Some regulatory lessons to be drawn from the financial crisis

The article briefly outlines how the two major structural causes of the financial crisis have been a massive underestimation of the negative externalities potentially arising from malfunctioning of financial markets, and the policy decision to assign the production of an eminently public good, financial stability, to private parties. Both ideas have been a tenet of the so-called Greenspan doctrine. The crisis also shows that all regulators tend to be captured in the end, and thus any new legislation should contain bright-line rules, that might look inefficient when assessed with reference to the market they regulate, but are socially efficient, because it would be politically costly to alter them. Criminal sanctions, which after all are a social form of regulation, should also be strengthened.

Monetary policy in a financial crisis

What are the economic effects of an interest rate cut when an economy is in the midst of a financial crisis? Under what conditions will a cut stimulate output and employment, and raise welfare? Under what conditions will a cut have the opposite effects? We answer these questions in a general class of open economy models, where a financial crisis is modelled as a time when collateral constraints are suddenly binding. We find that when there are frictions in adjusting the level of output in the traded good sector and in adjusting the rate at which that output can be used in other parts of the economy, then a cut in the interest rate is most likely to result in a welfare-reducing fall in output and employment. When these frictions are absent, a cut in the interest rate improves asset positions and promotes a welfare-increasing economic expansion.     

On measuring the effects of fiscal policy in global financial crisis: Evidences from an export-oriented island economy

Following the 2008 financial crisis, Taiwan implemented various fiscal policies so that they could offset the shocks from the financial crisis. In the present study, we investigate whether these two fiscal policies alleviated the shock generated by the 2008 financial crisis on Taiwan's economy and unemployment. The findings provide that the economic and employment effects generated by the public work investment project were the most substantial in the public sector. By contrast, the economic and employment effects generated by the consumption vouchers policy were the largest in the service sector. These outcomes are closely related to Taiwan's industry structure. The fiscal multiplier of the public investment project and consumer vouchers distribution was 1.94 and 1.47. The evidence in the present study also seems to suggest that the two fiscal policies examined could not induce an effective long-term transformation of Taiwan's economic system.     

Central banks' voting records,the financial crisis and future monetary policy

We examine whether central banks' voting records help predict the future course of monetary policy in the Czech Republic, Hungary, Poland, Sweden and the United Kingdom, controlling for financial market expectations. Unlike previous research, we first examine the period of the global financial crisis, characterized by a high level of uncertainty, and second, examine the predictive power of voting records over longer time horizons, i.e., the next monetary policy meeting and beyond. We find that voting records predict the policy rate set at the next meeting in all central banks that are recognized as independent. In some central banks, voting records are found—before, but not during, the financial crisis—to be informative about monetary policy at even more distant time horizons.     

Zero lower bound,ECB interest rate policy and the financial crisis

We explore whether the ECB’s interest rate setting behaviour changed during the financial crisis by estimating reaction functions over the period 1999–2010, allowing for a smooth transition from one set of parameters to another. The estimates show a swift change in the months following the collapse of Lehman brothers. The ECB appears to have cut rates more aggressively than expected solely on the basis of the worsening of macroeconomic conditions, consistent with the theoretical literature on optimal monetary policy in the vicinity of the zero bound.     

On the response to the financial crisis of 1914: The Bank of England's discount policy

This work investigates the Bank of England's policy response to the London Financial Crisis of 1914, triggered by the outbreak of the Great War. By using daily data on discount operations drawn from the Bank of England's historical archive, we empirically test whether the Central Bank played the role of lender of last resort or it restricted credit. Our results suggest that, during 1914, the Bank of England did not change its policy in terms of bills’ discounting. Even though the discounter identity might have been a determinant of Bank's lending decisions (as in Flandreau and Ugolini, 2011 and 2013; Anson et al., 2019a), our evidence suggests that, throughout 1914, the Bank of England operated as a lender of last resort according to the Bagehot rules.     

Dividend policy: Shareholder rights and creditor rights under the impact of the global financial crisis

The extant literature shows that shareholder and creditor rights positively affect corporate payout policy in a static macroeconomic environment. This study examines how the effects of shareholder and creditor rights on dividend policy change under the impact of the global financial crisis. We posit that this exogenous shock increases agency costs of both shareholders and creditors. With a sample of 133,631 firm-year observations from 23,890 firms incorporated in 41 countries, we find that both shareholder and creditor rights are less effective in dividend decisions in the post-crisis period and the extent of shareholder (creditor) expropriation in the post-crisis period is larger when creditors (shareholders) are adequately protected.     

辽宁省应对金融危机财政政策效果的实证分析

本文重点定量探讨了辽宁省财政政策实施效果.利用协整关系检验表明,辽宁省的财政支出、货币供给、税收以及实际GDP之间存在显著的协整关系,财政支出对辽宁省经济增长具有促进作用.通过定量分析结果看出,辽宁省为应对全球金融危机而实行的扩张性财政政策,对拉动投资、促进经济增长、调整产业结构和解决内需不足等问题能够得到相关数据和统计检验的支持.     

The eurozone financial crisis: debt,credit ratings and monetary and fiscal policy

This paper discusses the eurozone financial crisis. It argues that it was largely the result of a common monetary policy not being suitable for individual countries which led to excessive private and public borrowing and a debt crisis. Neither borrowing rates nor credit ratings anticipated the crisis. Fundamental changes to eurozone governance are being proposed. The paper examines whether instead there might be a market solution if financial markets priced risk better. Accordingly, a more timely way of obtaining credit ratings is shown.     

The future of financial markets: financial crisis avoidance

This article considers the lessons from the global financial crisis for redesigning the financial system and its regulation to make the chance of future such crises lower. It focuses on three areas: improvements to the regulation of individual financial firms; macroprudential analysis and improving the structure of crisis resolution and management. It argues that if the authorities implement a credible crisis management regime where no firm is too big to be resolved, a smarter and more incentive based approach to the regulation of individual financial firms and extensive macroprudential analysis that both makes the structure of financial markets less risky and identifies risks, the risk of future crises will be reduced. But no framework can eliminate the risk altogether.     

The effectiveness of monetary policy in steering money market rates during the financial crisis

The financial crisis has deeply affected money markets and thus, potentially, the proper functioning of the interest rate channel of monetary policy transmission. Therefore, we analyze the effectiveness of monetary policy in steering euro area money market rates by looking at (i) the predictability of money market rates on the basis of monetary policy expectations and (ii) the impact of extraordinary central bank measures on money market rates. We find that during the crisis money market rates up to 12 months still respond to revisions in the expected path of future rates, even though to a lesser extent than before August 2007. We attribute part of the loss in monetary policy effectiveness to money market rates being driven by higher liquidity premia and increased uncertainty about future interest rates. Our results also indicate that the ECB’s non-standard monetary policy measures as of October 2008 were effective in addressing the disruptions in the euro area money market. In fact, our estimates suggest that non-standard monetary policy measures helped to lower Euribor rates by more than 80 basis points. These findings show that central banks have effective tools at hand to conduct monetary policy in times of crises.     

Designing environmental policy: lessons from the regulation of mercury emissions

In its waning days, the Clinton administration decided that it was appropriate to regulate mercury emissions from power plants. The incoming Bush administration had to decide how best to regulate these emissions. The Bush administration offered two approaches for regulating mercury emissions from power plants. The first was to establish uniform emission rates across utilities, as mandated by the 1990 Amendments. The second was to establish a cap on mercury emissions while allowing emissions trading in order to reduce the cost of achieving the goal. This paper presents the first cost-benefit analysis of this issue that takes account of IQ benefits. We find that the benefits of the mercury regulation are likely to fall short of the cost. This assessment is based on a number of assumptions that are highly uncertain. The finding of negative net benefits is robust to many, though not all, reasonable variations in the model assumptions. We also find that the emissions trading proposal is roughly $15 billion less expensive than the command-and-control proposal. Mr. Gayer is associate professor of public policy at Georgetown University and a visiting scholar at the American Enterprise Institute. Mr. Hahn is co-founder and executive director of the American Enterprise Institute-Brookings Joint Center for Regulatory Studies and a scholar at AEI. We would like to thank Mary Jo Krolewski, Leonard Levin, Joel Schwartz, Anne Smith, Nik Wada, and Chris Whipple for helpful comments and Jordan Connors, Laura Goodman and Molly Wells for valuable research assistance. The views expressed in this paper represent those of the authors and do not necessarily represent the views of the institutions with which they are affiliated.     

The solvency of financial institutions in Spain: lessons from securitization

On analysing a sample of Spanish banks, we find that securitization has a slightly negative impact on the soundness of the issuing entity. An unbalanced dynamic panel model was estimated using the forward orthogonal deviations GMM method and used to analyse 537 traditional securitizations issued by 61 banks between 1998 and 2012. The analysis revealed that the entities’ soundness became weaker immediately prior to the crisis, but this effect became insignificant after 2007. Securitization has facilitated a process of regulatory capital arbitrage leading to lower capital requirements while, at the same time, giving rise to a slight worsening of the quality of the originators’ portfolios. It was found that profitability, liquidity and inflation positively affect solvency, while changes in short-term interest rates affect it negatively.     

The regulated firm and the DCF model: Some lessons from financial theory

This paper explores lessons from established financial theory for allowed rate of return calculations within the constant-growth dividend (DCF) framework. Analysts using this model have been wedded to the conventional cost-of-equity formula. We set forth equivalent alternatives which make the analysts' task easier, more precise, and more confident. What is even more important, we derive a set of consistency conditions that must be observed for the appropriate use of the model. We also use a basic capital-market principle to determine an alternative, flotation-cost adjusted, rate of return, an expression which provides useful insights for regulatory participants.     

The bank lending channel of monetary policy in EU countries during the global financial crisis

The study examines the existence of the bank lending channel of monetary policy in European Union (EU) countries. The paper advances current research on the monetary transmission mechanism in the following ways: Firstly, we analyze the differences between ‘old’ Economic Monetary Union (EMU) and ‘new’ EU countries. Secondly, we examine the key bank characteristics and monetary policy indicators that may have an impact on the bank lending channel. We assume that short-term market interest rates and monetary aggregate M2 affect banks' activities. We apply the generalized method of moments (GMM) with pooled data from 1999 to 2012. We show that in the pre-crisis period the effect of changing the short-term market interest rates on the bank lending channel of monetary policy is more pronounced among ‘old’ EMU countries, whereas the effect of M2 is significant during the period of the global financial crisis (GFC) among ‘old’ EMU countries. Last but not least the important finding is that banks in ‘new’ EU countries react differently to monetary shocks.     

Overall effects of financial liberalization: financial crisis versus economic growth

ABSTRACT

The contribution of this work consists firstly in decomposing the effect of financial liberalization into a global direct positive effect on growth and an indirect negative effect via financial fragility and crisis. We show that the aggregate positive effect of financial liberalization outweighs the negative partial or temporary effect. Secondly, contrary to previous works, we distinguish many types of financial reforms. We found that equity market liberalization is the most important component in reducing economical costs associated with financial crisis. Thus, equity market liberalization is the most important favoring growth. Interest rate liberalization enhances significantly the probability of crisis leading to a short-run indirect effect more important than other financial reforms. Thirdly, we improved our work by addressing model uncertainty using Bayesian Model Averaging techniques to choose appropriate indicators for model crisis specification.     

Catastrophe theory and the financial crisis

This paper develops and estimates catastrophe‐augmented models of the financial crisis. We employ catastrophe theory to explain discontinuous jumps in state variables of dynamic systems. We estimate an augmented bank failure model showing that the buildup of risk and an increase in the Federal Funds rate combined with low reserves (negative insurance effect) have been the main drivers of the financial crisis. Therefore, macroprudential policy and rating agencies play a key role in preventing the buildup of (systemic) risk and preventing the economy from entering a bifurcation area.     

Viewpoint: Empirical evidence and tax policy design: lessons from the Mirrlees Review

Abstract This paper examines the role of evidence in drawing up the recommendations for tax reform in the Mirrlees Review. The arguments are organised loosely under five related headings: (i) Key margins of adjustment. (ii) Measurement of effective tax rates. (iii) The importance of information and complexity. (iv) Evidence on the size of responses. (v) Implications from theory for tax design. Although the Mirrlees Review focuses on all aspects of tax reform, the focus is this paper is on the taxation of earnings with some examples drawn from the taxation of consumption and savings.     

Economic policy in Sweden: are there lessons from the Swedish model?

This article reviews Swedish economic policy since 1960 in the light of the trade union's Rehn-Meidner model. The arguments of economists who blame the crisis of the Swedish economy in the 1970s on that model are critically reviewed. The maintenance of full employment is analysed. The policies of the Social Democratic government since 1982 are found to be significantly at variance with the Rehn-Meidner model leading to a high risk of wage-push inflation. It is suggested that the British labour movement has lessons to learn from Swedish experience and the Rehn-Meidner model in particular.