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.

Maryam Farboodi

“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.

Luigi 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