The Department of Economics Macroeconomics Seminar Series presents

"A Macroeconomic Framework for Quantifying Systemic Risk"
with Arvind Krisnamurthy, Harold L. Stuart Professor of Finance, Kellogg School of Management, Northwestern University

Wednesday, May 15, 2013
3:30-5:00 p.m.
Social Science Plaza B, Room 3218

Systemic risk arises when shocks lead to states where a disruption in financial intermediation adversely affects the economy and feeds back into further disrupting financial intermediation. Krisnamurthy presents a macroeconomic model with a financial intermediary sector subject to an equity capital constraint. The novel aspect of the analysis is that the model produces a stochastic steady state distribution for the economy, in which only some of the states correspond to systemic risk states. The model allows us to examine the transition from “normal” states to systemic risk states. Krisnamurthy calibrates the model and uses it to match the systemic risk apparent during the 2007/2008 financial crisis. Krisnamurthy also uses the model to compute the conditional probabilities of arriving at a systemic risk state, such as 2007/2008. Finally, Krisnamurthy shows how the model can be used to conduct a macroeconomic “stress test” linking a stress scenario to the probability of systemic risk states.

For further information, please contact Gloria Simpson, simpsong@uci.edu or 949-824-5788.