Against Regulatory Stimulus
17 Pages Posted: 31 Mar 2020
Date Written: February 13, 2020
With political constraints on fiscal responses and monetary policy confronting the zero lower bound, policymakers may be tempted to turn to financial deregulation as a tool to stimulate economic growth in a recession, a strategy I label “regulatory stimulus.” This article creates a framework for answer two questions: first, whether and when regulatory stimulus is effective in promoting macroeconomic growth, particularly in a severe recession or liquidity trap; and second, if regulatory stimulus is effective, whether it is worth the potential trade-offs in terms of longer-term macroeconomic policy objectives.
Ultimately, I find grounds for skepticism that financial deregulation can effectively stimulate economies suffering from a liquidity trap. Policymakers must first articulate the channel by which deregulation would have a macroeconomic effect. In a given channel, it is unclear how most contemporary versions of financial deregulation would achieve sufficient magnitude without significant time lag given the constraints of legal process. Policymakers would also have to consider expectations, particularly whether financial deregulation might be “pushing on a string.” Financial institutions may not lend more even when permitted by loosened financial rules because of significant economic uncertainty. It would be difficulty to calibrate financial deregulation as a macroeconomic tool, and the political economy of financial regulation can create a one way ratchet effect toward deregulation.
The article conducts a brief case study of the 2012 JOBS Act, which illustrates these challenges.
Even if regulatory stimulus effectively achieves its aims, it may create significant intertemporal trade-offs. A short-term economic punch can come at the cost of economic institutions that promote long term financial stability and sustained growth. Legal rules represent more than mere regulatory “taxes” that can be repealed as a tool of stimulus.
Accordingly, policymakers should demand clear empirical evidence of deregulation’s efficacy before weakening a particular regulation in an effort to stimulate the economy.
Keywords: Financial deregulation, law and macroeconomics, stimulus, regulatory stimulus, JOBS Act
JEL Classification: E60,E61,E65,G01,G18,G28,K22
Suggested Citation: Suggested Citation