Should Regulation Be Countercyclical?

Abstract

Politicians and commentators have from time to time proposed that regulations be suspended or delayed during recessions because of their adverse impact on employment. We evaluate this argument from within a macroeconomic framework. When the business cycle is taken into account, it is possible that regulations should be weakened during downturns and strengthened during upturns, along the lines of stimulus policy, which normally takes the form of countercyclical adjustments to taxes or the money supply. However, countercyclical regulation will normally be a less efficient means of stimulus. For that reason, it should be used in relative narrow conditions, and when the other stimulus instruments are either ineffective on their own terms or politically infeasible.