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In Praise of (Some) Red Tape: A New Approach to Regulation

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Abstract

The costs of removing red tape include a lower chance of detecting recession-generating flaws in the financial system. What we call independent dimensions of regulation (IDRs) operate more or less independently to other groupings. If an IDR’s optimality is unknown, it may be risky to remove. Uncertainty thus implies that (some) red tape – i.e. a small amount of overregulation – is justified, in contrast to the Brainard (1967) principle that uncertainty dictates less policy activism. The long run GDP benefit of a 1% improvement in financial services productivity is 0.06% in our CGE model. These relatively modest gains reinforce our conclusion.

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  • Gordon Menzies & Peter Dixon & Maureen Rimmer, 2016. "In Praise of (Some) Red Tape: A New Approach to Regulation," Working Paper Series 33, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
  • Handle: RePEc:uts:ecowps:33
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    1. Robert W. Faff & Tom Smith, 2015. "A simple template for pitching research," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 55(2), pages 311-336, June.
    2. Douglas Elliott & Andre O Santos, 2012. "Assessing the Cost of Financial Regulation," IMF Working Papers 12/233, International Monetary Fund.
    3. Bird, R. & Menzies, G. & Dixon, P. & Rimmer, M., 2011. "The economic costs of US stock mispricing," Journal of Policy Modeling, Elsevier, vol. 33(4), pages 552-567, July.
    4. Cihak, Martin & Demirguc-Kunt, Asli & Johnston, R. Barry, 2013. "Incentive audits : a new approach to financial regulation," Policy Research Working Paper Series 6308, The World Bank.
    5. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, January.
    6. Jennifer A. Elliott & Aditya Narain & Ian Tower & José Vinãls & Pierluigi Bologna & Michael Hsu & Jonathan Fiechter, 2010. "The Making of Good Supervision; Learning to Say "No"," IMF Staff Position Notes 2010/08, International Monetary Fund.
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    1. repec:bla:ecorec:v:93:y:2017:i::p:16-37 is not listed on IDEAS

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    Keywords

    Banking; Regulation; Monitoring; Financial Crises; Independent dimension of regulation;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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