Sunday, 25 January 2009

Rationality and policy

A snippet from Asset Price Bubbles: The Implications for Monetary, Regulatory and International Policies about the differing policy prescriptions that emerge from differing views of how markets operate.

“The rational behaviour paradigms… imply a restrained role for policymakers. Regulations that interfere with investors’ pursuit of profit opportunities or the flow of information will be detrimental to financial market efficiency. In those models where frictions are identified… enlightened public policies will attempt to eliminate those frictions by removing restrictions on trading (e.g. lock-ups) and financial innovations. Behavioural finance models… have substantially different implications. Regulations should be tightened on self-directed retirement plans and the access that “unsophisticated” investors have to sophisticated and risky financial products. Transaction taxes effected to retard speculation would be a radical intervention… [T]ighter regulations on accounting and advertising and greater penalties for false reporting would seem warranted.”

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