The 2007-09 financial crisis revealed serious gaps in our understanding of how activity in financial markets affected the economy as a whole. This initiative works to study and clarify the linkages between financial markets—including credit markets that drive the mortgage and housing industry—and the macroeconomy.
Through sponsored research projects, conferences, and interactions with visiting scholars, this initiative focuses on three fundamental questions:
1. How do we construct models and measurements that will better support the prudent oversight of system-wide risks to the financial system?
2. How does the credit cycle influence the business cycle and how does the business cycle affect the credit cycle?
3. How can we improve financial market regulation?
The Macro Financial Modeling Project
Launched in 2012, this broad-based collaborative effort works to Friedman to develop and assess more ambitious macroeconomic models that can identify and measure potential sources of risk better than existing models used by policymakers. It engages economists from central banks and other policy agencies and draws on perspectives from the financial sector 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.
This project has focused on encouraging young scholars to work in this area and develop new models. Another key contribution is the development of a model repository researchers can use to evaluate and compare different models. Learn more »
Housing, Household Debt, and the Macroeconomy
Housing costs are the largest expense for most households and are therefore a significant portion of consumption nationally. Likewise, mortgages account for not just the lion’s share of household debt but also a substantial portion of credit markets. Surprisingly, however, the mechanisms by which mortgage and housing market disturbances ripple through the economy are not well understood.
The University of Chicago is home to a strong and growing group of experts in this area. The institute is supporting their work and fostering a collaborative community of researchers at Chicago Booth, Northwestern University, and the Federal Reserve Bank of Chicago. To that end, the institute sponsored a conference called Housing, Household Debt, and the Macroeconomy in September 2016. Amir Sufi of Chicago Booth organized the conference and collaborates with the institute to bring research on this topic to the fore.
Financial Market Oversight and Regulation
Governments responded to the financial crisis with by creating new agencies to monitor financial risk and regulations aimed at preventing future bank and credit crises. How well have these efforts worked? The institute has sponsored conference organized by Douglas Diamond and Amit Seru and supported research that assesses the costs and benefits of this regulation.
See feature: The Paradox of Frozen Liquidity
Collectively, these three projects will help add to our understanding of what we’ve experienced, respond to future market disruptions, and potentially add to our capabilities to predict where crises may arise.