What can we do to prevent global economic crises?

This research paper breaks down what we can do to prevent global economic crises. It looks into the role of policy, regulation and financial institutions in preventing crises, as well as identifying key areas that need improvement.

There are a number of things that can be done to prevent global economic crises. Firstly, better regulation and supervision of financial institutions is needed. This includes both macro-prudential regulation (which looks at the stability of the financial system as a whole) and micro-prudential regulation (which looks at the stability of individual financial institutions).

Secondly, there needs to be improved coordination between different national regulatory bodies. At present, there is a lack of coordination which can lead to regulatory arbitrage (where firms shop around for the weakest regulator).

Thirdly, the global financial system needs to be made more resilient to shocks. This can be done by increasing capital and liquidity requirements for financial institutions, as well as introducing other reforms such as resolution mechanisms (which allow for the orderly wind-down of failing banks).

Fourthly, we need to better understand the links between different parts of the global economy. This includes both understanding how shocks propagate through the system (e.g. via contagion effects) and also identifying potential vulnerabilities (e.g. through stress testing).

Finally, it is important to have an effective policy response in place in the event of a crisis. This should include both macroeconomic and financial stability policies.

While there is no silver bullet for preventing global economic crises, if we can improve in all of the above areas then we will be in a much better position to protect the economy from future shocks.