Model

Thinking

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Reason # 1: Intelligent Ci;zen of the World

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Reason # 2: Clearer Thinker

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Reason # 3: Understand and Use Data

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Reason # 4: Decide, Strategize, and Design

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Outline and Structure

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Outline
Image: Puzzledcat.blogspot

Outline
Image: Nuke Mayhem Deviant Art

Collec;ve Ac;on Tipping Points Colonel Blo/o

Wisdom of Crowds Markov Processes

Spa;al Vo;ng Decision Theory Linear Models

Lyapunov Models Learning Models

Economic Growth
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Online Course Format

Videos
8-15 minutes Ques;ons

Readings
Linked on Wiki

Assignments Quizzes Discussion Forum

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Sec;on Structure

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Sec;on Structure
The model
Assump;ons, results, applica;ons

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Sec;on Structure
The model
Assump;ons, results, applica;ons

Technical Details
Measures, Proofs (Easy, Medium, Hard) Prac;ce Problems

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Sec;on Structure
The model
Assump;ons, results, applica;ons

Technical Details
Measures, Proofs (Easy, Medium, Hard) Prac;ce Problems

Fer;lity

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Model Thinking

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Model Thinking

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Intelligent Ci;zen of the World

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George E. P. Box

"essen;ally, all models are wrong, but some are useful

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The New Lingua Franca

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Image: modernmythmuseum

Economics

Biology

Sociology

Political Science:Voting

Linguistics

Law

Game Theory

Models Are Be/er Than We Are

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Models Are Fer;le

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Models Make Us Humble

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Many Model Thinkers Know Best

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Model Thinking

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Model Thinking

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Clearer Thinker
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Name The Parts

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Iden;fy Rela;onships

ucsb.edu

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Work Through Logic

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Induc;vely Explore

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Understand Class of Outcome

Equilibrium Cycle Random Complex

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Understand Class of Outcome

zFacts.com

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Iden;fy Logical Boundaries

Two heads are be/er than one Too many cooks spoil the broth

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Communicate

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Model Thinking

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Model Thinking

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Use and Understand Data

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#1
Understand Patterns

#2
Predict Points

#3
Produce Bounds

#4
Retrodict

#5
Predict Other

#6
Inform Data Collection

#7
Estimate Hidden Parameters

#8
Calibrate

Model Thinking

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Model Thinking

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Decide, Strategize, Design

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#1
Decision Aids

HAPTER 2

ASSESSING THE SYSTEMIC IMPLICATIONS OF FINANCIAL LINKAGES

Figure 2.6. A Diagrammatic Depiction of Co-Risk Feedbacks

94 Lehman Brothers 155 158 204

Wachovia

Wells Fargo 142 490

180 204

Merrill Lynch

176 441

Bear Stearns

163 155

Morgan Stanley

248 154 Bank of America 456

97

135 390

102

103

AIG

Citigroup

117

114 136 466 JPMorgan Chase & Co.

Goldman Sachs

Sources: Bloomberg, L.P.; Primark Datastream; and IMF staff estimates. Note: This figure presents the conditional co-risk estimates between pairs of selected financial institutions. Only co-risk estimates above or equal to 90 percent are depicted. See Table 2.6 for further information.

nd Lehman to the rest of the institutions in he sample were, on average (excluding Bear tearns), 11 and 24 percent, respectively. And n September 12, 2008, these estimates jumped o 30 and 36 percent, respectively.

he Distress Dependence Matrix

In the method above, each pair of instituons is examined as a pair (conditioning on set of other general variables) and then one nstitutions co-risk measure versus each of

and then focusing on pairs of institutions, accounts for the relationship between the group of institutions implicitly by estimating a multivariate distribution of their asset returns as a rst step. This multivariate density can capture linear (correlation) and nonlinear interdependence among all the nancial institutions (due to the direct and indirect links) and the changes over the economic cycle. A general model for doing so is discussed more generally in Chapter 3.26 Having obtained

The Monty Hall Problem

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2 1/3

3 1/3

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2 2/3

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2/3

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2/3

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2 1/3

#2
Comparative Statics

#3
Counterfactuals

#4
Identify and Rank Levers

CHAPTER 2

ASSESSING THE SYSTEMIC IMPLICATIONS OF FINANCIAL LINKAGES

Figure 2.4. Network Analysis: Contagion Path Triggered by the U.K. Failure

Panel 1 (trigger failure)

Affected Countries: United Kingdom

Panel 2 (1st contagion round)

Affected Countries: United Kingdom, Belgium, Ireland, Netherlands, Switzerland

Panel 3 (2nd contagion round)

Affected Countries: United Kingdom, Belgium, Ireland, Netherlands, Switzerland, Sweden, Germany

Panel 4 (final round)

Affected Countries: United Kingdom, Belgium, Ireland, Netherlands, Switzerland, Sweden, Germany, France

features the distribution of capital losses after all contagion rounds have taken place. The fact that countries may contribute to further contagion rounds because of their inability to roll over their funding needs points to the need to consider the merits of interconnectednessbased liquidity charges. These potential riskbased charges could be assessed to institutions shown to be weakened by hypothetical liquidity squeezes. These risk-based charges could also be used for setting up a liquidity emergency fund for nancial institutions, as some have proposed.17

Summing Up
Our illustration of network analysis has highlighted its usefulness as a surveillance tool. For instance, this section has shown how it could track the reverberation of a credit event and a liquidity squeeze throughout the system. To be sure, the unfolding of a crisis will be a function of institutions reactions and policy responses that could halt spillovers. Though not trivial, these elements can be added to the analysis going forward. Furthermore, although the chapter relied on aggregate BIS country

17Similarly,

Perotti and Suarez (2009) argue that

mandatory liquidity charges to be paid to a regulator who is able to provide emergency funding and capital during

#5
Experimental Design

#6
Institutional Design

#7
Help Choose Among Policies and Institutions

Decide, Strategize, Design

1. 2. 3. 4. 5. 6. 7. Real Time Decision Aids Compara;ve Sta;cs Counterfactuals Iden;fy and Rank Levers Experimental Design Ins;tu;onal Design Help Choose Among Policies and Ins;tu;ons

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Model Thinking

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