TY  - JOUR
AU  - Gray,Dale F.
AU  - Merton,Robert C.
AU  - Bodie,Zvi
TI  - New Framework for Measuring and Managing Macrofinancial Risk and Financial Stability
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13607
PY  - 2007
Y2  - November 2007
UR  - http://www.nber.org/papers/w13607
L1  - http://www.nber.org/papers/w13607.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  - This paper proposes a new approach to improve the way central banks can analyze and manage the financial risks of a national economy.  It is based on the modern theory and practice of contingent claims analysis (CCA), which is successfully used today at the level of individual banks by managers, investors, and regulators.  The basic analytical tool is the risk-adjusted balance sheet, which shows the sensitivity of the enterprise's assets and liabilities to external "shocks."  At the national level, the sectors of an economy are viewed as interconnected portfolios of assets, liabilities, and guarantees -- some explicit and others implicit.  Traditional approaches have difficulty analyzing how risks can accumulate gradually and then suddenly erupt in a full-blown crisis.  The CCA approach is well-suited to capturing such "non-linearities" and to quantifying the effects of asset-liability mismatches within and across institutions.  Risk-adjusted CCA balance sheets facilitate simulations and stress testing to evaluate the potential impact of policies to manage systemic risk.
ER  -