Connor, Gregory and O'Kelly, Brian (2012) Sliding Doors Cost Measurement: The Net Economic Cost of Lax Regulation of the Irish Banking Sector. World Economy, 35 (10). pp. 1256-1276. ISSN 0378-5920

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Abstract

The financial and economic turmoil of the years 2007–10 has led to considerable regret among financial and economic policymakers about bad policy decisions at earlier dates. A worthwhile exercise in economic analysis is a careful delineation of the net economic cost of an earlier bad policy decision. Such an analysis is conceptually difficult because it requires a baseline case against which to compare observed economic outcomes. Comparing the actual outcome to that from the ex post best possible policy decisions at every juncture gives an unrealistically high benchmark, because it compares the actual outcome to that from policy decisions requiring perfect foresight by policymakers. Also, rational evaluation requires that all gains and losses subsequent to a policy decision be included. It is incorrect to evaluate an earlier past decision based on present and future impacts, since any intermediate impacts between the past decision date and current evaluation date must also be considered. This paper suggests a theoretically simple and well-defined procedure for analysing the ex post economic cost of an isolated policy decision. We suggest the comparison of actual economic outcomes with those that would have emanated from a counterfactual but real-world feasible alternative decision. We do this by identifying a specific policy choice available at the time of the decision which was ‘almost’ chosen. We call this almost-but-not-chosen policy the sliding doors choice. The cumulative economic welfare difference between relevant economic outcomes under this counterfactual choice and under the actual choice over all post-decision periods is our measure of the ex post net economic cost of the actual policy decision. Although we do not follow their particular methodology, we invoke Leeper and Zha’s (2003) ‘modest policy intervention’ theory, in which small variations in policy do not alter agents’ rational expectations, thereby circumventing the Lucas (1976) critique of counterfactual policy analysis. We argue that this restrictive evaluation procedure can be illuminating within certain narrow circumstances.

Item Type:	Article
Additional Information:	We would like to thank the statistics department of the Central Bank and Financial Services Authority of Ireland for providing the data for this study by special request. We would like to thank Anita Suurlaht for research assistance, and Colm Kearney, Philip Lane, Martin O’Brien and participants in the NUI Maynooth research workshop, the Dublin Economics Workshop, the Lehigh University Conference on the Irish Economy and the Central Bank of Ireland Financial Stability Seminar for helpful comments. We wish to acknowledge support from the Science Foundation of Ireland under grant 08=SRC=FM1389.
Keywords:	Economic Cost; Regulation; Ireland; Banking; Policy; Bankingh crisis;
Academic Unit:	Faculty of Social Sciences > Economics, Finance and Accounting
Item ID:	5417
Identification Number:	https://doi.org/10.1111/j.1467-9701.2012.01482.x
Depositing User:	Gregory Connor
Date Deposited:	24 Sep 2014 14:59
Journal or Publication Title:	World Economy
Publisher:	Blackwell Publishing
Refereed:	Yes
URI:	http://onlinelibrary.wiley.com/journal/1...
Use Licence:	This item is available under a Creative Commons Attribution Non Commercial Share Alike Licence (CC BY-NC-SA). Details of this licence are available here

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