the end, China’s policies may have prevented some employment loss, but at the expense of productive investment and long-run growth.
In “The Nexus of Monetary Policy and Shadow Banking and China,” Kaiji Chen of Emory University and his colleagues investigate the linkage between government policy and its influence on private vs. state-owned banks. State banks, which held 47.4 percent of total assets in 2015, were not allowed to bring shadow banking products into their balance sheet. On the other hand, private banks— which experienced relatively lax regulatory oversight—had an incentive to add shadow banking products to their portfolios. This occurred primarily during the run-up to the crash, when monetary policy was tightening. The net effect, as Chen described, was that the effectiveness of the Central Bank’s policy to reduce total credit was greatly hindered as shadow bank lending increased during this period.
At the same time that Chinese authorities tried to steer the country’s monetary and fiscal policies against the currents of SOEs and private firms, other waters roiled beneath the ship of state policy. This was the Chinese stock market, which was fueled in part through loans provided by the shadow banking sector. A group of scholars at the conference, presenting two papers and incorporating previously untapped data sets, presented on the topic of the 2015 Chinese stock market crash, which offered further insights into the complex nature of China’s economy. To begin to understand the forces that drove behavior during the crash, Kelly Shue of Yale and a co-author of “Leverage-induced Fires Sales and Stock Market Crashes,” offered a simple exercise. While economists often speculate about “fire sales’’ this investigation provided evidence for how they can transpire. A fire sale is triggered when investors become concerned that they are too highly levered and won’t be able to borrow in the future. For instance, brokers may demand that investors cover possible losses (a margin call). Selling risky assets reduces their leverage position, but such a market response induces downward price pressure. There is a further indirect impact as the market value of the remaining collateral is reduced. The price drop that ultimately emerges is a fire sale price. The empirical evidence in these papers helps us to understand both that financial markets are vulnerable to fire sales and how long they last, be it hours, days or weeks. Sell-offs in one market can spill over to others, as the initial price deductions can trigger collateral effects. Understanding such cross-market impacts in Chinese security markets is the thrust of another paper presented at the conference, “Leverage Network and Market Contagion.” The paper, presented by Dong Lou of the London School of Economics, utilized account-level data to investigate co movement among assets in leveraged networks of investors. A possible policy response, according to Lou, would be for the government to focus on stocks that are central to a leveraged network, as they are more vulnerable to negative shocks.
Fire sales and contagion are critical elements in understanding what happened during the Chinese stock market crash of 2015, and these two papers describe well how those phenomena occur, according to Markus Brunnermeier of Princeton University, who discussed the work at the conference. However, Brunnermeier noted the need for the researchers to more sharply define the timing of such events and their duration, as well as the need to identify causes of such shocks.
Finally, further complicating matters is the investor make-up of Chinese markets—85 percent domestic retail vs 15 percent institutional. This means that the great majority of Chinese investors were personally feeling the losses or fearing potential losses, according to Shue, and their rational attempt to manage their own loans and investments led to market turbulence.
When the 2015 crash hit, stoked in part by shadow lending, the Chinese government—just as it had following the crisis of 2007-08—had to make policy decisions with both SOEs and the private sector in mind, but with incomplete knowledge of the likely impact on both. Only recently, with a new wave of research exemplified by the papers presented at the MFM Winter 2018 Meeting, and by incorporating revealing new data sets, are researchers able to take a closer look at government policies and their effects. The insights extend beyond enhanced assessments into the Chinese economy. While there are unique attributes to the Chinese economy, an improved understanding of fire sale triggers in financial markets, their potential to spread and the time horizon over which they persist are questions with much broader implications for financial markets around the world.
UChicago’s Hansen sees this work as an important beginning to an enhanced understanding of Chinese financial markets, the impact of shadow finance, and consequences of alternative government policies. While it is too soon to claim that we have full knowledge of the interplay between finance, markets and the Chinese economy, this work is an effective start. Future efforts supported by MFM, along with the scholarship inspired by this conference, will further inform these issues.
February 6, 2018
The Riddle of Latin American Economies
Scholars Join Forces to Create a Monetary and Fiscal History of Latin America
Macroeconomists have long been interested in how best to design monetary and fiscal policies that address the societal needs provided by governments and nurture the overall performance of economies. They confront this challenge by building formal models that are designed to capture the policy inputs and macroeconomic outcomes and have empirical credibility.
While there is a tendency in public discourse to focus on monetary and fiscal policies as distinct, in fact there are important interactions between the two. Neither operate in a vacuum, and collectively they can have a major impact on the overall performance of an economy. On April 1, 2016, the Becker Friedman Institute held a conference assessing some of the overall conceptual and empirical challenges posed by interactions of monetary and fiscal policy. The aim of the project featured at this conference was to draw on Latin American economic history to further our understanding of which policies best nurture economic success and which result in bad outcomes. This complements George Hall and Thomas Sargent’s research described in Sargent’s Fiscal Insights piece called, “Honoring Public Debts.”
This is no small task, acknowledges Juan Pablo Nicolini, one of the organizers of the collaborative research effort titled “The Monetary and Fiscal History of Latin America.” However, he says, the time is right for economists to turn their attention to the vexing questions left in the wake of Latin America’s post-World War II economic performance. “We have the tools today,” Nicolini says, “and we are gathering important new data sets to shed light on Latin America’s turbulent economic performance in recent decades. We not only hope to help explain the past, but also to provide insights for better policies going forward.”
The Becker Friedman Institute, under the leadership of the University of Chicago’s Lars Peter Hansen, initiated sponsorship of this project starting in 2014. Nicolini, senior economist at the Federal Reserve Bank of Minneapolis, is joined by Tim Kehoe of the University of Minnesota, and BFI Distinguished Fellow Tom Sargent in leading this project, which has engaged more than 30 economists to provide supporting research and analytical insights on 11 Latin American countries. The Becker Friedman Institute sponsored two conferences in Chicago, the most recent in December 2017, and six country-specific conferences and workshops dating back to 2014, where economists presented and refined their work. Among University of Chicago faculty, Fernando Alvarez has been actively engaged in this project. The next step is to publish the completed papers, along with a comparative analysis that will describe common themes and suggest how to better structure macroeconomic policies going forward.
According to Hansen, these Latin American countries provide important sources of evidence to enrich existing models that connect monetary and fiscal policy. “My whole interest in this project from the outset has been to introduce some systematic evidence that can be used for proving grounds for alternative economic models and theories,” Hansen says.
To achieve that aim, the researchers are not only employing a common conceptual framework, but they are also building a comparable data set, according to Alvarez. The data, he says, will serve as an important contribution for future work. “As economists, we propose hypotheses, write models, and test them with data,” Alvarez says. “Some of these experiments are so extreme that they lend to speculative answers. However, we still need to test them, and that’s why a good database is so important.”
For some countries, data can be elusive. Abrupt regime changes—sometimes violent—along with corrupt institutions, means that data gaps exist over key timeframes. In those cases, economists have engaged with local officials, in person and long-distance, to comb through records and piece together reliable data. “This is the first effort of its kind,” Alvarez says. “And we’re doing everything possible to get this right.”
Many of the 11 countries have similar experiences, which will allow for common lessons, but Kehoe stresses that all Latin American economies cannot be lumped together. For example, while some have famously experienced hyperinflation measured in the hundreds and even thousands, others, like Colombia, never experienced hyperinflation.
The varied experience with inflation is just one of many perplexing questions facing the researchers. As an example, Nicolini and his co-author, Francisco Buera, ask in their paper, “The Fiscal and Monetary History of Argentina, 1960-2013″:
- Was a particular crisis driven by primary deficits, by increases in the world interest rate, or by changes in the countries risks?
- Was the “too big to fail” doctrine used during the period to justify bail-outs to the banking sector?
- Is there any evidence of moral hazard problems in periods previous to the crisis?
- Is there any evidence that central bank independence legislation changed the way monetary and fiscal policies interacted?
A central mystery for many Latin American economies, according to Kehoe, is that they were poised after World War II for economic success, much like the United States and other developed economies. At that time, Kehoe says, nobody would have predicted East Asia’s rise over that of Latin America, and yet that is exactly what happened. But why did it happen? “I’m not going to tell you that we’re going to provide all of the answers,” Kehoe says. “But we are going to arrange the stories.”
That was the advice of Francois Velde, senior economist at the Federal Reserve Bank of Chicago, and a discussant at the recent conference. An economic historian, Velde encouraged his colleagues to “find a narrative” among their many narrow points of research. In his closing remarks, Sargent repeated Velde’s advice, reminding the gathered economists of the scientist’s job to spot patterns and to organize them in meaningful ways.
One of the scholarly inspirations for this research effort is the 1981 paper by Sargent and Neil Wallace, “Some Unpleasant Monetarist Arithmetic,” which warned policymakers against overconfidence in monetary policy for controlling inflation without simultaneously considering the underlying fiscal challenges. While Sargent and Wallace wrote about unintended consequences of US deficits, the issues that they raised—along with those embedded in research on the so-called “fiscal theory of price level’’ by Michael Woodford, Christopher Sims, John Cochrane and others—carry over more generally to Latin America and other economies around the world.
While some may be concerned that studies of Latin America are too unique to be of a broader economic interest, Alvarez challenged this viewpoint and encouraged the economists to revisit another 1981 paper by Sargent, “The Ends of Four Big Inflations.” In that paper, Sargent stressed that contemporary countries—like the United States—had much to learn from the past struggles of other countries, a lesson that applies today: “… I have encountered the view that the events described here are so extreme and bizarre that they do not bear on the subject of inflation in the contemporary United States. On the contrary, it is precisely because the events were so extreme that they are relevant. … I believe that these incidents are full of lessons about our own, less drastic predicament with inflation, if only we interpret them correctly.”
As scholars have probed into the details of different countries’ experiences, they have exposed important contributing factors to how macro policies operated in the past. While the economic models necessarily pose monetary and fiscal policy in formal ways, there are important institutional details that undermine the actual conduct of these policies. This becomes an important part of the narrative of the experiences in these economies. The value of stable institutions immune from corruption, and longer-term commitments to credible policies not vulnerable to short-sided political motives, emerge as common themes from this exploration across various Latin American economies. The cross-country comparisons will open the door to further strengthening our understanding of the circumstances when monetary and fiscal policy and their interplay can either enhance or weaken economic performance and development.
he following three videos, with economists attending the December conference, provide unique insights into questions surrounding the economic history of Latin America:
Spotlight on Chile with Jose De Gregorio, Former Governor of the Central Bank of Chile and Professor of Economics, Universidad de Chile
Spotlight on Mexico with Felipe Meza, Centro de Investigacion Economica, Instituto Tecnologico Autonomo de Mexico
Spotlight on Argentina with Ricardo Lopez Murphy, Former Minister of Economy and Defense for Argentina, Academica Advisor, FIEL
Read the full news feature article on the Becker Friedman Institute website.
February 6, 2018
The Becker Friedman Institute initiated sponsorship of a major project starting in 2014, “The Monetary and Fiscal History of Latin America,” to investigate the complicated economic histories of 11 Latin American countries. Since then, BFI has engaged more than 30 economists to provide supporting research and analytical insights for the project and sponsored six conferences, in which economists received feedback and refined their work. A unique aspect of this project is that researchers are employing a common framework and building comparable data sets. While each country is different, many share similar experiences that will allow for some common lessons to emerge. A December 2017 conference sponsored by the Becker Friedman Institute’s Macro Finance Research Program (MFR), under the leadership of Lars Peter Hansen, was the final gathering of researchers prior to the release of their papers. The next step is to publish the completed papers, along with a comparative analysis that will describe common themes and suggest how to better structure macroeconomic policies going forward.
The following three videos, with economists attending the December conference, provide unique insights into questions surrounding the economic history of Latin America:
Spotlight on Chile with Jose De Gregorio, Former Governor of the Central Bank of Chile and Professor of Economics, Universidad de Chile
Spotlight on Mexico with Felipe Meza, Centro de Investigacion Economica, Instituto Tecnologico Autonomo de Mexico
Spotlight on Argentina with Ricardo Lopez Murphy, Former Minister of Economy and Defense for Argentina, Academica Advisor, FIEL
January 11, 2018
The 2018 Macro Financial Modeling (MFM) Winter meeting will be held on January 25-26, 2018 in New York City.
The Winter Macro FInancial Modeling Meeting is a research project supported by a generous grant from the Alfred P. Sloan Foundation, CME Group Foundation, and Fidelity Management & Research Company. The main organizers of the conference are Lars Peter Hansen, University of Chicago, and Andrew W. Lo of Massachusetts Institute of Technology.
Learn more about the MFM project here.
Find information about previous MFM meetings here.
January 10, 2018
Chicago Research Fellow Piotr Dworczak Awarded Amundi Smith Breeden First Prize
Many important financial trades are made through more informal over the counter markets rather than exchanges. Especially since the financial crisis there has been considerable interest in obtaining a deeper understanding of how such markets function and how successful they are in supporting efficient trades among interested parties. This article, co-authored with Darrell Duffie of Stanford University’s Graduate School of Business and Haoxiang Zhu of MIT’s Sloan School of Management, provides new insights by showing that reliable benchmarks reduce informational asymmetries between customers and dealers, thereby increasing the volume of socially beneficial trades. The increase in trading volume may offset the reduction in profit margins, giving dealers who can coordinate an incentive to introduce benchmarks. The authors argue that benchmarks deserve strong and well-coordinated support by regulators around the world.
The journals’ associate editors selected the top three papers published in the first five issues of the 2017 and in the December issue of 2016 for the Amundi Smith Breeden Prizes in any area other than corporate finance.
View the original feature story as it appears on the Becker Friedman Institute website.
December 7, 2017
2017 Latin American Fiscal Studies Conference
This conference will discuss a series of papers that–by using a common conceptual framework and building a comparable date set–will narrate the history of the 11 largest Latin-American countries since 1960. That period was plagued by macroeconomic crises of a different nature: defaults, devaluations, balance of payment crises, banking crises or sudden stops, to name the most common ones. The events of the last five years made clear that developed economies are in no way immune to these events. While bad macroeconomic fundamentals like chronic deficits and high public debt appear many times as potential causes for the crises, this does not seem to always be the case. Indeed, as a large literature review has shown, expectations and multiplicity may play a key role in these events. The case studies discussed in the conference will serve as laboratories to test alternative theories and strengthen our understanding of economic crises. This conference is part of a long-run project, funded by the Becker Friedman Institute at the University of Chicago.
View full conference schedule here.
November 21, 2017
I just returned from an insightful trip to visit Tsinghua University in Beijing, China.
It was a busy few days as I gave four talks in total, three of them at Tsinghua University – the Chen Daisun Memorial Lecture in Economics at the Tsinghua School of Economics and Management, a Tsinghua Top Talk for the Graduate Student Union, and a more academically oriented lecture at the Tsinghua Forum & Tsinghua PBCSF Global Academic Leader Forum at the Tsinghua School of Finance.
While I appreciated the opportunity of participating in all three forums, the most fun talk of the three was the Top Talk, in which I was able to share insights with close to 200 energetic graduate students from a variety of fields. Their thoughtful questions led to some interesting exchanges. In my third talk, I shared my perspective on an academic literature on valuation and uncertainty. This allowed me to place some of my recent research into a broader context. In addition, I met with several scholars over a two-day period and found the environment to be intellectually vibrant.
I had the opportunity to talk to some of the administrative leaders, including the university president, Qiu Yong, about potential collaboration between Tsinghua University scholars and the Macro Financial Research Program (MFR) that I oversee at the University of Chicago. Zhiguo He of University of Chicago had set the stage for these conversations. He is a graduate of Tsinghua and continues to spend time there and collaborates with some of the researchers. He, along with Hui Chen of MIT and others, are keenly interested in furthering the study of credit opportunities, financial restrictions, and investment in China. Tsinghua University was kind enough to make me an Honorary Professor. I was a bit mischievous and asked if the title came with tenure.
China has much to be proud of given its pace of economic development. It has a truly remarkable history. The cultural revolution was very harmful to intellectual endeavors and the nurturing of scholarship. Luckily, it did not fully deplete the stock of human capital so that more open markets including the market for ideas have contributed to China’s economic success. While this transition has been remarkable, there is some cause for concern going forward. The state-owned banks continue to play a prominent role in financing businesses. On the other hand, the shadow-banking sector has arguably been better suited to support new ventures and to nurture creative entrepreneurial activity. There is potential for the government to limit this outside activity to ensure financial stability, but this could inhibit productive investments and retard economic growth.
On Saturday, I was pleased to speak at an event hosted by the National Economics Foundation that honored Gregory Chow and Xiaohong Chen as the new winners of the “2017 China Economics Prize.” Both researchers have made important contributions to econometrics over the last several decades. Interestingly, Xiaohong was born 36 years after Gregory. As many people noted, in addition to his intellectual contributions, Gregory contributed to Chinese scholarship in economics by helping to open the door for many promising scholars in China to attend graduate schools in the United States. Xiaohong Chen was actually one of the initial scholars to benefit from Gregory’s efforts and received her PhD degree at the University of California, San Diego.
Gregory was very kind to me early in my career. Just out of graduate school, I participated in an Economic Dynamics and Control Society conference in Cambridge, England. Gregory was the President of the Society at the time. He was very kind for welcoming me to the event and for allowing me to present joint work with Tom Sargent.
I first got to know Xiaohong Chen when she was recruited as a new Assistant Professor at the University of Chicago. I have followed her career with great interest ever since, and I have written a couple of papers with her. I have learned much from her over the years. As I anticipated, many speakers at the award ceremony discussed specific aspects of Gregory and Xiaohong’s contributions. I chose instead to put their work into a broader perspective and discuss why their characterizations of statistical complexity and the associated econometric challenges contribute to an understanding of a variety of market phenomena and should help us in obtaining and framing a more sanguine approach to economic policy. I ended my talk with a reference to Confucius:
When you know a thing, hold that you know it; and when you do not know a thing, allow that you do not know it – this is knowledge.
October 20, 2017
Reflection from recent trip to Chile
Myself with University of Desarrollo faculty members who organized the lecture
I recently returned from my first trip to Chile. There is a long-standing, well-known connection between the University of Chicago and Chile. The Pinochet regime in Chile is renowned for two reasons – political repression and economic reforms. The former was brutal and indefensible, while the latter had a long-lasting positive impact on the Chilean economy. Indeed, in terms of economics, Chile has become one of the best success stories in Latin America. The so-called “Chicago boys,” trained at the University of Chicago, played a central role in designing and implementing liberal reforms following the economically flawed policies of the previous socialist government of Allende. The long-term impact of some of these reforms has been an interesting and valuable test case for economists and governments.
Against this backdrop, I was pleased to visit Chile in person, to share ideas and learn from local expert economists and policy-makers. During my two and half-day visit, I gave three talks in total. One of the lectures was an academic talk at the Pontifical Catholic University of Chile, and another was an open lecture to about 600 people at an event in downtown Chile hosted by University of Desarrollo (University for Development) in Santiago. My third talk was during a dinner to a group of about 130 interested alumni.
In addition, I had two very productive lunches, one at the Pontifical Catholic University and another at the Central Bank of Chile, along with a small dinner with faculty from Catholic University. My talks focused on uncertainty conceived broadly and its implications for markets and policy. The lunches and private dinner were fascinating to me, as they allowed to me engage in wide-ranging policy discussions pertinent for both the Chilean and the U.S. economies.
As part of the economic reforms of the past, Chile designed a pension system to help people save for their own retirement and to avoid burdening current taxpayers to support the pensions of existing retirees. While I like the aims and basic design, the current pension system is under attack because many retirees expected to be in better shape financially. They did not save sufficiently to provide the retirement income they hoped they would receive. There are some calls to have the government scrap the basic approach, but this would be a mistake. In my view, it would be better to structure incentives and encourage more savings from some during their working lives. Transient subsidies might be required in the short run, but these should be phased out. Thus, it would be best to make some repairs to the pension system without scrapping the basic approach.
Audience at University of Desarrollo broad lecture
There is a move afoot to provide free education including college or undergraduate education. I am sympathetic to some educational subsidies, but one has to ensure that these investments are done wisely. As my colleague Jim Heckman likes to emphasize, early childhood education can be a valuable social investment. In contrast, government guarantees for free college education are apparently being tied to more governmental control on how the higher education is to be provided and valued. This can be truly counterproductive. I would rather continue to see multiple colleges and universities flourish, nurtured in part by competition. I was also pleased to learn more about the successes and limitations of the voucher system in Chile, aimed at providing school choice and nurturing productive competition.
For these and other reasons, my visit to Chile expanded my understanding of economic policy in practice. The trip served as a reminder that there is more to policy design than abstract constructs that look appealing. The details of implementation are significant and sometimes require a form of “learning by doing.”
At the Central Bank of Chile, I had the opportunity to discuss some of the Macro Finance Research Program (MFR) projects that are currently being undertaken. The Central Bank if Chile will be co-hosting a MFR/BFI event next summer which will take a systematic inventory of what we have learned from the observed and documented monetary and fiscal histories of Latin America.
I very much look forward to my opportunity to return the Chile, and I even hope to have the opportunity to ski there during the summer months in the northern hemisphere.
October 19, 2017
Latin American and Caribbean Economic Association (LACEA) and the Latin American Econometric Society (LAMES) annual meeting – November 9-11, 2017
The Latin American and Caribbean Economic Association (LACEA) and the Latin American Econometric Society (LAMES) 2017 annual meeting will be held in Buenos Aires, Argentina between November 9th and 11th, 2017. This conference will serve as a precursor for the upcoming MFR Latin American Fiscal Studies conference hosted by the Becker Friedman Institute at the University on Chicago on December 11-13, 2017.
Learn more about the LACEA LAMES 2017 annual meeting here.
October 13, 2017
Pierre-André Chiappori, Columbia University, and Maxim Pinkovskiy, Federal Reserve Bank of New York, offer some important perspectives on the public financing of health
As posted on the Becker Friedman Institute for Research in Economics featured news section:
Creating a More Efficient Health Insurance Market in the United States: Goals and Challenges
With the latest legislative defeat of attempts to repeal all or parts of the Affordable Care Act (ACA), there is renewed interest in bi-partisan, evidence-based approaches to reforming health insurance markets in the United States.
Becker Friedman Institute (BFI) Distinguished Fellow Pierre-André Chiappori of Columbia University and Maxim Pinkovskiy of the Federal Reserve of New York explore the performance of the US health insurance system over recent decades, both prior to and after implementation of the Affordable Care Act (ACA). They find that relative to other OECD countries, Americans tend to pay more for less, making the health system a top priority for US policymakers. The authors highlight key misperceptions in discussions around health care reform and target factors for consideration in reforming the ACA, including the ban on using pre-existing conditions in the underwriting and pricing process. Chiappori and Pinkovskiy also explore the role of government in the regulation and provision of health insurance in the United States, raising the basic question of whether health insurance should be linked to employer contacts. Read the full piece here.
Articles in the Fiscal Insight Series are authored by BFI’s Distinguished Research Fellows and use research-based approaches to exploring policy questions around debt, wages, taxes and inflation. The views expressed in these articles are those of the author and not necessarily those of BFI.
Previous articles can be found here.
October 4, 2017
The Fiscal and Monetary History of Mexico 1960-2016: From Fiscal Dominance to Debt Crisis to Low Inflation
The event took place on October 4th 2017 at ITAM’s main campus in Mexico City. The local organizers were Professors Felipe Meza and Diego Dominguez, ITAM faculty, and Dr. Enrique Cárdenas, former director of the research center CEEY in Mexico City, and Mexico’s most well-known contemporary economic historian. The audience included current policy makers from the central bank, the Banco de México, and from the treasury, the Secretaría de Hacienda y Crédito Público, as well as ITAM faculty and researchers from other institutions.
After a description of the Latin America project by Juan Pablo Nicolini, Felipe Meza presented an analysis of the modern fiscal and monetary history of Mexico using as framework the model of Sargent and Wallace. In a first panel his work was analyzed dividing 1960-2016 into periods:
· Enrique Cárdenas analyzed the part of the paper that studies 1960-1982.
· Dr. Ignacio Trigueros, head of the CAIE research center on applied macroeconomics, analyzed 1983-2000.
· Dr. Germán Rojas, Director of Undergraduate Studies at ITAM, analyzed 2001-2016.
In a second panel a group of former and current policy makers analyzed the work presented by Felipe Meza. This panel was moderated by Dr. Alejandro Hernández-Delgado, Provost of ITAM. The group of economists included:
· Dr. Jesús Marcos-Yacamán, former Deputy Governor of the Banco de México
· Dr. Jaime Serra-Puche, former Secretary of Trade and Industrial Development, and former Secretary of the Treasury
· Dr. Francisco Gil-Díaz, former Secretary of the Treasury, and former Deputy Governor of the Banco de México
· Dr. Manuel Ramos-Francia, Deputy Governor of the Banco de México.
Additionally, Dr. Manuel Sánchez-Gónzalez, former Deputy Governor of the Banco de México sent comments by email, as he could not attend the event.
The former and current policy makers provided their thoughts on the implementation of economic reforms, and on policy responses to large events in the economic history of Mexico. There was a lot of interaction between the presenter, the panelists and the audience, and a frank and profound discussion of events that shaped Mexico’s economic history. Two events that generated many comments were the 1982 Debt Crisis, and the 1994 Crisis. The audience and the panelists provided a large amount of feedback that after processing will be added to the paper on Mexico’s fiscal and monetary history.
— Juanpa Nicolini
July 21, 2017
MFM Summer Session for Young Scholars
The 2017 MFM Summer Session for Young Scholars was held at Bretton Woods, NH. Below are Lars Peter Hansen’s reflections from the conference:
It was my great privilege to participate in the 2017 Macro Financial Modeling Summer Session for Young Scholars held at the Omni Hotel at Mt. Washington in Bretton Woods, NH. This was my first visit to Bretton Woods.
The location has much history attached to it. In 1944, 730 delegates from 44 countries participated in a forum to reshape the commercial and financial interactions around the world. Prominent economists such as John Maynard Keynes were actively involved in the conversations. Coming out of Bretton Woods were a set of rules and institutions to oversee the international monetary system. The International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) were created, the gold standard was embraced, and it set the stage for fixed exchange rate regimes. The gathering was at the same hotel, the Mt. Washington Hotel, as this year’s summer camp.
Paymon Khorrami, my co-presenter, and myself at Bretton Woods, NH
It was my pleasure to participate. The lectures covered a wide variety of topics including liquidity, financial network modeling, histories of financial crises and exchange rate regimes, housing finance, along with methods for estimation, inference and model comparison. Many elite scholars gave informative lectures. A lot (perhaps too much) was packed into the first two days of the camp. Two of the speakers, Maryam Farboodi and Luigi Bocola were 2013 MFM fellowship awardees.
Like last year, my co-director Andy Lo and I found value in having private sector and public sector panels with research support leaders adding their perspectives on the important policy challenges and open research questions. Leo Melamed, CME Group Chairman Emeritus’ talk was a real highlight, as he provided a personalized discussion of the breakdown of the fixed exchange rate regime and the resulting emergence of derivative claims markets.
I was particularly impressed with the student engagement, both formal and informal. There were some terrific poster sessions and some nice short talks given by MFM scholars. The MFM project has provided research support for 61 graduate students, and the camp provided an opportunity for some of this research to be presented. Dinners were fun for me because they were engaging. I enjoyed talking to many of the students. I even joined them at the Mt. Washington Hotel bar, The Cave, but embarrassed myself in my attempts to table shuffleboard. It is truly terrific to see such young and energetic talent enter the macrofinance field, and I look forward to watching them develop in the future.
— by Lars Peter Hansen
June 20, 2017
CME Group Chairman Emeritus Leo Melamed Speaks at 2017 MFM Summer Session
Leo Melamed, Chairman Emeritus of the CME Group, was invited to the 2017 MFM Summer Session for Young Scholars at Bretton Woods, NH.
Below is his full speech from the conference, as posted on his website.
Allow me to begin by applauding the Becker Friedman Institute for initiating this Macro Financial Modeling Project and to congratulate its two Project Directors, Lars Peter Hansen, of the U of C and Andrew W. Lo of MIT.
While I congratulate them and agree that identifying the root causes of the 2008 crisis and similar calamities—in a quest to discover a canary for the financial mineshaft—is a noble mission, I feel compelled to tell them that their task is daunting. They are attempting to defy what Georg Wilhelm Hegel sadly told us two hundred year ago: “Experience and History,” he stated, “teach us that people and governments never have learned anything from history, or acted on principles deduced from it.”
Hegel’s admonition stands nearly unblemished.
That said, I feel honored to support this innovative initiative by offering some brief thoughts. I assume that one reason for my invite here is that much of my life is intertwined with Bretton Woods. As everyone knows, it was here in Bretton Woods, at the Mount Washington Hotel, in 1944, that there was an assembly of 730 delegates from 44 Allied Nations in order to re-establish financial order in a war-torn world after the Second World War. No, I was not present. I was just a child at that time and had just arrived to this country.
The squeaky wheel at Bretton Woods
The Conference lasted three weeks, from July 1 to July 22. The agreement established a system of fixed exchange rates in which world currencies became pegged to the dollar, with the dollar itself convertible into gold. Its two principal architects were John Maynard Keynes, representing the British Treasury, and Harry Dexter White, representing the U.S. Treasury. The Articles of Agreement were hailed as a seminal achievement and ratified on December 27, 1944. It ambitiously prescribed open markets but with fixed exchange rates.
There was but one squeaky wheel. A single voice defying the near-unanimous applause for this achievement. The voice belonged to Milton Friedman. He argued that Bretton Woods was doomed to failure. It tried to achieve incompatible objectives: freedom for countries to pursue an independent internal monetary policy; fixed exchange rates; and relatively free international movement of goods and capital.
Allow me to digress. The world eventually learned that Milton Friedman’s opinions were not to be ignored. That truism was adroitly described by Milton’s very good friend, Nobel Laureate, George Stigler, on the occasion of 1976 Nobel Prize celebration for Milton Friedman. Professor Stigler introduced Friedman in the following fashion:
Milton, he said, will begin a debate by asking you to grant him three simple assumptions. For instance: That $2 is better than $1; That the law of diminishing returns is valid; And, that individuals do not have complete knowledge of the future.
Simple, undeniable assumptions, right? My fundamental advice,” said Professor Stigler, “Do not grant him these assumptions. For if you do, you will find yourself led, by inexorable logic, to conclusions such as these:” That the Federal Reserve System should be abolished; that the Board of Governors of the Federal Reserve should be put on Social security; and that Social Security should be abolished.
During the first decade of Bretton Woods, the system worked fine and it looked as if Friedman was wrong. Trouble was the 44 nations grew up. Some of them on a fast track who became competitive to each other and to the U.S. In practice, maintaining announced parities became a matter of prestige and political controversy. Foreign exchange became a competitive tool. Countries held on to parity as long as they could, in the process letting minor problems grow into major crises and then making large changes. Friedman’s prediction was coming true.
The information era and its implications for the fixed exchange rate system
Then, beginning in the late 1950s, the curtain opened on the “Information Era.” Technology created the transistor—perhaps the greatest invention of the 20th Century. With the transistor communication was revolutionized and information began to flow globally in minutes rather than in days or weeks. The technological revolution which is still very much alive, enabled markets to learn facts before finance ministers could gather to react. It became impossible for a fixed exchange rate system to cope with continual changes in currency values resulting from the daily flows of political and economic information. By the late 1960s, the Bretton Woods fixed exchange rate system had become a joke.
As it happened, I was then the chairman of an insignificant, back-water, pork-belly futures market, the Chicago Mercantile Exchange. My good friend, Adlai Stevenson, the former US Illinois Senator, likes to tell the story this way. One day in August of 1971, as Chairman of the Senate Subcommittee on International Finance, he received a note that the President, Richard Nixon, had closed the gold window. Stevenson says he had no idea what this meant. In fact, in his view nobody in Congress knew what it meant. And maybe, he goes on to say, no one in the US— except this one guy at the Chicago Mercantile Exchange.
That is a bit of an overstatement but several things are certain. It wasn’t easy. What the modern world needed, I thought, was a system that would allow currency values to adjust in an ongoing fashion. In other words—at a futures market in financial instruments —where prices reflected continuous changes as demanded by the constant flow of new information. Such a system would allow risks to be hedged and opportunities to be captured in real time.
Futures in finance? “Fuhgeddaboudit!”
In early 1971, my suggestion for a futures market in foreign exchange was met by derision and contempt, not only by my board of directors, but by practically the whole financial world. The idea prompted a prominent New York banker to laughingly say, that “foreign exchange couldn’t be entrusted to a bunch of pork belly crapshooters in Chicago.”
As some in Chicago were apt to say, “Futures in Finance, fuhgeddaboudit.”
Besides, I was a lawyer, not an economist. To achieve a measure of credibility I went directly to Milton Friedman. Not only did he like the idea, at my request, he authored a feasibility paper embracing the concept. That paper proved magical. His fee was $5,000. The International Monetary Market, IMM, was launched by the CME on May 16, 1972 and merged with the CME in 1976. Some will tell you that today the CME has a street value of perhaps $100 billion. Now that’s what I call a pretty good trade.
Actually Friedman also tried to defy Hegel’s law by urging President Nixon to abandon fixed exchange rates directly after his election in 1968. Nice try! By the time Nixon acted on August 15, 1971, world currency values were so screwed up, they were nearly beyond repair, and the US was about to go broke selling gold to the whole world at $35 an ounce.
I must admit our timing was lucky. If one could ordain the perfect backdrop for the creation of a new futures exchange designed to manage the risk in instruments of finance, one could not have bettered what actually happened. The decade that followed can be described as a “Perfect Financial Storm,” — turmoil that tested the very foundations of western civilization.
The U.S. dollar plunged precipitously; U.S. unemployment reached in excess of 10%; oil prices skyrocketed from about $7 a barrel to $39; the Dow fell to 570; gold, from its $35 base, reached $800 an ounce; U.S. inflation climbed to an unprecedented peacetime rate of 20%; interest rates went even higher.
The IMM went from currency futures to interest rates to stock indexes and to derivatives across the entire financial spectrum. We were copied by every industrial nation in the world. Not to brag, but in 1986, Nobel Laureate, Merton Miller called financial futures the most important financial invention of the past twenty years.
So, what did history teach us over the past five or so decades? Well, yes, that necessity is the mother of invention. And yes, that timing is everything. But we also learned that when it comes to innovation, the US is the place to be. Could the Internet, Google, Apple, Microsoft, Facebook, or Amazon, to name but a few, have been created somewhere else? I have grave doubts. Could the IMM have been initiated in another country? Same answer.
The U.S. as the world’s crucible for innovation
Thomas Friedman said it best: America, he wrote, allows “extreme freedom of thought, an emphasis on independent thinking, a steady immigration of new minds, and a risk-taking culture with no stigma attached to failure.” Yes, those are the precise attributes that make our nation exceptional. We are the world’s crucible for innovation.
This Becker Friedman undertaking is another example. It is an initiative within the academic sciences which to my knowledge has not been undertaken anywhere else. An innovative effort to jointly advance our understanding of the links between financial markets and the macro-economy. To construct more comprehensive models for assessing systemic risk. To foster discussion and research. To collect resources for analysis and study. And, to the extent possible, to create and share a data-bank of economic information.
In short: To learn from history and act on principles deduced from it, and finally prove Georg Wilhelm Hegel wrong. I wish you luck.
— by Leo Melamed
June 16, 2017
Macro Financial Modelers Make Good
Former MFM Fellows launch successful careers probing sources of financial instability that impact the economy
Two 2013 MFM dissertation fellowship awardees are well on their way to establishing themselves as top scholars. For Maryam Farboodi and Luigi Bocola, their research potential was affirmed their job market success and by their participation in the 2014 Review of Economic Studies Tour. This prestigious opportunity selects top candidates on the job market to visit and present their work to multiple schools in Europe.
Both economists are now engaged in a variety of interesting research projects, so we took the opportunity to interview them and gain a better appreciation of their successes.
Maryam Farboodi initially embarked on a PhD program in computer science with a focus on theoretical work, after earning undergraduate and master’s degress in that area from Sharif University of Technology in Tehran, Iran and the University of Maryland. While she found the work interesting and mentally stimulating, she came to view that angle as a bit too narrow and detached from problems found in the world around her.
“I wanted to do something a bit more significant that allowed me to think about relatively abstract problems with real-world implications,” Farboodi explained.
She decided that pursuing economics would entail broad, interdisciplinary work across various fields she found particularly appealing, so she switched her doctoral studies from computer science to economics, pursuing her degree at the University of Chicago. After graduating in 2014 with interests in banking, financial macroeconomics, and mechanism design, Farboodi accepted an opportunity as an assistant professor at Princeton University.
At Princeton, Farboodi has further focused her research agenda more specifically on financial intermediation.
Bringing the tools of micro and finance to macroeconomics
“Intermediation is a broad field, and many different aspects of it can be studied to provide insights pertaining to the financial sector and the various setbacks that can potentially occur,” she explained. “I am particularly interested in inter-financial institution market structure, information consequences of interactions in the financial sector, market power, and spill over to the real economy.”
One strand of her research focuses on technological choices of financial institutions and their welfare implications with a focus on interbank intermediation. In another sequence of papers, she uses information economics to study the long-run impact of advances in financial technology on economic growth and various types of misallocation that can arise from the interaction of financial and real sector. In another project, she explores the strategic incentives of banks, which is a central concern for enhancing our understanding of systemic risk in the financial sector.
“I believe that the strategic nature of the interaction between financial institutions is actually really important,” she said. “In one of my recent projects, I focus on how these strategic incentives change a lot of factors, such as opacity of the portfolio in order for banks to make themselves gain market power.”
Newer themes in her work bring in microeconomic and corporate finance tools to study questions which traditionally have had a macroeconomics focus, such as sovereign debt.
Receiving an MFM fellowship allowed Farboodi to concentrate only on her job market paper without having to teach. The financial support and the extra time it freed up is one benefit the MFM provided. “The most unique quality of the MFM program is its commitment to promoting young researchers and to expose them to high-quality talks by elite, senior researchers who actively participate and help young scholars evolve their research,” Farboodi concluded.
“I was incredibly lucky to have the opportunity to present at the October 2013 Young Scholars meeting just before I went out on the job market,” she explained. “The exposure that I got from that particular meeting contributed to all of the interviews that I was offered, and this exposure remains invaluable to me.”
This opportunity allowed her to present her work among elite scholars and young researchers and to gain valuable feedback from them.
Probing the sources of instability
Luigi Bocola, another 2013 MFM dissertation fellowship recipient who is now an assistant professor of economics at Northwestern University, derived similar benefits from his MFM support. In addition to the financial stipend, the fellowship gave him the opportunity to present his work in various early stages in front of distinguished researchers. This was instrumental in the completion of his dissertation, according to Bocola.
“What I found most unique about the MFM program is that it was essentially understood that everything presented at the conference was simply a work in progress. That understanding enabled feedback about which components of the work were genuinely worth pursuing and which weren’t,” he explained.
Bocola’s dissertation studied a key aspect of the debt crisis in Europe, namely the negative spillovers that sovereign default risk had on financial intermediation and the real economy. He developed a macroeconomic model in which banks are exposed to risky sovereign debt, and applied the model to Italian data. His work also made progress on the empirical analysis of this class of models, which are inherently nonlinear.
His dissertation was the recipient of the William Polk Carey Prize in Economics, which is awarded annually to the best doctoral dissertation in the Economics Department at the University of Pennsylvania.
Much of Bocola’s research focus since has remained the same, with a continuing emphasis on the exploration of linkages between macroeconomics and finance in an international framework. His recent work has two objectives in mind: identifying sources of financial crises in modern economics and understanding what government policies can do to make the financial sector more stable.
In a recent joint work with Guido Lorenzoni of Northwestern University, Bocola studies the sources of financial instability for emerging markets and the constraints that an open capital account imposes on the lender of last resort.
“We believe our research can shed light on the motivations behind the large accumulation of foreign currency reserves by emerging market over the past 20 years,” Bocola concluded.
Given the successful launch of their professional careers, both Maryam Farboodi and Luigi Bocola were recruited to present their perspectives on important lines of research at the 2017 Macro Financial Modeling Summer Session for Young Scholars in Bretton Woods, New Hampshire, June 18-22, 2017.
— by Diana Petrova
May 23, 2017
Lenel to Pursue Macro Finance Studies as a Chicago Research Fellow
May 2, 2017
Fourteen Scholars Awarded Fellowships to Study Macrofinance
The Becker Friedman Institute’s Macro Financial Modeling Project has announced the recipients of this year’s dissertation fellowships. Thirteen promising new scholars from universities across the United States and Europe were chosen from a highly competitive pool of applicants to receive funding for their MFM research. The project, supported by the Alfred P. Sloan Foundation , CME Group Foundation and Fidelity Management & Research Company, provides dissertation support for doctoral students who are working to advance macroeconomic models with financial sector linkages.
The 2017 awardees are studying an impressive range of research questions, with dissertation subjects including bank consolidation and credit expansion, household finance, institutional risk management, and corporate debt and transmission of unemployment risk.
“Supporting early career scholars is one of the key goals of the Macro Financial Modeling Program,” says Lars Peter Hansen, the David Rockefeller Distinguished Service Professor in Economics, Statistics, and the College and Research Director of the Becker Friedman Institute for Research in Economics. “These awards recognize the contributions that graduate students are making in the field of macroeconomics and finance, and the fellowship process serves as a vehicle to preview some of the cutting-edge work in the field. We look forward to learning more about their progress and potential breakthroughs in their dissertations.”
Sasha Indarte, a PhD candidate at Northwestern University and one of this year’s grantees, says the funding will ease her teaching burdens and allow her to focus on her research studying the effect of bank consolidation on lending standards.
As high school student in Minnesota during the 2008 financial crisis, Indarte saw people she knew losing their jobs and heard disturbing discussions of another Great Depression. That experience inspired her to pursue a career investigating elements of financial crises.
Her current research, which she hopes will be the cornerstone of her dissertation, evaluates large declines in the number of U.S. banks – down more than 50 percent since the 1980s – despite a growing population. Alongside this banking trend, researchers have observed interesting changes in household credit; lower income borrowers are seeking more credit for different types of activities. “My aim is to understand if consolidation is one of the reasons credit has expanded to riskier populations by looking at how borrower and loan characteristics change after bank mergers,” she explains.
Daniel Green, a PhD student in finance at the Sloan School of Management at MIT, was similarly troubled by the 2008 financial crisis and fascinated by the slew of policies that injected billions of dollars into the financial sector, affecting not only financial markets, but the broader economy as well.
Green’s MFM project examines how the type of information available to credit institutions affects lending decisions. For instance, does information about the broader economy versus individual contracts affect the types of industry or the riskiness of projects that a lender will finance, and do those decisions have aggregate implications for the overall economy?
Quentin Vandeweyer is taking a slightly different, more computational approach to his research, illustrating the breadth and diversity of activities supported by the MFM project fellowship program. As part of his PhD work at Sciences Po in Paris, he is working on an innovative methodology to account for heterogeneous incentives and behaviors that the financial sector may have as both a creator of liquidity and a manager of risk.
Vandeweyer’s research interests position him at the intersection of macro, finance, and monetary economics. As an MFM Summer Camp alumnus (2016), he is setting his roots firmly within the MFM community. “I am, of course, delighted to win the fellowship. A big part of growth in research is the interaction you have with different people along the way. The MFM project provides a forum for discussion and exchange of ideas between very smart people with similar concerns and interests.”
In addition to Indarte, Green, and Vandeweyer, 2017-18 awardees include:
Carlos Avenancio-Leon, University of California, Berkeley
Sarita Bunsupha, Harvard University
Cristian Fuenzalida, New York University
Paul Ho, Princeton University
Adam Jorring, University of Chicago
Yann Koby, Princeton University
Anton Petukhov, Massachusetts Institute of Technology Sloan School of Business
Julian Richers, Boston University
Samuel Rosen, University of North Carolina at Chapel Hill
Tianyue Ruan, NYU Stern School of Business
Ishita Sen, London Business School
—by Tina A. Cormier
Macro Financial Modeling dissertation support is provided annually to doctoral students who are working toward improved and more comprehensive models of systemic risk in the financial sector that can impact the broader economy. The application deadline for the next round of funding is February 10, 2018.
February 1, 2016
Students Trace the Causes, Impact of Systemic Financial Crisis
Turbulent times make for compelling research questions
Young scholars funded through the Macro Financial Modeling project are adding to our understanding of the macroeconomic effects rippling out from each of these areas. They shared their research in progress at the January 2016 meeting.
N. Aaron Pancost, a doctoral student at the University of Chicago, used data from India to explore the question of whether and to what extent financial development increases economic growth. Aggregate labor productivity in India growing at about six percent a year, and the financial sector is also growing. Is access to capital driving investment that boosts firms’ productivity?
No, Pancost showed. “What I find is that it’s a common shock to productivity across the board, not financial development, that explains cross-sectional productivity. His results show that firms that are unproductive don’t borrow, while productive firms choose a higher leverage and grow faster on average.
Credit Markets and Liquidity
Two students focused on problems in the financial sector during the recent crisis, presenting work addressing issues of liquidity and credit provision.
Credit market disruptions in the recent crisis were devastating to economy, so Alexander Rodnyansky of Princeton University, in joint work with Olivier Darmouni, looked at how unconventional monetary policy affected bank lending. They found that in the US, the first and third rounds of quantitative easing had a large effect on lending, particularly in real estate, commercial, and industrial lending. QE2 had no significant effect on banks.
The results show that the type of asset used in QE—not just the quantity—makes a difference, Rodnyansky said.
While debt-laden banks stopped lending in the crisis, many also faced insolvency when depositors and investors reclaimed their funds. New Basel rules tried to stabilize the financial system by requiring banks to hold enough assets to withstand a one-month run.
University of Chicago student Fabrice Tourre studied the influence of portfolio liquidity composition on run behavior of banks’ creditors. Taking his model to data, he found that cash can play a novel role in corporate finance, as a run deterrent. Currently liquidity regulations are too conservative for certain firms, and not conservative enough for others, he showed. And it’s not always the case that issuing more long-term debt makes the firm less run-prone.
“The takeaway is that regulators, as opposed to focusing on capital on one side and liquidity on other, should think about them together; the two regulatory regimes talk to each other,” Tourre said.
The Housing Boom Before the Bust
Jack Liebersohn, a Massachusetts Institute of Technology student, shared work that tried to explain the nationwide variation in the severity of the housing bust that precipitated the financial crisis. The standard model holds that local differences in housing supply shocks, mediated by differences in elasticity of the supply response explained the variation. Liberson added a demand shock to the model.
He hypothesized that areas with a large manufacturing sector would have lower payrolls in general and therefore lower demand for housing that would keep prices lower. He comparing areas with high and low manufacturing concentration but also high and low supply elasticity. He found that housing prices rose and fell dramatically in low-manufacturing cities, and less so in cities with greater manufacturing employment. High elasticity dampened the housing price effect, he found.
To see whether higher housing prices led to more consumption, he looked at auto sales, as measured by employment in the auto industry. He found that wages had a much stronger effect on auto sales than housing prices did.
Turning to more methodological issues, Elisabeth Pröhl of the University of Geneva demonstrated a promising approach to using numerical algorithms to solve a labor income risk model with aggregate risk.
Work from Former Grantees
Zachary Stangebye, an assistant professor of economics at the University of Notre Dame, presented theoretical work on sovereign debt motivated by the recent European debt crises. He presented a model in which such a crisis arises, driven by the sovereign’s inability to commit to future debt issuance.
The intuition behind the model is that when investors anticipate high borrowing in the future, they demand a dilution premium on long-term bonds. That forces the sovereign to borrow more today because they can’t borrow as much tomorrow. As a result, high current borrowing causes need for high rollover, which indeed leads the sovereign to borrowing more in the future, fulfilling expectations.
Stangebye’s model imposes a commitment on borrowing, and finds that multiple financing trajectories arise as result of coordination failures with long-term debt
When the model is calibrated to Ireland’s results, it accounts for about 85 percent of the increase in debt-to-GDP ratio seen in the crisis.
Marco Machiavelli of the Federal Reserve Board presented work on the role of dispersed information in pricing default. Studying modern bank runs with data from the recent crisis, he showed that if forecasts about a bank’s viability are bad, lower dispersion of beliefs about a bank’s prospects greatly increases default risk, and amplifies the reaction to changes in market expectations. In other words, more precise and consistent shared information coordinates bank runs, as all investors respond to the information in the same way.
Her work focused on the process of intermediation that provides access to assets and turns risky illiquid assets into safe and liquid ones. In a model with households, banks, and shadow banks, she found that increasing capital requirements on regulated banks caused an increase in shadow bank activity. It also led to higher prices of intermediated assets but reduced default risk for both types of banks.
—by Toni Shears