Ideology and Financial Innovation
Ideology and Financial Innovation
The Celtic Tiger’s fall occurred against the background of significant changes in prevailing global economic ideologies that emphasized financial deregulation and the arrival of the ‘Great Moderation’. These ideologies greatly influenced policymakers as to the role of monetary policy, financial regulation, and the financial architecture of the ECB. The ideologies inherent in the New Classical Macroeconomics and the Efficient Markets Hypothesis encouraged the view that people were rational and that markets could successfully self-regulate, thereby downplaying the risks to financial stability. The Maastricht Treaty charged the ECB with a single macroeconomic objective — control of inflation — leaving other important goals to politicians and/or economic forces. Supervisory responsibilities of the national central banks remained vested at the national level. The ECB had no direct role in promoting or overseeing a pan-European financial regulatory system. The problem of the sovereignization of a country’s banking debts in order to prevent contagion and the systemic failure of the financial system was not considered.
Keywords: financial deregulation, Great Moderation, monetary policy, financial regulation, ECB, New Classical Macroeconomics, Efficient Markets Hypothesis, Maastricht Treaty
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