MU economist finding solution for other countries to prepare for financial crises
The model will help explain why certain economies react differently than others.
Aug. 21, 2012
The National Science Foundation recently awarded MU economist Christopher Otrok a $70,600 grant for a research project. Ortok is in the process of developing a model that would be able to forecast how one country’s financial crisis will affect other countries' economies.
According a news release, Otrok said the model will help explain how shocks work in the global economy and why there is a difference between how certain economies react.
“For example, after the financing and housing collapse in the U.S. led to a global crisis, developing economies, like India and Brazil, bounced back sooner than developed economies,” he said in the release.
The research is built off a decade of Otrok’s previous studies of international business.
“Previously, I have done studies on how to measure whether a large group of countries’ economies do or do not move together,” Otrok said. “Now I have developed that model and used it elsewhere — what this project does is take it to the next step. And the purpose of this one is to measure the amount of financial shocks from one country to another.”
The inspiration for this project came from many of the recent financial troubles of European countries, such as Greece. Otrok will make the model public once it is finished. Countries will then be able to use the model to gauge how they could change their own monetary systems in order to prepare for the shocks.
“Ideally, the monetary authority in each country can dose how much shock is coming,” Otrok said. “Then each country can be ready to respond to that shock."
Policy responses haven't been developed yet, Otrok said. When policy responses are created, countries will know if a policy will be affected by a crisis in another country. For example, if a country needs to fortify its exchange rate, it can enter the exchange market to prevent the economy from collapsing.
Countries of any size and financial structure will be able to utilize this model to protect themselves from any type of crisis.
Ortok said he is still early in the process but predicts the model will be finished by next summer.