Macro Financial Modeling (MFM) Project

The financial crisis of 2007–2009 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 are not well designed to account for important financial sector influences on the aggregate economy.

PhD students participating at the MFM Summer Session for Young Scholars

To address these deficiencies, the Macro Finance Research Program, led by University of Chicago’s Lars Peter Hansen, launched the Macro Financial Modeling (MFM) project to develop and assess more ambitious macroeconomic models. The MFM Project is a collaborative venture 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 Macro Financial Modeling (MFM) Project endeavors to bridge these gaps by bringing together elite scholars in macro and finance from all over the world, junior scholars at the start of their research careers, policy makers, and leaders from the financial industry. The project is sponsored by the University of Chicago’s Becker Friedman Institute under its Macro Finance Research Program (MFR) in collaboration with MIT’s Laboratory for Financial Engineering. The project is led by Lars Peter Hansen, David Rockefeller Distinguished Service Professor and Director of the MFR Program at the University of Chicago, and Andrew W. Lo, the Charles E. and Susan T. Harris Professor of Finance at the MIT Sloan School of Management.

Lars Peter Hansen and Andrew W. Lo, MFM Project Co-Directors

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. Participants gain insights from central bank research departments distinguished researchers, and peers at the frontiers of research in this area through presentations and interactions at targeted events and conferences.

Another aim of the project since its beginning in 2006 has been to enhance macroeconomic models to include how the financial sector influences and poses risks to the economy and to improve economists’ ability to define, measure, and manage financial sector activities. The effort is not purely an academic exercise. Better macro-financial models can improve the tools available to policy makers—such as central banks, which now include financial stability among their priorities and are considering pursuing macroprudential policies. To address these policy objectives without a better understanding of macro-finance linkages is like shooting in the dark. Throughout the years, the MFM project has addressed a wide range of topics including systemic risk measures, intermediary asset pricing, liquidity and segmented markets, comparative valuation dynamics, housing and credit markets, fintech, machine learning and AI, Bitcoin economics, financial crises, and Chinese financial markets. Many of these topics are motivated by the challenges faced by regulators and policy makers. Through regular structured conferences, targeted research support, and disseminating its open access findings on its website, the MFM project has been busy nurturing a community of fruitful engagement and scholarly research.

The MFM project also organized three consecutive MFM Summer Session for Young Scholar camps in 2016, 2017, and 2018, which have served as a model for introducing graduate students and post-doctoral students to cross-disciplinary research at the intersection of macro and finance through structured presentations by established researchers and industry leaders. By organizing these intensive three-day summer camps, the MFM project fostered a network of young scholars who were exposed to frontier research in this area and provided them the opportunity to engage with elite researchers. Some of the elite participants engaged by the MFM project throughout the years include many of the elite executive committee members as well as innovative younger scholars including some with MFM research support. In addition, the project has engaged prominent people from the private and public sectors, including Leo Melamed, CME Group; Tobias Adrian, IMF; Lisa Emsbo-Mattingly, Fidelity; Blu Putnam, CME Group; Laura Kodres, IMF; Tao Wang, UBS; Richard Sandor, American Financial Exchange; and Beverly Hirtle, NY Fed. The MFM camps also provided an opportunity for young scholars to present their own early-career research findings and gain valuable feedback from these established scholars through structured talks and poster presentations.

Additionally, the MFM project has awarded 81 dissertation fellowship awards to exceptional young scholars working at the intersection of macro and finance. Some of these MFM dissertation fellowship awardees presented their findings at MFM events including our recent capstone. Some of these students moved on to work at the World Bank, the International Monetary Fund, the Federal Reserve and other state Federal Reserve banks.

The project has convened regular meetings since 2012 so scholars could present research, discuss and critique macro models that capture aspects of financial markets. The last seven years culminated in a capstone meeting on February 21 and 22, 2o19 held in New York City, featuring presentations about findings from the MFM project’s executive committee members who received MFM funding to pursue innovating work on macroeconomic models with financial sector linkages or related topics in this area. The MFM’s capstone event brought together leading academics, policy makers, and top finance industry executives to acknowledge the advances to date in our understanding and to better appreciate remaining challenges. The papers presented illustrated different ways to incorporate uncertainty and financial frictions into macro models using a variety of different empirical and theoretical approaches.

The Macro Financial Modeling Project is a research project supported by a generous grant from the Alfred P. Sloan FoundationCME Group Foundation, and Fidelity Management & Research Company