Is the Financial System Fit for Purpose?
Who is Leading the Change? Innovation and influence in Macroprudential Regulation
Principal Investigator: Matthias Thiemann
Matthias Thiemann is a sociologist with close affinities to political economy and Assistant Professor at Sciences Po, Paris. On the one hand, he is analyzing the attempts of financial regulators in Europe and the US to control the risk taking behavior of agents in the financial industry, an attempt complicated by the fact that these agents gain from evading such control. On the other hand, he is investigating post-crisis regulatory changes in the US asking why certain ideas that gained prominence post-crisis are translated into policy tools, while others are eschewed by policy makers.
Methodologically, he is drawing on expert interviews and document analysis, but also citation network analysis and topic modeling.
Co-Investigator: Edin Ibrocevic (Goethe University Frankfurt am Main)
What is the role of applied economists working in central banks and international organizations? And what is the role of academic economists contributing to the resolution of the problems that applied economists face?
This project analyses the rise of macro-prudential research to answer these questions. We aim to better understand the changes to economic thinking about finance post-crisis and the role of applied economists in central banks and international organizations.
Since the Global Financial Crisis, new macro-prudential frameworks have been introduced at many central banks. Underpinning these frameworks is the view that finance is inherently unstable, that there are financial cycles and that financial excesses can damage real economic activity. These views stand in stark contrast to the pre-crisis vision, based on the Efficient Market Hypothesis and the Rational Expectations framework, which was used to advocate a structural deregulation of finance. Some central banks with responsibility for financial system stability either downsized or downgraded their financial stability departments.
We argue that the pre-crisis macro-prudential ideas which raised the dangers of integration between financial markets and bank business could not just simply be transposed into regulatory measures after the crisis. This was due to the mode of evidence-based regulation and the ‘regulatory science’ it attends to. Ideas required validation in the language of mainstream discourse. That is, through models and statistical findings that corroborates these models. The rise of (international) macro-prudential analysis after the crisis is arguably the most successful of these new discourses. This raises the question: to what degree does this new discourse radiate into the mainstream professional discourse?
Who are the agents of change that in the last decade have introduced this new discourse of the crisis-proneness of the financial system and its potential negative impact on the macro-economy? This project seeks to find out by applying a machine-based learning algorithm to the textual corpus produced by economists on the financial system and systemic risk post-crisis, including both published journal articles as well as working papers. We aim to identify the main topics that emerge as well as the carriers of these ideas, where they are employed and with whom they are collaborating. The working hypothesis of the project is based on our own interview work and the literature on the sociology of knowledge (particularly the sociology of economics) is that economists in central banks and international organizations might be these ‘agents of change’.