The Countercyclical Benefits of Regulatory Costs

Abstract

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 in conventional macroeconomic models and its empirical support in 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 (JEL classification: E02, E6, K23).