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A New Framework for Analyzing and Managing Macrofinancial Risks of an Economy

  • Dale F. Gray
  • Robert C. Merton
  • Zvi Bodie

The high cost of international economic and financial crises highlights the need for a comprehensive framework to assess the robustness of national economic and financial systems. This paper proposes a new comprehensive approach to measure, analyze, and manage macroeconomic risk based on the theory and practice of modern contingent claims analysis (CCA). We illustrate how to use the CCA approach to model and measure sectoral and national risk exposures, and analyze policies to offset their potentially harmful effects. This new framework provides economic balance sheets for inter-linked sectors and a risk accounting framework for an economy. CCA provides a natural framework for analysis of mismatches between an entity's assets and liabilities, such as currency and maturity mismatches on balance sheets. Policies or actions that reduce these mismatches will help reduce risk and vulnerability. It also provides a new framework for sovereign capital structure analysis. It is useful for assessing vulnerability, policy analysis, risk management, investment analysis, and design of risk control strategies. Both public and private sector participants can benefit from pursuing ways to facilitate more efficient macro risk accounting, improve price and volatility discovery, and expand international risk intermediation activities.

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File URL: http://www.nber.org/papers/w12637.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12637.

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Date of creation: Oct 2006
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Handle: RePEc:nbr:nberwo:12637
Note: ME EFG IFM
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  1. Brad Setser & Nouriel Roubini & Christian Keller & Mark Allen & Christoph B. Rosenberg, 2002. "A Balance Sheet Approach to Financial Crisis," IMF Working Papers 02/210, International Monetary Fund.
  2. William R. White, 2000. "Recent initiatives to improve the regulation and supervision of private capital flows," BIS Working Papers 92, Bank for International Settlements.
  3. Jorge A. Chan-Lau, 2003. "Anticipating Credit Events Using Credit Default Swaps, with An Application to Sovereign Debt Crises," IMF Working Papers 03/106, International Monetary Fund.
  4. Robert C. Merton, 1995. "A Functional Perspective of Financial Intermediation," Financial Management, Financial Management Association, vol. 24(2), Summer.
  5. Mario Draghi & Francesco Giavazzi & Robert C. Merton, 2003. "Transparency, Risk Management and International Financial Fragility," NBER Working Papers 9806, National Bureau of Economic Research, Inc.
  6. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  7. Robert C. Merton & Zvi Bodie, 1992. "On the Management of Financial Guarantees," Financial Management, Financial Management Association, vol. 21(4), Winter.
  8. Bodie, Zvi & Merton, Robert C., 2002. "International pension swaps," Journal of Pension Economics and Finance, Cambridge University Press, vol. 1(01), pages 77-83, March.
  9. Liliana Schumacher & Mario I. Bléjer, 2000. "Central Banks Use of Derivatives and Other Contingent Liabilities; Analytical Issues and Policy Implications," IMF Working Papers 00/66, International Monetary Fund.
  10. Zvi Bodie, 2006. "On asset-liability matching and federal deposit and pension insurance," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 323-330.
  11. Dale F. Gray & Elena Loukoianova & Samuel W. Malone & Cheng Hoon Lim, 2008. "A Risk-Based Debt Sustainability Framework; Incorporating Balance Sheets and Uncertainty," IMF Working Papers 08/40, International Monetary Fund.
  12. Yingbin Xiao & Dale F. Gray & Cheng Hoon Lim & Michael T. Gapen, 2004. "The Contingent Claims Approach to Corporate Vulnerability Analysis; Estimating Default Risk and Economy-Wide Risk Transfer," IMF Working Papers 04/121, International Monetary Fund.
  13. Merton, Robert C. & Bodie, Zvi, 1993. "Deposit insurance reform: a functional approach," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 38(1), pages 1-34, June.
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