Financial crises: reducing pro-cyclicality
Macroeconomics and Finance in Emerging Market Economies, 2009, vol. 2, issue 1, 173-183
The swing in favour of markets weakened regulation, created incentives for excessive risk-taking, and reduced transparency and diversity. As a result, financial markets became more pro-cyclical. The right combination of regulation and markets is required to reverse this. Principle-based reform should aim to change behaviour rather than forbid activity. Central Bank accommodation has been blamed for the crisis, but excessive leverage due to lax regulation was of a much greater magnitude than any monetary imbalance. Capital's mobility and arbitrage in response to regulation, implies changes must be adopted globally. A diversity of voice and power is essential to enable implementation of the core set of proposals that can make financial markets more robust.
Keywords: regulation; countercyclical; incentives; diversity (search for similar items in EconPapers)
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