BFI NewsMar 23, 2015

The Present and The Future of Macroeconomic Modeling

As a capstone encompassing three years of exploration of improved macroeconomic models to guide monetary policy, this MFM meeting featured two broad-based comparisons of available and emerging models.

Other presentations examined the dynamics and impact of regulatory responses and financial sector safeguards such as capital requirements and stress testing that came to the fore after the 2008 financial crisis.

Two different approaches to model comparison were highlighted. Doctoral student Winston Dou presented a comprehensive review conducted in collaboration with project director Andrew Lo of three strands of available models central banks commonly use in setting macroeconomic policy. The resulting paper suggests a canonical model that improves on existing ones by incorporating financial market influences.

In contrast, Volker Wieland presented a computational framework that has been developed as software that allows researchers to run systematic comparisons of new models and policy evaluations easily and at low cost. Discussants and participants pointed out areas of concern with the assumptions, but the tool has value and will be made available as a resource for scholars at a later date.

Two young scholars who received dissertation support from the MFM project shared their analysis of banks’ capital requirements, optimal quantitative easing policy, and the impact of market dominance in credit default swap insurance.

Turning to practical implications, Richard Bookstaber of the Office of Financial Research shared thoughts on the current and future status of stress-testing and an agent-based model for assessing the fragility of financial institutions.

Friday’s sessions were capped off with a dinner featuring Andrew Haldane, chief economist of the Bank of England, who gave a talk on the future of central banking. Highlighting the extraordinary responses to the lingering recession and evolution in global finance, he told the assembled scholars and students that banks need their research to guide policy.