Project Directors

• Lars Peter Hansen, University of Chicago
  Andrew Lo, Massachusetts Institute of Technology

The financial crisis of 2007–2009 crisis revealed serious gaps in our ability to define, measure, and manage financial sector activities that pose risks to the macroeconomy as a whole.Current macroeconomic models typically used for quantitative and empirical investigations were not well designed to account for important financial-sector influences on the aggregate economy.

To address these deficiencies, the Becker Friedman Institute is launching an initiative to develop and assess more ambitious macroeconomic models.

The goal of our project is to advance knowledge of the interplay between financial markets and the macroeconomy, while contributing more powerful tools for sound policy-making and regulation. Without a solid scientific underpinning, attempts to manage systemic risk may become justification for broad regulatory discretion, which may have serious unintended consequences.

Building quantitatively ambitious new models is a long-term venture that requires a broad-based, collective perspective. This three-year initiative establishes the Macro Financial Modeling (MFM) Group, a network of prominent researchers to develop the next generation of policy tools. These enhanced models will be rich enough to study the impact of shocks that are either initially large or build endogenously over time.

Project Details

The working group will meet regularly to discuss and critique current and proposed models. It will report the group's findings and disseminate relevant research online.

It will provide research assistance and data sets to support efforts to develop new models and work toward creating software for solving and evaluating these models.
We also will provide support for young scholars under the guidance of working group. This project is expected to generate:

• papers and an online compendium of research related to better measurement of systemic risk;
• new and improved software for macroeconomic modeling; and
• new knowledge in the form of dissertations and journal articles that explore linkages between economic sectors.

In the first year of the initiative, the Institute will focus on assessing the current landscape of risk measurement, exploring questions like these:

• What are the virtues and potential pitfalls of existing measures? What new measures will be revealing?
• What data is available to effectively measure risk? What data is lacking?
• How do we address data confidentiality issues?

MFM Group Meetings

The macroeconomic modeling research group held its first meeting Friday, April 6, 2012 in New York.
Related readings »

The next group meeting is planned for September 13–14, 2012 in New York.

Working Group Members

Lars Peter Hansen, Chicago
Andrew Lo, MIT
John Cochrane, Chicago
Marcus Brunnermeier, Princeton
Mark Gertler, NYU
John Heaton, Chicago
Anil Kashyap, Chicago
Nobuhiro Kiyotaki, Princeton
Robert Merton, MIT
Tom Sargent, NYU
Hyun Song Shin, Princeton
Christopher Sims, Princeton
Harald Uhlig, Chicago

Sponsor

This research project is supported with a generous grant from the Alfred P. Sloan Foundation.

Related Activities

The framework for this initiative grew out of the Institute's Measuring Systemic Risk conference held December 15-16, 2010. Cosponsored by the Federal Reserve Banks of New York and Chicago with support from the Chicago Mercantile Exchange Group Foundation, the event brought together leading academics, regulators, and practitioners from the financial industry for active dialogue.

The conference helped identify directions for future research and challenges for implementing new risk measurement models.
See conference coverage »