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Jihad Dagher
Financial crises are traditionally analyzed as purely economic phenomena. The political economy of financial booms and busts remains both under-emphasized and limited to isolated episodes. This paper examines the political economy of financial policy during ten of the most infamous financial booms and busts since the 18th century, and presents consistent evidence of pro-cyclical regulatory policies by governments. Financial booms, and risk-taking during these episodes, were often amplified by political regulatory stimuli, credit subsidies, and an increasing light-touch approach to financial supervision. The regulatory backlash that ensues from financial crises can only be understood in the context of the deep political ramifications of these crises. Post-crisis regulations do not always survive the following boom. The interplay between politics and financial policy over these cycles deserves further attention. History suggests that politics can be the undoing of macro-prudential regulations.
Andreas Adriano

create something worthwhile, all are destructive—of value, wealth, and trust in institutions. Humanity has figured out how to innovate without euphoria. But, as Galbraith shows, it rarely learns the lessons of financial bubbles. FD ANDREAS ADRIANO is a senior communications officer in the IMF’s Communications Department.

International Monetary Fund. External Relations Dept.

will also play a major role in the IMF’s efforts to address conceptual issues affecting global financial markets. For example, I would like to review—together with the private sector—the experiences with financial bubbles and volatility in international capital flows and, on this basis, to contribute to forward-looking financial markets policy. I also see an important role for the new department in helping members in their efforts to gain access to international capital markets. A market economy requires debtors and private creditors to bear the consequences of

Robin Brooks,, Kristin Forbes,, Jean Imbs,, and Mr. Ashoka Mody

innovations, such as information technology in the 1990s. Increased comovement resulting from the spread of productivity gains, however, is difficult to distinguish from increased comovement arising from a financial bubble (where market expectations and fundamentals become misaligned). The rise in financial market comovement in the 1990s, as well as the increased link between real variables and financial comovement, undoubtedly reflects a combination of genuine productivity gains and a financial bubble. Explaining a bubble The potential for bubbles in financial

William N. Goetzmann

attributes the bursting of financial bubbles as frequently to government intervention (for example, the Bubble Act of 1720) as to irrational behavior among overleveraged investors. A remarkable work of synthesis and scholarship, the book affords a deep perspective to anyone trying to grapple with current problems in the role of finance and financial regulation in a civilized society. Elie Canetti Advisor, IMF Western Hemisphere Department Robbing Hood Kenneth Scheve and David Stasavage Taxing the Rich A History of Fiscal

Ms. Valerie Cerra and Sweta C. Saxena

adequately address the aftermath of the Great Recession questions the philosophy of “benign neglect” of financial bubbles. Svensson (2016) argues that leaning against the wind (keeping interest rates higher than required for price stability to avoid a financial bubble) may increase the cost of a crisis by weakening the economy and increasing unemployment. IMF (2015) maintains that monetary policy should not be altered to contain financial stability risks and that the case for leaning against the wind is limited. However, Gourio, Kashyap, and Sim (2016) embed the risk