Should monetary policy "lean or clean"?

It has been contended by many in the central banking community that monetary policy would not be effective in "leaning" against the upswing of a credit cycle (the boom) but that lower interest rates would be effective in "cleaning" up (the bust) afterwards. In this paper, these two propositions (can't lean, but can clean) are examined and found seriously deficient. In particular, it is contended in this paper that monetary policies designed solely to deal with short term problems of insufficient demand could make medium term problems worse by encouraging a buildup of debt that cannot be sustained over time. The conclusion reached is that monetary policy should be more focused on "preemptive tightening" to moderate credit bubbles than on "preemptive easing" to deal with the after effects. There is a need for a new macrofinancial stability framework that would use both regulatory and monetary instruments to resist credit bubbles and thus promote sustainable economic growth over time.Monetary policy ; Financial crises

Some alternative perspectives on macroeconomic theory and some policy implications

The macroeconomic theories and models favoured by academics, as well as those used more commonly by policymakers, effectively rule out by assumption economic and financial crises of the sort we are living through. In particular, the longer run dangers posed by the rapid expansion of credit and resulting private sector balance sheet developments were inadequately appreciated. As a result, the current crisis was neither anticipated nor prepared for, and the crisis was also less well managed than it might have been. At the level of macroeconomic theory and modelling, this experience suggests that basic Keynesian insights need to be complemented by some insights from the Austrian school as well as those of Minsky. Demand factors are important, but so too are supply side and financial considerations. Such a synthesis provides a reasonable explanation of the crisis and points to some of the difficulties likely to be faced in emerging from it. As for the policy implications in current circumstances, it needs to be better recognized that policies with positive short run effects can have negative effects over a longer time period. If, as a result, fiscal and monetary expansion have now reached their limits in some countries, supply side policies must be given greater emphasis. These would include measures to encourage investment, both private and public, as well as other structural measures to raise the potential growth rate of the economy. Such measures, along with more decisive efforts to reduce the "headwinds" of over indebtedness, should with time provide the foundations for a sustainable economic recovery.Global financial crisis ; Business cycles - Econometric models ; Financial markets ; Macroeconomics - Econometric models ; Supply-side economics ; Monetary policy ; Fiscal policy

Some Alternative Perspectives on Macroeconomic Theory and Some Policy Implications

An initial version of this paper was presented at a meeting of the Euro50 group in Paris on 20, November, 2009. It has benefitted from comments by David Laidler and Axel Leijonhufvud, neither of whom necessarily agree with all of its contents.

The Modernization of Legal Lists

Worldwide, fatal traffic injuries and drowning deaths are important problems. The aim of this thesis was to investigate the cirumstances of fatal and non-fatal traffic injuries and drowning deaths in Sweden including analysis of the presence of alcohol and drugs, which are considered to be major risk factors for these events. Data where obtained from the database of National Board of Forensic Medicine. In the first study, we investigated 420 passenger deaths from 372 crashes during 1993-1996. There were 594 drivers involved. In total, 21% of the drivers at fault were alcohol positive compared to 2% of drivers not at fault (p<0.001) (Paper I). During 2004-2007, crashes involving 56 fatally and 144 non-fatally injured drivers were investigated in a prospective study from Northern Sweden (Paper II). The drivers were alcohol positive in 38% and 21%, respectively. Psychoactive drugs were found in 7% and 13%, respectively. Benzodiazepines, opiates and antidepressants were the most frequent drugs found in drivers. Illict drugs were found 9% and 4% respectively, with tetrahydrocannabinol being the most frequent of these drugs (Paper II). We investigated 5,125 drowning deaths in Sweden during 1992-2009 (Paper III). The incidence decreased on average by about 2% each year (p<0.001). Unintentional drowning was most common (50%). Alcohol was found in 44% of unintentional, 24% of intentional, and 45% of undetermined drowning deaths. Psychoactive substances were detected in 40% and benzodiazepines were the most common substance. Illicit drugs were detected in 10%. Of all drowning deaths, a significantly higher proportion females commited suicide compared with males (55% vs. 21%, p<0.001). Suicidal drowning deaths (n=129) in Northern Sweden were studied further in detail (Paper IV). of these, 53% had been hospitalized due to a psychiatric diagnosis within five years prior to the suicide. Affective and psychotic disorders were the most common psychiatric diagnoses. Almost one third had performed a previous suicide attempt. One fourth had committed suicide after less than one week of discharge from hospital. Alochol was found in 16% and psychoactive drugs in 62% of these cases, respectively.  In conclusion, alcohol and psychoactive drugs are commonly detected among injured drivers and drowning victims, and probably play a role in these events. Most of the individuals that tested positive for alcohol and high blood concentrations, indicating alochol dependence or abuse. This association warrants futher attention when planning future prevention.

The Prudential Regulation of Financial Institutions: Why Regulatory Responses to the Crisis Might Not Prove Sufficient

It is now six years since a devastating financial and economic crisis rocked the global economy. Supported strongly by the G20 process, international regulators led by the Financial Stability Board have been working hard ever since to develop new regulatory standards designed to prevent a recurrence of these events. These international standards are intended to provide guidance for the drawing up of national legislation and regulation, and have already had a pervasive influence around the world.  This paper surveys recent international developments concerning the prudential regulation of financial institutions: banks, the shadow banking system and insurance companies. It concludes that, while substantial progress has been made, the global economy nevertheless remains vulnerable to possible future financial instability. This possibility reflects three sets of concerns. First, measures taken to manage the crisis to date have actually made the prevention of future crises more difficult. Second, the continuing active debate over virtually every aspect of the new regulatory guidelines indicates that the analytical foundations of what is being proposed remain highly contestable. Third, implementation of the new proposals could suffer from different practices across regions.  Looking forward, the financial sector will undoubtedly continue to innovate in response to competitive pressures and in an attempt to circumvent whatever regulations do come into effect. If we view the financial sector as a complex adaptive system, continuous innovation would only be expected. This perspective also provides a number of insights as to how regulators should respond in turn. Not least, it suggests that attempts to reduce complexity would not be misguided and that complex behaviour need not necessarily be accompanied by still more complex regulation. Removing impediments to more effective self discipline and market discipline in the financial sector would also seem recommended