Rewriting the rules of finance

While the current economic crisis has left many people scrambling, one group of Penn students is finding a way to reap the benefits.

The first Penn team to compete in the College Fed Challenge made it to the semifinals last weekend. If they advance, they will have the opportunity to win up to $15,000 in prize money for themselves and the Economics department.

The Challenge is a tournament organized by the Federal Reserve Bank of New York to promote a greater understanding of the Federal Reserve's role in the development and implementation of policy.

"While it may be a bad year for the economy, it's a great time to be competing in the Fed Challenge," wrote College senior Sam Reid in an e-mail. "The rules of finance and economics are being rewritten, and we're getting a chance to learn about these changes in real time."

In the first part of the competition, teams had 20 minutes to present their views on the current financial condition and its potential risks to the economy; to make short-term forecasts on monetary policy; and to recommend actions the Fed should take with respect to short-term interest rates.

A panel of judges then followed up with 15 minutes of questions on a broad range of topics relating to monetary policy.

Penn's team, which will compete in the semifinals and finals on Nov. 21, consists of three seniors in addition to Reid: College senior Anna Cororaton, a Daily Pennsylvanian photographer, Wharton and College senior Amy Macbeath and College senior Derek Tang. Economics Professor Gwen Eudey acts as the team's faculty advisor.

The team has been preparing for the tournament since the beginning of the semester by reviewing current events in the markets, business cycle indicators and recent policy changes. Visiting Columbia University Economics professor Stefania Albanesi helped the team form a thesis, which focused on the risk of monetary policy forcing the U.S. into either a liquidity trap situation or a deflationary episode, Eudey wrote in an e-mail.

The team recommended the panel "cut the interest rate by 25 basis points to 0.75 percent," Cororaton wrote.

Macbeath felt the team's "ability to answer [the judges'] questions" impressed the panel and helped them move to the next round. The broad mix of classes team members have taken in the Economics department and Wharton also helped the team, Tang wrote.

Macbeath said their summer internships gave them an additional advantage. She interned at Credit Suisse, while Reid worked at Lehman Brothers, Tang at Merrill Lynch and Cororaton at the Federal Reserve Bank of Richmond.

"We definitely have a shot of doing well at the next round," Reid said.

If they win the finals, the team will travel to Washington, D.C., in December to compete in the national championship.

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