Report

The Countercyclical Benefits of Regulatory Costs

Abstract: Legal academics, journalists, and senior executive branch officials alike have assumed that the cost of imposing new regulatory requirements is higher in severe recessions that drive the central bank’s policy rate to zero than in other times. This is not correct; the aggregate output costs of regulatory requirements decrease, not increase, in such recessions. This article is the first to analyze how this effect arises, drawing on both conventional macroeconomic models and empirical findings from the econometrics literature. Scholars and policymakers have likely missed the countercyclical benefits of regulatory costs because of informal, ad hoc macroeconomic assumptions embedded in regulatory analysis.

Keywords: law and economics; law and macroeconomics; zero lower bound; zero lower bound (ZLB);

JEL Classification: E02; E6; K2; K3;

https://doi.org/10.59576/sr.1109

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2024-07-01

Number: 1109