Financial Stability

The Institute for New Economic Thinking takes a broad view of economic research and supports it in many ways: through its main grant program, through working groups it organizes, and via conferences, panels, and other smaller gatherings of scholars across the globe.

Institute scholars normally publish their work in journals and books. While many – but far from all – of this work appears in working papers sponsored by the Institute and other leading research forums, the Institute also attempts to make its research results accessible to a wider public on its website. Below is a sampling of interviews featuring Institute scholars explaining the significance of their research in non-technical terms.

Finance Without Crises

Project Leader: 

The goal of this research project is to describe the long-term dynamics of incomes in a financialized developed economy from both an empirical and theoretical perspective. Specifically, it will examine the interaction between big corporations/banks, small firms, and households, thereby aiming to define a stylized economic paradigm, characterized by a broad access to credit on one side and an oligopolistic control of the financial flows on the other. The first stage will consist of an empirical study of US data on the composition of spending and on the indebtedness behavior of households along the income distribution ladder as well as distribution of their net worth. Read more

Dynamic Contagion Mechanisms in Financial Networks

Project Leader: 
Project Members: 

This project proposes a novel framework to capture both instantaneous and dynamic contagion mechanisms arising in financial networks when balance sheet linkages across entities exist. Building on Eisenberg and Noe (2001), a multiperiod clearing system will be developed, where the financial network evolves stochastically over time. The project models explicitly the impact of default events on the state of the network and allows for a regulator entity to rescue illiquid but solvent nodes. Using techniques from stochastic programming, an efficient algorithm will be developed which allocates bailout loans in order to maximize the amount of interbank payments within the network. Read more

Roger Guesnerie – The Next Economic Frontier and the Wild World of Non-Rational Expectations


One of the fundamental ideas of modern economics – that people have rational expectations, an unbiased, statistically correct view of the future – is, in reality, a simple hypothesis. And despite its prominence in recent economic thought, this hypothesis and the economic models that rely on it have been the subject of serious debate since the advent of the Great Recession. Read more

Fixing finance: The missing piece in banking reform

Eric Beinhocker and Tony Dolphin argue that lasting reform to the financial sector will not be achieved without tackling the price rigging and anti-competitive behaviour that is rife in the industry. Read more

Jurassic Economics at ASSA-AEA 2013

  The History of Economics Society (HES) held four sessions at the Allied Social Science Associations (ASSA) 2013 meeting, in San Diego, Jan. 4-6: “Keynes and the International Monetary System” (co-organized by Robert Dimand and Rebeca Gomez Betancourt), “Writing MIT’s History” (organized by E. Roy Weintraub and having our blog fellow Yann Giraud presenting), “Looking for Best Practices in Economic Journalism: Past and Present” (organized by our blog fellow Tiago Mata), and “Real Business Cycle after Three Decades: Past, Present and Future” (a panel discussion co-organized by Warren L. Young and Sumru Altug).

  I will here focus only on the latter. Participants included Nobel Prize Laureates and central figures of the Real Business Cycle (RBC) macroeconomics Read more

Janine Wedel - Behind the Scenes of International Banking Regulation


Five years into the Great Recession, discussion and political fights continue about the right approach to international banking supervision. How to avert the next financial crisis or at the very least lessen its damage?

Given the topic's importance, surprising little research exists on the two institutions that actually set banking standards in practice: the Basel Committee and the International Swaps and Derivatives Association (ISDA) operate at the heart of the system, setting capital requirements and standardizing derivative contracts.

Is Capital Flight Taking Place in China?

From the balance of payment perspective

Despite a larger-than-expected amount of net exports this year, China’s capital accounts have printed negative numbers for several months, while in the past China always reported surpluses in both current account and capital account. Some analysts start arguing that China is facing tremendous amount of capital outflow implying that many people are losing confidence on China’s economy. Moreover, they say, Renminbi depreciation in the first three quarters support the view that capital is flowing out of China. Acknowledging capital flight a very important issue, we at the central banking seminar made an effort to find out the reasons for the Renminbi depreciation and the capital account deficit. Read more

Katharina Pistor: False Dichotomies in Law and Finance

“You can’t understand finance if you don’t put law front and center.”

So says Katharina Pistor in her innovative keynote address at INET's False Dichotomies conference, which was co-hosted with the Center for International Governance Innovation (CIGI) in Waterloo, Canada on November 16-17th, 2012. Read more

OMT: Slouching toward Eurobills?

The Eurocrisis has many dimensions—bank solvency crisis, sovereign debt crisis, political unity crisis, and economic/unemployment crisis—but time after time it has been the liquidity crisis dimension driving events, and ECB response to the liquidity crisis driving institutional evolution.  The reason is simple.  Liquidity kills you quick. Read more

The Chicago Plan Revisited - IMF Working Paper

Author Name and Affiliation: 
Jaromir Benes

At the height of the Great Depression a number of leading U.S. economists advanced a proposal for monetary reform that became known as the Chicago Plan. It envisaged the separation of the monetary and credit functions of the banking system, by requiring 100% reserve backing for deposits. Irving Fisher (1936) claimed the following advantages for this plan: (1) Much better control of a major source of business cycle fluctuations, sudden increases and contractions of bank credit and of the supply of bank-created money.
(2) Complete elimination of bank runs. (3) Dramatic reduction of the (net) public debt. (4) Dramatic reduction of private debt, as money creation no longer requires simultaneous debt creation. We study these claims by embedding a comprehensive and carefully calibrated model of the banking system in a DSGE model of the U.S. economy. We find support for all four of Fisher's claims. Furthermore, output gains approach 10 percent, and steady state inflation can drop to zero without posing problems for the conduct of monetary policy.

At the height of the Great Depression a number of leading U.S. economists advanced a proposal for monetary reform that became known as the Chicago Plan. It envisaged the separation of the monetary and credit functions of the banking system, by requiring 100% reserve backing for deposits.

JEL classification: 
E44: Financial Markets and the Macroeconomy
E52: Monetary Policy
G21: Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages