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Sliding Doors Cost Measurement.A Restrictive Approach to Analyzing the Net Economic Cost of Policy Decisions and an Application to Irish Financial Regulation

  • Gregory Connor

    ()

    (Department of Economics Finance and Accounting, National University of Ireland, Maynooth)

  • Brian O'Kelly

    (Dublin City University)

This paper develops a restrictive procedure for evaluating economic policy decisions, by comparing actual economic history to a simulated history where a specific policy decision is replaced with a counterfactual, but credible, alternative. Our procedure is theoretically straightforward, but empirically problematic since it requires the identification of a feasible policy alternative and a model linking a specific policy choice to subsequent economic outcomes. We apply the procedure to the mistaken decision to maintain an excessively lax financial regulation regime in Ireland during the period 2003 – 2008. We measure the differences in banking sector stability and national income that would have occurred if the stricter regulatory regime imposed in Ireland in 2009 had been put in place six years earlier. We find that a few simple, reasonably prudent regulatory controls on the Irish banking sector would have greatly limited the vulnerability of the domestic sector to the 2008 global credit freeze, and almost certainly prevented the 2008-2009 collapse of the domestic banking sector and the consequent deep Irish recession of 2009-2010. On the other hand, the risky and unsustainable inflow of foreign capital mediated by the domestic banks accounts for a substantial part of Irish economic growth during the 2003-2007 period. Without this net foreign borrowing inflow, cumulative gross domestic product over the early period would have been substantially lower.

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File URL: http://repec.maynoothuniversity.ie/mayecw-files/N214a-10.pdf
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Paper provided by Department of Economics, Finance and Accounting, National University of Ireland - Maynooth in its series Economics, Finance and Accounting Department Working Paper Series with number n214a-10.pdf.

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Length: 22 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:may:mayecw:n214a-10.pdf
Contact details of provider: Postal: Maynooth, Co. Kildare
Phone: 353-1-7083728
Fax: 353-1-7083934
Web page: http://www.maynoothuniversity.ie/economics-finance-and-accounting

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  1. Moritz Schularick & Alan M. Taylor, 2012. "Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870-2008," American Economic Review, American Economic Association, vol. 102(2), pages 1029-61, April.
  2. Carmen Reinhart & Vincent Reinhart, 2009. "Capital Flow Bonanzas: An Encompassing View of the Past and Present," NBER Chapters, in: NBER International Seminar on Macroeconomics 2008, pages 9-62 National Bureau of Economic Research, Inc.
  3. Reinhart, Carmen & Kaminsky, Graciela & Vegh, Carlos, 2004. "When it rains, it pours: Procyclical capital flows and macroeconomic policies," MPRA Paper 13883, University Library of Munich, Germany.
  4. Alan J. Auerbach & Yuriy Gorodnichenko, 2010. "Measuring the Output Responses to Fiscal Policy," NBER Working Papers 16311, National Bureau of Economic Research, Inc.
  5. Reinhart, Carmen & Reinhart, Vincent, 1998. "“Some Lessons for Policy Makers Who Deal with the Mixed Blessing of Capital Inflows,”," MPRA Paper 7123, University Library of Munich, Germany.
  6. Conefrey, Thomas & FitzGerald, John, 2009. "Managing Housing Bubbles in Regional Economies under EMU: Ireland and Spain," Papers WP315, Economic and Social Research Institute (ESRI).
  7. Montiel, Peter & Reinhart, Carmen M., 1999. "Do capital controls and macroeconomic policies influence the volume and composition of capital flows? Evidence from the 1990s," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 619-635, August.
  8. Gregory Connor & Thomas Flavin & Brian O’Kelly, 2010. "The U.S. and Irish Credit Crises: Their Distinctive Differences and Common Features," Economics, Finance and Accounting Department Working Paper Series n206-10.pdf, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
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