Desmond Lachman | Official Monetary and Financial Institutions ForumFed Chair Jay Powell will need to normalize interest rates in order to curtail inflation. However, today’s global political environment, with several troubled economies abroad, will make Chair Powell’s task significantly more challenging. He will have to raise rates without causing disruptive credit repricing that could unsettle troubled financial markets abroad.
Paul H. Kupiec | AEI Economics Working Paper Series
In his most recent working paper, Paul Kupiec analyzes the accuracies of alternative methods for forecasting bank performance over multi-year stress scenarios, using the financial crisis as a “natural experiment.” The results show that complex Federal Reserve CLASS-style models produce stress test forecasts that severely underestimate the income before taxes and extraordinary items earned by a representative bank over the first three years of the financial crisis. In contrast, simplified stress test model specifications produce far more accurate forecasts. The results highlight the need for national regulators, multinational standard setting bodies, and researchers to focus on developing reliable methods to assess the accuracy of supervisory stress testing models.