New Professor Studies the Role of Financial Markets in Developed Economies

31 August 2015 1:12PM

Since the Great Recession began in 2007, global economic recovery has been sluggish, and the downturn has led many macroeconomists to rethink their models. 

One such macroeconomist is new professor Kyle Jurado, who specializes in the intersection of financial markets and the real economy. He has joined the Department of Economics from Columbia University, where he recently earned a doctorate in economics.

As an undergraduate, the Florida native spent the summers of 2007 and 2008 working at the Council of Economic Advisers (CEA) and Lehman Brothers — a combination of experiences that ultimately shaped his research interest in the field. “They helped me to see that there is still much work to be done in understanding the role of financial markets in a developed economy like ours,” Jurado said.

“I remember sitting in on a ‘state of the economy’ conference call in which several top executives of different U.S. companies reported on current developments in their specific industries,” he recalled. “The banking sector executive reported that, overall, business was healthy apart from some ‘minor dislocations’ in the market for subprime mortgages.”

The financial crisis began shortly thereafter, and the subprime mortgage market was thrust into the spotlight. Jurado said it was striking how seemingly “so few people anticipated the far-reaching effects that a ‘dislocation’ in one corner of financial markets could have on the entire financial system.”

By the time he joined Lehman Brothers, the crisis was well underway.

“At times it felt like ‘anything could happen.’ Nobody seemed to have a reliable framework for understanding what was happening in financial markets, or how or when the real economy would be affected,” he said.

The investment bank eventually filed for bankruptcy in September 2008, leading to a large wave of losses across the global financial system.

In his research, Jurado builds economic models to understand the causes of fluctuations in macroeconomic and financial data. This data comprises different variables that pertain to the economy as a whole, such as gross domestic product, consumption, investment, inflation, interest rates, and stock prices. “One of the main goals of my field is to construct a logically consistent, empirically adequate framework for understanding how all these different variables are related, and what usually causes them to change over time.”

One project Jurado currently is working on involves building and estimating a model in which an agent’s beliefs can be “irrational.” He has hypothesized that allowing for this possibility can be helpful for understanding some features of the data.

But it’s not just about the data and models. Jurado believes macroeconomics has an important role in the policymaking process: In order for economists to determine what needs to be done “when things to wrong,” they need to know how the economy works. “We can use data to help discriminate between the competing causes,” he said. “This process helps us to understand which kinds of policies make sense and which kinds don’t.”

The assistant professor will be applying his expertise to two Ph.D.-level modules this fall that focus on macroeconomics and finance (ECON 882-08) and monetary economics (ECON 882-11), and he expressed hope that students would see these classes as an opportunity to explore the material together.

“I don’t mind getting hard questions, even if I can’t answer them right away,” Jurado said. “The fun thing about teaching is that you really get to learn the material well yourself. I enjoy doing that and then having the opportunity to communicate what I’ve learned to the students.”

Learn more about the Duke Economics faculty.