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Offshore financial regulatory competition: a force for modernization and for crisis

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  • Edward J. Kane

Abstract

How policymakers frame an economic problem inevitably restricts the range of policy solutions they entertain. It is important to prevent restrictions on the range of policy options being explored from undermining the quality of policy performance. This implies that outside economists should challenge misframing whenever they see it. ; This paper contends that, at least in the financial press, policymakers and some economists are misframing two related problems in financial regulation. The first concerns the nature of the process by which financial modernization spreads from country to country. The second concerns how modernization unmasks institutional vulnerability and transmits crisis pressures from country to country. ; Reframing these problems produces a Schumpeterian view of the forces that determine the onset, costs, and duration of financial crisis in an individual country. In the reframed model, technological change, microeconomic imbalances, weaknesses in accountability, and distributional politics help to generate financial change and macroeconomic disequilibria. Introducing these elements leads us to distinguish adjustments in market structure that endogenously correct microeconomic inefficiencies from the disruptive effects of political and psychological responses to indications of banking and currency weakness.

Suggested Citation

  • Edward J. Kane, 1998. "Offshore financial regulatory competition: a force for modernization and for crisis," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
    • Handle: RePEc:fip:fedfpr:y:1998:i:sep:x:7
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