TY - JOUR AU - Gray,Dale F. AU - Merton,Robert C. AU - Bodie,Zvi TI - A New Framework for Analyzing and Managing Macrofinancial Risks of an Economy JF - National Bureau of Economic Research Working Paper Series VL - No. 12637 PY - 2006 Y2 - October 2006 UR - http://www.nber.org/papers/w12637 L1 - http://www.nber.org/papers/w12637.pdf N1 - Author contact info: Dale F. Gray Sr. Risk Expert, Monetary and Capital Markets Dept International Monetary Fund 700 19th St N.W. Washington DC 20431 E-Mail: dgray@imf.org Robert C. Merton Massachusetts Institute of Technology Sloan School of Management, E62-634 77 Massachusetts Avenue Cambridge, MA 02139 Tel: 617 715 4866 E-Mail: rmerton@mit.edu Zvi Bodie School of Management, room 534 Boston University 595 Commonwealth Ave. Boston, MA 02215 Tel: 617-353-4160 E-Mail: zbodie@bu.edu AB - 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. ER -