Thank you, Alessandra, for organizing us today, and thanks to you, Veronica Guerrieri, and Marina Azzimonti for initiating this effort seven years ago. I am honored to be with so many friends in macroeconomics at the 2025 Women in Macro Conference. I still read, recommend, and cite your work and am grateful to New York University and the University of Chicago for supporting this conference and this research.
How has the arc of mainstream macroeconomic research become more closely integrated with issues related to financial stability? This question is what I would like to discuss today. I applaud the advances in incorporating financial stability into macroeconomic models, which have significantly enhanced our understanding of financial market functioning and its effect on the economy. It is a topic that holds special importance to me as a macroeconomist who has worked at the intersection of macroeconomics and finance since my dissertation and as the chair of the Federal Reserve Board's Committee on Financial Stability. I would like to then offer my assessment of the stability of the U.S. financial system.
Financial stability supports the objectives assigned to the Federal Reserve, including full employment and stable prices, a safe and sound banking system, and an efficient payments system. A financial system is considered stable when banks, other lenders, and financial markets are able to provide households, communities, and businesses with the financing they need to invest, grow, and participate in a well-functioning economy - and can do so even when hit by adverse events, or "shocks." Financial instability, by contrast, arises when vulnerabilities - such as asset bubbles, excessive leverage, liquidity mismatches, or interconnected exposures - can build up to such an extent that they can amplify different shocks and threaten the core functions of the system and the functioning of the broader economy.