The systems that constitute the global financial landscape have become increasingly interconnected since the financial crisis, but policy makers have lagged behind the trend and still manage monetary, fiscal, and financial stability policies in isolation. Andrew W. Lo and his coauthors (Robert C. Merton, Monica Billio, Mila Getmansky, Dale Gray, and Loriana Pelizzon) discuss the interconnectedness of global markets and the need for policy integration in a Financial Analysts Journal piece, “On a New Approach for Analyzing and Managing Macrofinancial Risks,” which appears in the March/April 2013 issue.
Abby Farson Pratt, assistant editor at CFA Institute, recently talked with Lo about his team’s research as part of our series of FAJ author interviews.
Lo said that over the last few decades, “macro policy has become less effective, because the financial system has become more and more a part of the global financial landscape.” The greater interconnectedness of the global financial landscape means that “the risks to the macroeconomy and to financial stability can change pretty quickly and in ways that are not intuitive,” and policy makers need to be able to adapt to these new risks. He hopes that his team’s research will allow policy makers to anticipate changes in the macroeconomy and adjust their policies accordingly. Furthermore, Lo said that he and his coauthors believe that “this is really the beginning of a very fruitful collaboration with macroeconomists and financial economists.”
To hear more about Lo’s work and what policy makers should consider in light of a new global financial paradigm, listen to the complete interview above or download the MP3.
CFA Institute members can access the full article, which includes a thorough analysis of the interconnectedness of the global markets and some applicable insight from the late-1990s collapse of Long-Term Capital Management, on the CFA Publications website.
Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.