Econometric DSGE (dynamic stochastic general equilibrium) models are widely used by monetary authorities for conducting monetary policy. The insurance industry then uses monetary authority guidance to inform its market risk parameters in economic capital models. 

The strangest feature of these DSGE models is that they hold money supply as a constant in a model designed to guide monetary policy. Thus money itself is not an explanatory variable in a model that guides money policy. 

This presentation: 

• provides the history of why money is no longer a part of monetary policy 
• explores how this modern approach results in models that fit well to a framework of expectations but not to reality 
• looks at how it has therefore warped our understanding of all market risks: specifically, interest rate risk, inflation risk, foreign exchange rate risk, and asset price risk 

This presentation challenges both your own and the mainstream’s understanding of interest rates and inflation, and so also challenges your understanding of money. 

Improved understanding of market risks, particularly interest rate and inflation risk, gives insurance companies a better chance at fitting a model that more closely resembles reality.