Stanford Economist Piazzesi Influences Fed ForecastsJeff Kearns
Monika Piazzesi found inspiration for her career at France’s top statistics school in a math class that initially was too hard for her.
A Bonn University economics major on an exchange program in Paris, she audited a course taught by math legend Nicole El Karoui and was captivated by the concept of asset pricing. The experience at the Ecole Nationale de la Statistique et de l’Administration Economique, or Ensae, became a key turning point for Piazzesi, now a Stanford University economics professor whose research helps inform Federal Reserve forecasting models.
She “had this immensely successful career, is an amazing lecturer, and I took that course and I thought, ‘This is cool all right; if she can do it, I can also do it,’” Piazzesi said of El Karoui, who’s known for training top derivatives traders. “She had a huge effect on me.”
Piazzesi, 44, now works to do what El Karoui did for her: inspire a new generation, particularly women, to embrace her field. Nearly three times as many men as women major in economics in U.S. colleges.
“You have to get some level of excitement, and for some reason this is not working with women,” Piazzesi said in an interview in her office, where a whiteboard filled with equations about housing markets fills an entire wall.
Economics gave Piazzesi a way to understand the world, she said. When she began her work in the 1990s, bond-pricing models showing future values for interest rates across the range of different maturities, known as the term structure, didn’t include how the Fed’s monetary policy influenced those rates. She found that odd.
Yields on bonds such as U.S. Treasuries are closely related to the Federal Funds Target Rate on overnight loans among banks. The central bank’s main policy lever affects interest rates and, by extension, borrowing, spending, hiring, investing and, ultimately, economic growth.
John Taylor, the Stanford economist who created a rule for guiding monetary policy, remembers how Piazzesi from the start of her doctoral work demonstrated “innovative ways of thinking” about integrating term-structure models with monetary policy.
Models at the time “were quite rudimentary,” Taylor, a Treasury undersecretary in President George W. Bush’s administration, said in an interview. Piazzesi’s unprecedented methods influenced the whole field because they were “much more useful, as well as sophisticated and interesting.”
The Fed “has changed its forecasting models directly in response to her research,” the American Economic Association said when it awarded her the Elaine Bennett Research Prize in
2006. She was nominated by Ben S. Bernanke, who became Fed chairman that year, and three University of Chicago professors: Lars Peter Hansen, who shared the 2013 Nobel Prize in economics, John Cochrane and Anil Kashyap.
“She’s really one of the few people who deeply understands macro- and microeconomics and technical hard-core finance,” said Kashyap, an economics and finance professor at the University of Chicago and former Fed board economist who has known Piazzesi since 2001, when they were fellows at the Bank of England. “There’s almost nobody who goes back and forth, and she’s a bridge between them,” he said, working “in a space that almost nobody else has the bandwidth to occupy.”
Bridging different worlds is familiar for Piazzesi, who was born in Heidelberg, Germany, to a German mother and Italian father. She lived in Italy as a child then returned to Germany at age 7.
Initially a language student at Bonn, she went to a microeconomics lecture by mistake and discovered “a framework in which to think about the world and that immediately appealed to me,” she said.
She switched her major and studied with Werner Hildenbrand, a mathematician and economist who pushed students to leave Europe for further economic studies. Piazzesi followed his advice after the French exchange program.
Piazzesi gravitated to Stanford in California, which she saw as “an exciting place” focusing on financial markets and the macro economy, and began her doctoral work there in 1995. She participated in reading groups, where students presented research under the guidance of Professor Thomas Sargent, who later won the 2011 Nobel Prize in economics.
The gatherings “scared me,” Piazzesi later wrote in her dissertation acknowledgments. She credits the sessions with teaching her “much of what I know about macroeconomics.”
Darrell Duffie, a professor at Stanford’s Graduate School of Business who was Piazzesi’s main thesis adviser, recalls her pulling all-nighters to solve the difficult problems he assigned in his financial economics class, where it was “clear she was a standout.” She learned from him the flaw in term-structure models in use then, which inspired her to improve them.
The framework for connecting Fed policy and bond markets took short-term rates as an unspecified “random process” that didn’t specify the fed funds rate, said Duffie, a member of the Financial Advisory Roundtable for the Federal Reserve Bank of New York. “Monika said, ‘Now that’s not how short-term interest rates are set; they’re set by the central banks.’”
Her focus on joining different kinds of research would inspire other economists to build on her theories.
“That was seminal work,” and many papers since then have been based on her dissertation, Duffie said. “Today it’s one of the standard approaches to modeling the term-structure of interest rates.”
Piazzesi’s work has been cited in other research papers more than 1,100 times, putting her in the top 5 percent of authors, according to data compiled by the St. Louis Fed. Her advisees have gone on to posts at the Fed board in Washington, three of the Fed’s 12 regional reserve banks, Mexico’s central bank and top research universities.
After Stanford, Piazzesi went to the University of California at Los Angeles Anderson School of Management, where she was an assistant professor for three years. In 2003 she joined the University of Chicago, one of the top schools for finance and economics.
Piazzesi joined the Minneapolis Fed as a staff economist from 2007 to 2008. She worked on new ways of looking at unexplained phenomena in asset markets, including housing.
With co-author Martin Schneider, also a Stanford economics professor now, she found that home-market booms can be explained by how different classes of investors expect property to appreciate. The interaction of buyers and sellers spurs activity and “as credit markets proliferate, the potential for price booms increases,” according to the December 2007 issue of the bank’s newsletter.
Piazzesi returned to Stanford in 2008. She now leads her own reading group, which former students say helped inspire their research. Johannes Stroebel said it spurred him to examine relationships between macroeconomics and markets.
“It got me and a lot of other students excited to work at that intersection, this idea of bringing financial elements into macro models,” said Stroebel, now an assistant professor of finance at New York University’s Stern School of Business. “It certainly got me interested in the field.”
Piazzesi directs the asset-pricing program at the National Bureau of Economic Research, the Cambridge, Massachusetts-based group that determines when U.S. recessions begin and end. Her dual focus earned her positions on the executive committees of the American Finance Association and the American Economic Association, the top bodies for both disciplines.
While she has worked to bring more women into economic research, they remain outnumbered. Even with Fed Vice Chairman Janet Yellen poised to succeed Bernanke and become the first woman to lead any Group of Seven central bank, male economics majors outnumber female by 2.9 to 1 at U.S. colleges, according to a report this year from Claudia Goldin, American Economic Association president and a labor economist at Harvard University in Cambridge, Massachusetts.
Even so, Piazzesi says there’s no “boys’ club.” While the academic profession has “a tenure clock which works against” the time period when women want to start a family, she said she doesn’t see “any impediment to becoming an economist.”
Some Piazzesi students followed her not just into the profession but also into the same research realm. Josephine Smith was an economics major at the University of Rochester in New York in 2004, when she did a yearlong internship at the Fed in Washington.
Her first task was to summarize Piazzesi’s research. “I sat in the library for about a month teaching myself term-structure finance,” Smith said.
Smith went on to earn her economics Ph.D. at Stanford, with Piazzesi as her adviser, and now is an assistant professor of finance at NYU’s Stern School. The intersection of macroeconomics and markets has changed so much since Piazzesi’s paper her methods are natural to those in the field, said Smith.
“All the work I did learning that paper is the reason I do the research I do today,” Smith said. “That paper is why I do macrofinance.”
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