Understanding Macro Risks

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AbstractProject Title: Understanding macro risks Project SummaryProposal Number: SES-1227280Principal Investigator: Harald UhligMacroeconomic risks have an important impact on macroeconomic movements. These are in turn central issues for macroeconomic policy, as the 2008 financial crisis as well as the ongoing European sovereign debt crisis has shown. Understanding these relationships is therefore of first-order importance. The proposed research seeks to make a contribution to that end, pursuing three projects in particular. The first project provides a new method for estimating macroeconomic models, when their asset pricing properties are the center of attention. As a particular application, a model with habit formation is investigated, thereby deepening our understanding for the scope as well as the role of particular features of this important class of model to replicate asset pricing and macroeconomic facts in an uncertain environment. This project will deepen our understanding about how economies react to risks at the macro level. The second project investigates Epstein-Zin preferences, a second important approach in macroeconomic models to explain asset pricing and business cycle facts. The project will provide a clarification of key features of these models and to provide a useful benchmark for models with more elaborate features or solution methods. The third project is motivated by the current sovereign debt crisis in the European monetary union. It should prove useful for thinking about the underlying dynamics as well as for analyzing various policy options and their consequences.