Understanding the Shift from Micro to Macro-Prudential Thinking: A Discursive Network Analysis

Abstract

While some economists argued for macro-prudential regulation pre-crisis, the macro-prudential approach and its emphasis on endogenously created systemic risk have only gained prominence post-crisis. Employing discourse and network analysis on samples of the most cited scholarly works on banking regulation as well as on systemic risk (60 sources each) from 1985 to 2014, we analyze the shift from micro to macro-prudential thinking in the shift to the post crisis period. Our analysis demonstrates that the predominance of formalism, particularly, partial equilibrium analysis along with the exclusion of historical and practitioners' styles of reasoning from banking regulatory studies impeded economists from engaging seriously with the endogenous sources of systemic risk prior to the crisis. Post-crisis, these topics became important in this discourse, but the epistemological failures of banking regulatory studies precrisis were not sufficiently recognized. Recent attempts to conceptualize and price systemic risk as a negative externality point to the persistence of formalism and equilibrium thinking, with its attending dangers of incremental innovation due to epistemological barriers constrains theoretical progress, by excluding observed phenomena, which cannot yet be accommodated in mathematical models.

The professional politics of the austerity debate: A comparative field analysis of the European Central Bank and the International Monetary Fund

“…The literature on economic ideas in international financial institutions used mostly qualitative methods (Mommani ; Broome and Seabrooke ; Clift ), combinations of text and network analysis (Ban ; Ban et al ; Thiemann et al ) and some statistical tests of the relationship between graduate training and economic ideas (Chwieroth ). Jeffrey Chwieroth, for example, showed that the IMF's advocacy of current account liberalization coincided with the New Classical turn in the US economics departments the IMF recruits from (Chwieroth , ).…”

“…The literature gained more rigour when Leonard Seabrooke and Emelie Nilsson (2015) used sequence analysis to trace the flows of new staff from the private sector and into the IMF, yet without establishing their impact on the Fund's policy doctrine. Others still combined qualitative analysis and descriptive network analysis to map out political conditions under which international financial institutions embraced new economic thinking in academia in order to change some parts of their policy doctrine (Ban et al ; Thiemann et al ). Finally, although more advanced forms of quantitative text analysis entered the scene, they did not connect the ideas to specific scientific alliances between the thinking of issue professionals in the policy institutions and the other niches of the economics profession that supplied them with evidence, models or new ways of conceptualizing economic challenges (Güven ; Moschella and Pinto 2019).…”

“…Specifically, research on economists based in central banks and international financial institutions suggests that they are more open to revisions to economic orthodoxy than mainstream academic economists because incentives and returns to publication are weaker in policy institutions compared to academic institutions, with policy utility (as opposed to theoretical value added) taking the driving seat in the former . Indeed, even if evidence‐based policy‐making is an important filter to doctrinal change in both central banks (Thiemann et al ; Thiemann 2019) and international financial institutions (Ban ; Clift ), one gets promotion and prestige based on how relevant one's research is to the policy dilemmas of the institution, with the overall result being more flexibility on economic ideas…”