Counter-Cyclical Regulation

My entry at the Free Exchange Raghuram Rajan roundtable on Counter-cyclical regulation:

Seize the Moment, by Mark Thoma: I’ve also worried about the regulatory cycles discussed by Raghuram Rajan, but I don’t see the problem in quite the same way. How you should view the regulatory cycles he describes depends upon your view of the average level of regulation at the centre of these cycles. Rajan appears to take the view that the regulatory oscillations are centered on the correct level of regulation, leaving us with too much regulation just after the reactionary bad times, and too little regulation during the good times when regulation tends to be eased either implicitly, by the market, or explicitly by regulators.

Rajan’s piece has recommendations for ways to offset the regulatory cycles, but if the average level of regulation over the entire cycle is too high or too low, the recommendations would differ, or at least require augmentation. Suppose, for example, that the level of regulation is too low on average, a view I have much sympathy with. … […continue reading…]

The lead article is here. There are also responses from Charles Goodhart, Arnold Kling, Hyun Song Chin, and Martin Baily. [Entire roundtable]

Originally published at the Economist’s View and reproduced here with the author’s permission.

One Response to "Counter-Cyclical Regulation"

  1. Ecclesiastes   April 10, 2009 at 2:21 pm

    Yesss!!!! Economists have found a new fascinating field of research that will certainly spawn thousands of articles, PhD theses, professorships and earn one of them a Nobel prize.very free market economies being excessively prone to boom and bust, would seem logical that governements, central banks and regulators should play an anticyclic rôle, but why chose regulation? What needs to be smoothed around a long term trend?Lotsa things: commodities prices, exchange rates, current act balance, asset prices (real estate, stocks mainly), credit, incomes, fiscal balance, investment. Plus the State should provide public goods such as health insurance and pensions, for which private provision has clearly failed, instead of wasting zillions of taxpaers money fighting problems it has created, the worst being the criminality due to the war on drugs. But mediocraties are not conducive to sound policies.