Financial Crises and Regulatory Response
30 Pages Posted: 23 Aug 2009
Date Written: August 22, 2009
This paper focuses on the nature and intensity of regulatory responses to crises. It highlights the role of mediation played by capital markets and banks in transmitting the action to economic and the time effect this intermediation activity as on the final outcome. In this context, we argue that actions undertaken both by regulatory authorities in order to encounter a financial crisis are subject to lag-structures which in turn are (negatively) correlated with the intensity level of undertaken actions. Intensity of regulatory activity in turn is a function of actions undertaken by regulatory authorities in order to encounter a crisis. We show that a higher degree of intensity with regard to regulatory responses is not always positively correlated with better economic conditions. On the basis of 38 different crises (1990-2003) we find empirical prove that different intensity levels of crisis-response strategies indeed lead to different economic scenarios also impacting lag structures of economic variables in the wave of a crisis. However, response strategies seem additionally to display some learning effects within a country that has already suffered a crisis recently, leading to the then applied measures being the minimum from which response strategies are gradually escalated. Our main contribution stresses that the response in times of crisis is not only more intense, but interestingly (and somewhat contra dictionary to the increased intensity) requires longer lime lags to become effective. Liquidity arguments and velocity of the monetary transmission system thereby do not seem to be the crucial elements that mitigate these effects. Second round effects and disruptions in the financial intermediation system rather than at central bank level might thus need to be given additional attention in future research.
Keywords: Crisis, Regulatory Response, transmission mechanism, financial intermediation, time-lag
JEL Classification: G21, G29, E44, E58
Suggested Citation: Suggested Citation