Description
Financial stability choices of central bankers are generally geared to two key goals: the immediate support of financial institutions during a crisis and the prevention of moral hazard, and thus, of future financial crises. Often officials are confronted with a trade off between these two goals if they find themselves in a moment of financial distress because if they intend to effectively and rapidly direct support to financial actors, they may have to set aside concerns about future financial instability. While scholars have increasingly engaged with the question of financial stability policy since the GFC, there is little research on whether there have been regimes of financial stability policy in different countries which have existed before the crisis (and may have contributed to financial instabilities which led to the crisis in the first place). This study conducts a historical comparison of the Fed and the Bank of Japan between the 1980s and the 2010s. It finds that the Fed acted like a “firefighter” focused on fast and effective support for financial markets during moments of financial distress, while the BoJ acted like a “guardian of long-term stability” always considering long-term stability and moral hazard before engaging in support for financial markets. Likely this differential response to financial distress has led to considerably more stable financial markets in Japan and less so in the US. On the other hand, the lack of support for financial markets through the BoJ may explain why economic growth has been stagnant since the 1990s. This article explains the differential approaches to financial stability through an institutionalist approach which highlights the role of the institutional proximity of central bankers with the banking system via micro-prudential banking supervision versus macroprudential supervision.
