Do Regulatory and Balanced Budget Requirements Risk Exacerbating Economic Cycles? Or a Paradox of Prudence?

6 Pages Posted: 19 Aug 2010

See all articles by Dan Ciuriak

Dan Ciuriak

Ciuriak Consulting Inc.; Centre for International Governance Innovation (CIGI); C.D. Howe Institute; Asia Pacific Foundation of Canada; BKP Development Research & Consulting GmbH

Date Written: February 1, 2002

Abstract

Regulations established for economic agents and policy rules established for governments incorporate distilled wisdom based on (usually unhappy) experience as to what works and what doesn’t. At times, however, these rules require action that appears to run contrary to common sense. At the heart of this question is the classic debate over rules versus discretion in public policy. Automatic rules designed to build in prudent behaviour for an individual entity, whether it be a person, a bank or insurer, or a country, can, in certain circumstances lead to the paradox of prudence noted by Paul Samuelson. Those circumstances arise when the individual entities cease to behave as uncorrelated individuals and become a correlated herd, all heading in the same direction – often because of the same external shock. However, the alternative of discretionary eclecticism has often turned into a slippery. The question thus becomes which is the lesser of the two evils – the rigidity of the rule or the slippery slope of discretionary eclecticism. This note argues in favour of setting rules that meet with common sense and meeting them in the normal course, but not necessarily meeting them. The overwhelming importance of prior credibility is stressed.

Keywords: Policy Rules, Discretion

JEL Classification: E61

Suggested Citation

Ciuriak, Dan, Do Regulatory and Balanced Budget Requirements Risk Exacerbating Economic Cycles? Or a Paradox of Prudence? (February 1, 2002). Available at SSRN: https://ssrn.com/abstract=1661077 or http://dx.doi.org/10.2139/ssrn.1661077

Dan Ciuriak (Contact Author)

Ciuriak Consulting Inc. ( email )

83 Stewart St.
Ottawa, Ontario K1N 6H9
Canada

Centre for International Governance Innovation (CIGI) ( email )

57 Erb Street West
Waterloo, Ontario N2L 6C2
Canada

C.D. Howe Institute ( email )

67 Yonge St., Suite 300
Toronto, Ontario M5E 1J8
Canada

Asia Pacific Foundation of Canada ( email )

Canada

HOME PAGE: http://ciuriakconsulting.com/

BKP Development Research & Consulting GmbH ( email )

Romanstrasse 74
München, 80639
Germany

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