Macro Finance Research Program (MFR)

Probing how financial market activity affects the broader economy

 

Program Director: Lars Peter Hansen, University of Chicago Department of Economics, Statistics and the Booth School of Business
Program Associate Director: Diana Petrova 

 

One of my great teachers, Wesley C. Mitchell, impressed on me the basic reason why scholars have every incentive to pursue a value-free science, whatever their values and however strongly they may wish to spread and promote them. In order to recommend a course of action to achieve an objective, we must first know whether that course of action will in fact promote the objective. Positive scientific knowledge that enables us to predict the consequences of a possible course of action is clearly a prerequisite for the normative judgment whether that course of action is desirable. The Road to Hell is paved with good intentions, precisely because of the neglect of this rather obvious point. This point is particularly important in economics. ― Milton Friedman, Nobel Lecture, Journal of Political Economy

[read more on Friedman's views and contributions to the economic sciences here.]

This research program will expand our understanding of how financial markets affect the economy as a whole and, conversely, how the macroeconomy influences financial markets. It will do so by bringing together a community of elite scholars with common ambitions to tackle these important challenges. The program operates under the auspices of the Becker Friedman Institute with generous funding support from The University of Chicago Booth School of Business

The program explores the following themes:

Through sponsored research projects, conferences, and interactions with visiting scholars, this program focuses on these fundamental questions:

  • How do we best capture the interplay between monetary and fiscal policy?
  • How do we construct models and measurements that will better support the prudent oversight of system-wide risks to the financial system?
  • How do we provide a more coherent assessment of the financial obligations of government?
  • How does the credit cycle influence the business cycle, and how does the business cycle affect the credit cycle?
  • What broader lessons can we extract from country-specific monetary and fiscal histories?
     

MFR Suite 

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).

DOWNLOAD MFR SUITE 

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.

Proposals 

The program welcomes proposals for University of Chicago faculty and advanced graduate students for research projects involving comparisons of existing linear and nonlinear economic models, linkages between economic sectors, new and improved software for macroeconomic models and other tools related to better measurement of systemic risk, broadly defined. In addition, we welcome studies of macroeconomic impacts of monetary and fiscal policy and their interactions.

Proposals may be submitted at any time to Diana Petrova, MFR Associate Director at dpetrova@uchicago.edu. See links below for more information. 

MFR Request for Proposals 

MFR Request for Proposals Application
 

MFR Advisory Committee

The MFR Program Advisory Committee oversees the research agenda of the program. Members of the committee are prominent experts in macroeconomics and finance with particular interests in exploring linkages between these fields. They have made important substantive research contributions and are well-positioned to help the research agenda for the program.

  • Fernando Alvarez, Professor, University of Chicago Department of Economics
  • John Cochrane, Senior Fellow, Hoover Institution, and BFI Distinguished Research Fellow
  • Douglas Diamond, Professor, University of Chicago Booth School of Business  
  • Zhiguo He, Professor, University of Chicago Booth School of Business
  • John Heaton, Professor, University of Chicago Booth School of Business
  • Anil Kashyap, Professor, University of Chicago Booth School of Business
  • Ralph Koijen, Professor, University of Chicago Booth School of Business
  • Thomas Sargent, Professor, New York University Department of Economics and BFI Distinguished Research Fellow
  • Amir Sufi, Professor, University of Chicago Booth School of Business
  • Harald Uhlig, Professor, University of Chicago Department of Economics
     

Forthcoming Conferences and Events:

Previous Conferences and Events:

Macro Financial Modeling (MFM) Project

Project Directors:
Lars Peter Hansen, University of Chicago, Program and Project Director
Andrew W. Lo, Massachusetts Institute of Technology, Project Director

Launched in 2012, this collaborative venture works to develop and assess enhanced macroeconomic models that better account for important financial sector influences on the economy. The aim is to close gaps in our ability to define, measure, and manage financial sector activities that pose risks to the macroeconomy as a whole.

The project brings together a network of prominent scholars and innovative early career researchers actively working in this field. Since 2012, the project group has met regularly to discuss and critique current and proposed models. With input and regular involvement of policymakers, the group is working to develop the next generation of policy tools.

One major focus of the effort is to cultivate emerging scholars in this area, through dissertation support and opportunities for students to present and refine their work. New this year is a 2016 summer session that will offer doctoral students and other young scholars and professionals working on related topics. Participants will gain insights from central bank research departments distinguished researchers, and peers at the frontiers of research in this area.
 
Browse the MFM Project website to discover recent papers and research tools relevant to this work.

MFM dissertation fellowships are provided with funding from the Alfred P. Sloan Foundation, CME Group Foundation, and Fidelity Management & Research Company.

Upcoming MFM Meetings

2019 Macro Financial Modeling (MFM) Winter Meeting - February 21-22, 2019 at the NYMEX, 300 Vesey Street, New York, NY 10282, USA

Previous MFM Meetings

2018 MFM Summer Session for Young Scholars - June 17-21, Harwich, Massachusetts 

Macro Financial Modeling Winter 2018 Meeting - January 25-26, 2018 - NYMEX, 300 Vesey Street, New York, NY 10282, USA

2017 Macro Financial Modeling Summer Session for Young Scholars - June 18-22, 2017, Bretton Woods, NH

Macro Financial Modeling Winter 2017 - March 9-10, 2017, New York, NY

Latin American Fiscal Studies Project

Project Directors:
Juan Pablo Nicolini, Senior Research Economist, Federal Reserve Bank of Minneapolis
Timothy J. Kehoe, Advisor, Federal Reserve Bank of Minneapolis
Fernando Alvarez, University of Chicago, Department of Economics
Thomas J. Sargent, NYU, Department of Economics

Latin American economies have endured a wide variety of experiences in terms of the design, the implementation and the consequences of monetary and fiscal policies. While many country-specific narratives exist, this research project is assembling comprehensive historical time series for eleven countries to provide more complete and comprehensive accounts for each country and to facilitate cross-country comparisons. This project, as part of the MFR program, has engaged scholars and experienced policy makers to provide accurate assessments for each country’s fiscal history. The lessons gleaned from analyzing these historical data will offer valuable guidance for policy makers, international financial institutions, and the academic community.

Visit the project website here.

Behavioral Implications of Uncertainty in Macroeconomics (BUMP)

Project Director: Thomas J. Sargent, NYU, Department of Economics

How people conceive of and respond to uncertainty is a critical behavioral ingredient of dynamic economic models. In many macroeconomic models today, uncertainty has only modest impacts. This is because these models embrace the assumption of rational expectations that says that people know the probabilities implied by the model. The rational expectations assumption is a valuable tool for evaluating many problems, but is dubious for analyzing many of the important situations we face today when concerns about temperatures, other physical determinants of long-term growth prospects, and demographic drivers of possible “secular stagnation” are on many peoples' minds. Therefore, we propose to expand the usual rational expectations approach in macroeconomics by attributing uncertainty to the probabilities that people in our models are facing. We see this as having vital implications for formulating sensible economic policies. We push beyond the conventional risk-based, rational expectations analyses by building on more general paradigms coming from decision theory and modern mathematical control theory. Furthermore, we complement and extend other behavioral research that emphasizes psychological mechanisms. We accomplish this by using statistical theory to formalize how environmental complexities of the model framework can influence individual behaviors. This project is funded by generous support by the Alfred P. Sloan Foundation. 

Click here to read a research brief summarizing the aim of the BUMP project. 

Financing Investment in China Project (MFR-China)

Project Director: Zhiguo He, University of Chicago Booth School of Business 

The instruments of finance are evolving quickly in China. China’s interbank market has experienced rapid growth and has turned the nation into the third largest economy in the world behind the United States and Japan. Participants in this market include commercial banks, insurance companies, mutual funds, and other qualified institutions. This project formally named "Chinese Financial Markets (CFM)" as part of the MFR program, will provide a comprehensive study of the interbank market in China including its overall stability, its consequences for investment and its support for new productive ventures.

Read more about MFR-China here.

University of Chicago Joint Program in Financial Economics

This Macro Financial Research Program project will seek to encourage the participation of interested and promising advanced graduate student researchers. One vehicle for doing this is the Joint Program in Financial Economics at the University of Chicago. This program is a collaboration between the Economics department and the Booth School of Business.

The aim of this program is to exploit the strengths of both sponsors in training PhD students interested in financial economics. Core economics training is valuable for students seeking to do research in financial economics, and advances in financial economics have important spillovers to other areas of economics.

Every year, the program holds a number of conferences, workshops and events designed to expose students to frontier research in financial economics and to encourage research collaborations aimed at supporting prudent policy-making.

Macro, Money and (International) Finance: A Heterogeneous Agents Continuous Time Approach Online Live Course
In addition, to support students in the Joint Program in Financial Economics, the MFR is currently sponsoring a pan-universities course on macro, money and international finance online live course, taught by Markus Brunnermeier, Lars Peter Hansen and Yuliy Sannikov. View recorded class sessions here:

Syllabus

  • 1. Introduction - slideszoom video link
  • 2. A Simple Macro-Finance Model in Continuous Time - slideszoom video link
        Problem Set #1 - Merkel review session - slides   zoom video link
  • 3. Macro-Finance Model with Hetereogenous Agents - slides; zoom video link  Parts: (1), (2), (3) 
  • 4. Symmetric International Model with Runs/Sudden Stops - slides; zoom video link
  • 5. A Simple Money Model and Optimal Inflation - slides; zoom video link
  • 4. Money Models with Aggregate and Idiosyncratic Risks - slides; zoom video link
  • 5. The I Theory of Money - slides; zoom video link

Housing, Household Debt, and the Macroeconomy

Project Director: Amir Sufi, University of Chicago Booth School of Business 

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 forefront. 

Financial Market Oversight and Regulation

Governments responded to the financial crisis 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.

For program inquiries, please contact Diana Petrova, MFR Associate Director, at dpetrova@uchicago.edu.
 

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