TNL R3 – Systemic Risks and the Need for Advanced Methods

TNL RAND Researcher Residency – Jonathan Welburn

Prior to 2008, there was little concern over systemic risks and potential impacts. However, after a seemingly isolated shock to the US housing market spread through markets and economic systems creating a global financial crisis, the concept rose to the foreground. At their core, system risks present two fundamental challenges requiring a new approach.

First, increasingly interconnected and interdependent economic systems were allowing for idiosyncratic risks to amplify and create large aggregate shocks. In contras to traditional models of the macroeconomy, many called for more complex models that captures the microfoundations of aggregate risks.

Second, system risks are inherently a multi-stakeholder problem; given the global reach of economic shocks, managing future crises would require coordination bot just across regulatory bodies within a single country, but across countries and regions.