This project offers several methodological contributions in the area of macro-finance: both in terms of theory and empirics. The overarching theme is that certain questions about the role of financial intermediation and financial frictions can be answered without relying on specific microfoundations. Instead, the relevant characteristics of financial intermediaries can be described in terms of observable sufficient statistics.
We will provide a general framework that nests a large class of models of financial intermediation. We will use data on prices and quantities of assets to estimate the elasticities of asset supply and demand using the Granular Instrumental Variable approach. Our estimates will allow us to derive prescriptions regarding policies that work through asset markets, formulated in terms of observable returns and estimated elasticities - an optimal financial index. Finally, we will contribute to the debate about the importance of risk and liquidity premia in the determination of asset prices. Ultimately, we will contribute not only to academic debate but will also provide valuable guidance to policymakers.
This project is located at the frontier of macro-finance research. All working packages provide innovations in the literature both in terms of the research question and in terms of methodology. We will provide a flexible interface to study the role of financial frictions in shaping macroeconomic responses to policies, study properties of a large class of models belonging to our framework, and incorporate aggregate risk into sequence space. All new methodological contributions will be made publicly available in terms of data and codes to ensure replicability and encourage further research in the area.
