Varieties of Economic Crisis,Varieties of Ideational Change: How and Why Financial Regulation and Macroeconomic Policy Differ

One of the principal tasks facing post-crash academic political economy is to analyse patterns of ideational change and the conditions that produce such change. What has been missing from the existing literature on ideational change at times of crises however, is a sense of how processes of persuasive struggle, and how the success of those ‘norm entrepreneurs’ arguing for ideational change is shaped by two contextual variables: the most immediate material symptoms and problems that a crisis displays (the variety of crisis); and the institutional character of the policy subsystem that agents have to operate within to affect change. Introducing these two variables into our accounts of persuasive struggle and ideational change enables us to deepen our understanding of the dynamics of ideational change at times of crisis. The article identifies that a quite rapid and radical intellectual change has been evident in the field of financial regulation in the form of an embrace of a macroprudential frame. In contrast in the field of macroeconomic policy – both monetary and fiscal policy, many pre-crash beliefs remain prominent, there is evidence of ideational stickiness and inertia, and despite some policy experimentation, overarching policy frameworks and their rationales have not been overhauled. The article applies Peter Hall's framework of three orders of policy changes to help illuminate and explain the variation in patterns of change in the fields of financial regulation and macroeconomic policy since the financial crash of 2008. The different patterns of ideational change in macroeconomic policy and financial regulation in the post-crash period can be explained by timing and variety of crisis; sequencing of policy change; and institutional political differences between micro policy sub systems and macro policy systems.     

The Institutionalist Roots of Macroprudential Ideas: Veblen and Galbraith on Regulation,Policy Success and Overconfidence

One consequence of the global financial crisis has been to prompt debate over macroprudential regulation – meant to limit private risk-taking that threatens systemic stability. In this paper, we stress the roots of macroprudential ideas in the Institutionalist economics of Veblen and Galbraith in a way that highlights both unrecognised policy possibilities and underappreciated impediments to policy effectiveness, arguing in particular that regulatory success can breed overconfidence. First, we argue that while Veblen's views anticipated macroprudential arguments, they also obscured tensions between the technocratic acumen of policy ‘engineers’ and popular legitimacy. Second, we argue that while Galbraith's views similarly shaped the postwar Keynesian policy mix, they also echoed Veblen in underrating the potential for populist resentment of an intellectual ‘technostructure’. We conclude that while this analysis can be seen as highlighting an overlooked century of macroprudential debate, it also demonstrates the potential for technocratic overconfidence – which can eventually undermine policy legitimacy and effectiveness.     

Housing and credit market shocks: Exploring the role of rule-based Basel III counter-cyclical capital requirements

This paper examines the extent to which the Basel III bank capital regulation attenuates fluctuations in housing and credit markets and fosters financial and macroeconomic stability. We use a positive housing demand shock to mimic a housing market boom and a negative financial shock for credit squeeze and economic meltdown. The results show that the rule-based Basel III counter-cyclical capital requirement effectively attenuates fluctuations in housing and credit markets and prevents bubbles. In the case of a negative financial shock, it significantly reduces the magnitude of economic meltdown. Our analysis of the transition from Basel II to Basel III suggests that it is the counter-cyclical capital buffer that effectively mitigates the pro-cyclicality of its predecessor, while the impact of the conservative buffer is marginal. In contrast to the credit-to-GDP ratio, the optimal policy analysis suggests that the regulatory authority should adjust the capital requirement to changes in credit and output when implementing the counter-cyclical buffer. Future research could extend the study by comparing the effectiveness of the rule-based Basel III with other macroprudential tools in achieving financial and macroeconomic stability.     

Countercyclical capital rules for small open economies

The growing literature on macroprudential regulation focuses on how a combination of monetary and macroprudential policies can boost macroeconomic and financial stability. We contribute to this literature by developing a DSGE model that assesses the effectiveness of countercyclical capital regulation in small open economies, in monetary unions or with exchange rate pegs, where policymakers do not have full control over traditional stabilisation instruments such as nominal interest and exchange rates. In such economies, macroprudential policy could potentially play an even more relevant role in mitigating the adverse effects of macro-financial feedback loops. To validate the model’s ability to replicate the stylised facts of financial crises, we calibrate using data for the Irish economy, the scene of a recent housing crash. Our results demonstrate that the pro-active use of countercyclical capital regulation – in the form of Basel III-type rules – can help attenuate boom-bust cycles driven by over-optimistic expectations. We also find that more aggressive action by regulators during the release phase can bolster the economy’s ability to absorb a negative shock.     

Household debt,macroprudential rules,and monetary policy

Today's Canadian economy features a historic high of household debt and persistently low growth rate. The average debt-to-GDP ratio has reached the level experienced in the U.S. just prior to the recent financial crisis. In this paper, we ask whether monetary policy should lean against the household indebtedness or macroprudential policies are better suited for the task. To provide a quantitative answer, we develop a small open economy dynamic stochastic general equilibrium model featuring a micro-founded banking sector. We estimate the model using Canadian data and conduct policy experiments. Our findings favor macroprudential approach to reining in indebtedness: using monetary policy that reacts to household debt increases inflation volatility and lowers borrowers' welfare, while using macroprudential policies such as lowering the loan-to-value ratio limit increases borrowers' welfare.     

Comparative Capitalisms,Ideational Political Economy and French Post-Dirigiste Responses to the Global Financial Crisis

This article advances the case for the more systematic incorporation of ideational factors into comparative capitalisms analysis as a corrective to the rational choice proclivities of the Varieties of Capitalism approach. It demonstrates the pay-off of such an ideationally attuned approach through analysis of French capitalist restructuring over the last 25 years, placing it in comparative context. A modus operandi for such ideational explanation is elaborated through delineating different national conceptions of the market, and setting out their impacts on practices of market-making. The claim made in this article is that understanding the evolution of French capitalism requires recognition of the ongoing market-making role of the French State, in combination with the French conception of the market and its embedding within a social context characterised by the inter-penetration of public and private elitist networks of France's ‘financial network economy’ which remains substantially intact. The ideational dimension is crucial because French understandings of the market and competition, the ideational building blocks of market-making, inform French state interventions and leave footprints on French institutions and market structures, and the evolutionary trajectory of French capitalism. In charting this trajectory, this article deploys the concept of post-dirigisme. We map out the parameters and causes of the post-dirigiste condition in France through examination of French bond market development, privatisation, the shift from a government- to a market- dominated financial system, and French capitalism's internationalisation. It then uses post-dirigisme to explain French state responses to the financial crisis and the banking bailout, noting how state actors, in concert with the banking elites, actively facilitated dominant market positions of French international champions.     

Globalisation and the Institutional Re-embedding of Markets: The Political Economy of Price Formation in the Bordeaux En Primeur Market

Contemporary analyses commonly attribute the global credit crisis to faulty regulation. What have been the roots of these deficient rules, particularly in Europe, where rapid spill-over from US markets took policy makers and observers by surprise? This article focuses on regulatory liberalism as the paradigm guiding European Union (EU) regulation. It has dominated regulatory thinking for decades, but it has been implemented throughout Europe only since the mid-1990s. This shift can be traced to political institutions that have filtered policy ideas. EU financial reforms have pushed policy from pragmatism, under which it was adapted to political contingencies, to dogmatism, which adapts it to the intellectual exigencies of rigid policy paradigms. Inadvertently, reforms had created an epistemic community in which ‘professional’ rule setters systematically ignored external criticisms. The institutionalised ambition to craft ‘intellectually sound’ policy–rather than policy that simply ‘works’ –generated rules that persistently ignored the financial markets' self-reflexivity and thereby aggravated the crisis.     

逆周期宏观审慎银行监管研究评述

近期全球金融危机表明,以微观审慎监管为核心的《巴塞尔协议Ⅱ》,不能有效解决银行体系的系统性风险问题,同时还加剧了银行体系的顺周期性。各国金融当局和学界开始关注宏观审慎监管和逆周期监管问题,并对这一问题进行了广泛的研究。我国＂十二五＂规划中也明确提出了构建逆周期宏观审慎金融管理制度的目标。为了反映这一最新研究进展,更好地为我国金融监管改革提供有益的借鉴,本文在对微观审慎监管缺陷的相关成果进行总结的基础上,全面归纳、梳理了关于逆周期宏观审慎银行监管的最新研究成果。     

Taming the City? Ideas,Structural Power and the Evolution of British Banking Policy Amidst the Great Financial Meltdown

We are increasingly learning more about the contingencies and independent variables that shape the structural power of business and financial interests. This paper contributes to this research by analysing factors that led to weakening in the structural power of financial interests in the City of London in the aftermath of the 2007/2008 crisis. We focus on under-researched mediators of structural power dynamics, especially the context of action and the agency and ideas of state leaders. Prior to the crisis, closed regulatory policy and a prevailing discourse premised upon the notion of market efficiency, helped to reinforce the structural power of the UK banking and financial sector. After the crisis heightened politicisation, more assertive state leadership, and especially ideational revision, has increasingly challenged the power of the City. We illustrate this through an examination of the Independent Commission on Banking's proposals in relation to the ‘ring fencing’ of investment and retail banks.     

The dynamic of bank lending channel: Basel regulatory constraint

This article analyzes the impact of monetary policy on bank behavior under the Basel I regulatory framework using a dynamic model with monopolistic competition. There are two main objectives. First, we theoretically predict the dynamic model of bank lending channels under the Basel I regulatory constraint. Second, we empirically analyze the situation in Malaysia by using panel data on 23 commercial banks in the period of 1999 to 2007 by using General Method of Moments. The empirical results show that market rates on loans and policy rates are important influences on average rates of banks' loans. This has an implication that Malaysian banks have the power to set their own prices on loans as they are influenced by the change in the market rate and policy rate. We also have proven that the previous period of spread risk weighted loans and securities is statistically significant and correlated with the average loan rate, whereas risk weighted securities is also statistically significant and correlated with the average time deposit rate in both periods. This shows that the role of risk-weighted assets under the Basel I is important in influencing the optimal rates on loans and time deposits.     

Dynamic Stochastic General EQUILIBRIUM ‐ BASED Assessment of Nonlinear Macroprudential Policies: Evidence from Hong Kong

In the wake of the 2008–2009 global financial crisis, the macroeconomic discussion has returned to the topic of proactive macroprudential policies. The use of loan‐to‐value (LTV) policies to curb booming property markets has long been used by Hong Kong's monetary authorities to actively manage the potential fallout from housing price bubbles. In 2013 the Hong Kong authorities supplemented the LTV policies with property transfer taxes. Here, we also analyse the merits of these tax‐based macroprudential policies in the dynamic stochastic general equilibrium framework. Furthermore, we calibrate the impact of both countercyclical macroprudential policies employed in conjunction with forward guidance. We conclude that both policy approaches can limit the pace of housing price increases. As regards the comparison of LTV and tax‐based measures, it turns out that property acquisition taxes are more effective.     

A policy model to analyze macroprudential regulations and monetary policy

We construct a small‐open‐economy, new Keynesian dynamic stochastic general‐equilibrium model with real financial linkages to analyze the effects of financial shocks and macroprudential policies on the Canadian economy. The model incorporates rich interactions between the balance sheets of households, firms and banks, long‐term household and business debt, macroprudential policy instruments and nominal and real rigidities and is calibrated to match dynamics in Canadian macroeconomic and financial data. We study the transmission of monetary policy and financial and real shocks in the model economy and analyze the effectiveness of various policies in simultaneously achieving macroeconomic and financial stability. We find that, in terms of reducing household debt, more targeted tools such as loan‐to‐value regulations are the most effective and least costly, followed by bank capital regulations and monetary policy, respectively.     

An Institutionalist Framework for a Consistent Financial Regulation

Abstract:

In the light of recurrent systemic crises that financialized market economies have been experiencing since the 1980s, this article seeks to determine the conditions required for a regulatory framework apt to ensure financial stability. Drawing upon an Institutionalist Minskyian endogenous financial instability approach, the article studies the fragilities of liberalized finance and points to some policy alternatives able to lead to an alternative financial regulatory model that is consistent with macroeconomic stability. It argues that in a weak regulatory environment financial markets naturally generate instabilities that could turn into systemic crises. The analysis maintains that in order to deal with such crises, a tight supervision should be framed under the aegis of public authorities and suggests some rules to develop a relevant regulatory system through an open and democratic decision process. Two points then deserve particular attention: a macro-prudential approach that regards instability as a systemic (non-individual) issue, and a preventive approach that aims at preventing systemic-risk generating activities from taking control over the markets.     

Reform of the UK Financial Policy Committee

We argue that: The FPC should have a wider remit; a much broader membership (covering many specialisms); should be wholly independent of Government and outside the Bank of England; its aim should be to comment publicly and authoritatively on any possible areas of risk to financial stability while itself controlling few, if any, levers of policy. The rationale for these conclusions is that: Macroprudential/financial risks come from many sources; many of these sources are structural and outside of the Bank’s regulatory purview/competence; in a sense, the Bank gets to mark its own homework as regards issues such as the SMR, resolution, appropriateness of capital, effectiveness of ring-fencing etc.; many aspects of macroprudential actions have distributional implications, and hence, politicians, not the Bank or any other body, should take and justify, or not, these decisions.     

The Global Governance of Systemic Risk: How Measurement Practices Tame Macroprudential Politics

ABSTRACT

This article explores how systemic risk has been governed at the international level after the financial crisis. While macroprudential ideas have been widely embraced, the policy instruments used to implement them have typically revolved more narrowly around the monitoring of risk posed by discrete ‘systemically important’ entities. This operational focus on individual entities sidelines the more radical implications of macroprudential theory regarding fallacies of composition, fundamental uncertainty and the public control of finance. We explain this tension using a performative understanding of risk as a socio-technical construction, and illustrate its underlying dynamics through case studies of systemic risk governance at the Financial Stability Board (FSB) and the International Monetary Fund (IMF or Fund). Drawing on official reports, consultation documents and archival sources, we argue that the FSB’s and IMF’s translations of systemic risk into a measurable and attributable object have undermined the transformative potential of the macroprudential agenda. The two cases illustrate how practices of quantification can make systemic risk seemingly more governable but ultimately more elusive.     

Macroprudential regulations and bank profit efficiency: international evidence

This study examines the impact of macroprudential regulations on bank profit efficiency. The latter is being estimated with a production frontier function using a cross-country dataset of more than 3000 banks from over 130 countries during 2013–2018. The results show that macroprudential regulatory policies diminish bank efficiency. This finding applies to both borrower-targeted and financial institutions-targeted policies, and it is robust to the inclusion of controls for microprudential regulations, financial consumer protection policies, and other county-level characteristics in the regressions.

     

Monetary and macroprudential policy with foreign currency loans

In a number of countries a substantial proportion of mortgage loans is denominated in foreign currency. In this paper we demonstrate how their presence affects economic policy and agents’ welfare. To this end we construct a small open economy model with financial frictions, where housing loans can be denominated in domestic or foreign currency. The model is calibrated for Poland - a typical small open economy with a large share of foreign currency loans (FCL). We show that the presence of FCLs negatively affects the transmission of monetary policy and deteriorates the output-inflation volatility trade-off it faces. The trade-off can be improved with macroprudential policy but the outcomes are still worse than under this same policy mix applied to an economy with domestic currency debt. We also demonstrate that a high share of FCLs is harmful for social welfare, even if financial stability considerations are not taken into account. Finally, we show that regulatory policies that discriminate against FCLs may have a negative impact on economic activity and discuss the redistributive consequences of forced currency conversion of household debt.     

How does capital regulation react to monetary policy? New evidence on the risk-taking channel

Before the subprime crisis, financial stability was a microprudential issue addressed by capital regulation and unrelated to monetary policy. The financial crisis put this paradigm to the test and turned the spotlight on the relationship between financial stability and monetary policy. Hence, the following question arises: how does capital regulation react to monetary policy? This article seeks to answer this question. We analyze the link involving monetary policy and capital regulation through the risk-taking channel in Brazil. The findings suggest that banks react to monetary policy by changing the amount of loan provisions as well as the capital adequacy ratio (CAR). An important novelty of the study is the evidence that there is no trade-off between provisions and CAR, which are important tools used by banking supervisors. The key result of the article is that banks react to the macroeconomic environment differently from what is expected by banking supervision, i.e., there exists a paradox between the microprudential view and the macroprudential view. Thus, in terms of practical implication, a banking supervision strategy for financial stability must take into account the effects of monetary policy.     

Optimal monetary and macroprudential policies: Gains and pitfalls in a model of financial intermediation

We estimate a quantitative general equilibrium model with nominal rigidities and financial intermediation to examine the interaction of monetary and macroprudential stabilization policies. The estimation procedure uses credit spreads to help identify the role of financial shocks amenable to stabilization via monetary or macroprudential instruments. The estimated model implies that monetary policy should not respond strongly to the credit cycle and can only partially insulate the economy from the distortionary effects of financial frictions/shocks. A counter-cyclical macroprudential instrument can enhance welfare, but faces important implementation challenges. In particular, a Ramsey planner who adjusts a leverage tax in an optimal way can largely insulate the economy from shocks to intermediation, but a simple-rule approach must be cautious not to limit credit expansions associated with efficient investment opportunities. These results demonstrate the importance of considering both optimal Ramsey policies and simpler, but more practical, approaches in an empirically grounded model.     

Financial frictions and stabilization policies

After the financial crisis of 2007, in many economies, public and private debt have moved in opposite directions, as opposed to pre-2007 evidence. Private deleverage and public debt build-up may affect the recovery path of countries after a recession. In a new Keynesian model with financial frictions, we show that when the economy is hit by a credit risk shock, the negative correlation arising between public and private debt amplifies the response of GDP. In our setup, the traditional monetary-fiscal policy mix is not enough to offset this private-public debt mechanism and therefore bring back economic stability. When macroprudential policy is part of the policy mix, the private-public debt channel can be broken. Interestingly, depending on the macroprudential instrument, a trade-off may arise between private debt and output stabilization.