Two Barcelona GSE Affiliated Professors, Alberto Martín and Barbara Rossi, have been selected as recipients of Consolidator Grants from the European Research Council (ERC).

This is the first edition of the Consolidator Grants, which are awarded to mid-career top researchers. This new funding will enable already independent excellent researchers to consolidate their own research teams and to develop their most innovative ideas across the European Research Area.

Project proposals for Consolidator Grants are evaluated by selected international peer reviewers, and scientific excellence is the sole criterion. The ERC received over 3,600 applications in the inaugural call; 312 projects in 21 European countries have been selected to receive funding. The projects proposed by Prof. Martín and Prof. Rossi are two of only 59 projects in the area of the Social Sciences and Humanities to receive funding from the first Consolidator program.

Professors Martín and Rossi now join the list of Barcelona GSE Affiliated Professors who have been recognized in competitive research calls from the ERC. In addition to Consolidator Grants for mid-career researchers, the ERC awards Starting Grants to promising researchers just establishing their caeers and Advanced Grants to established research leaders. Including these two new projects, a total of 15 ERC grants have been awarded to 13 Barcelona GSE Affiliated Professors since the beginning of the program.

Brief summaries of the two newly funded projects are included below.

The Macroeconomics of Collateral

Alberto Martín (CREI, UPF and Barcelona GSE), principal investigator

Financial markets constitute the backbone of modern economies, intermediating resources from those who have them (i.e., lenders) to those who can put them to productive use (i.e., borrowers). The defining feature of these markets is that they entail the exchange of goods today for a borrower’s promise to deliver goods in the future. These promises are sustained by guarantees, which are akin to the amount of future income that borrowers can credibly pledge to lenders. I refer to this pledgeable income as an economy’s stock of collateral. This stock determines the amount and type of promises that can be traded in an economy and, in turn, this set of promises determines the transactions that can be carried out. Intuitively, when this set of promises is large, resources find their most productive uses and efficiency is high.

This raises a general question: what are the key determinants of the set of promises that an economy is able to sustain, and why does it vary?

In most macroeconomic models, it is commonly assumed that all promises are backed by only one kind of collateral, i.e. usually that of private borrowers, and that this collateral is ‘fundamental’, i.e. it consists of output. Real-world financial markets, however, rely on many types of collateral to guarantee promises. In this proposal, I focus on three such types. First, collateral may be ‘bubbly’, in the sense that promises can be backed by nothing else but the income that the sale of new promises is expected to bring in the future. Second, collateral need not be private, as government promises are sustained by pledging public income. Third, collateral need not be homogenous, as it may differ in quality or type across entrepreneurs, and this quality may not be perfectly observed by all. The proposal addresses the following broad questions. How do economies produce these different types of collateral? How do they interact with one another? Is there a role for policy in maintaining the efficient level and composition of collateral?

Alberto Martín (PhD, Columbia University) is Senior Researcher at CREI, Adjunct Professor at UPF, and Barcelona GSE Research Professor. He is also a Research Affiliated of CEPR. He has held visiting positions at the International Monetary Fund and Collegio Carlo Alberto. His research interests include Macroeconomic Theory, International Economics, and Financial Markets.

New Methods and Applications for Forecast Evaluation

Barbara Rossi (ICREA-UPF and Barcelona GSE), principal investigator

Forecasting is a fundamental tool in Economics, Statistics, Business and other sciences. Evaluating whether forecasts are good and robust is of great importance since forecasts are used everyday to guide policymakers’, Central banks’, private firms’, consumers’ as well as laymen’s and practitioners’ decisions.

Unfortunately, the methodologies that are currently available to evaluate forecasts have several limitations.

For example, how to assess whether forecasts are optimal in the presence of instabilities? Optimality is an important property of models’ forecasts: if forecasts are not optimal, then the model can be improved. Existing methods to assess forecast optimality are not robust to the presence of instabilities, which are widespread in the data.

Or, how to evaluate density forecasts in practice? Density forecasts are important tools for policymakers, since they quantify uncertainty around forecasts.

Or, how to improve models that do not forecast well? Model misspecification is widespread, still economists are often left wondering exactly which parts of their models are misspecified.

Barbara Rossi's research aims at addressing these issues as well as several others on the topic of forecasting.

Barbara Rossi (PhD, Princeton University) is ICREA Research Professor at UPF and Research Associate at CREI. She is also Research Fellow of the Center for Applied Financial Economics (University of Southern California). Her research interests include Time Series Econometrics, Applied International Finance, and Macroeconomics.

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