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Law and macroeconomics: legal responses to recessions

This event will feature an academic lecture on the use of law as a macroeconomic tool.




At this event, Yair Listokin, professor at Yale Law School, delivered an academic lecture on the ideas he puts forward in his new book, “Law and Macroeconomics: Legal Remedies to Recessions”.

Listokin argues that, apart from the traditional responses to acute recessions (namely, monetary and fiscal measures, or simply waiting them out), there is a whole another set of stimulus options in the form of law and regulation, which has thus far been overlooked. He notes that during the Great Recession, we saw vast expansions of central banks’ balance sheets, but due to operating at the zero-lower bound, this policy measure was somewhat constrained. That was also the case for fiscal efforts, which were regularly limited by a number of factors, e.g. a shared currency. Listokin’s work proposes that once monetary and fiscal measures prove to be insufficient for aggregate demand stimulation, we should turn to legislative remedies.

Law can also curb the already established practices – and this is the case for the main policy mechanism in Europe, namely monetary policy. While the law protects it, it also imposes efficiency-reducing limitations. To argue for this, Listokin brings attention to the European Central Bank’s programmes, for example legal limitations imposed on Quantitative Easing (QE) measures, and the challenges to the Outright Monetary Transactions (OMT) programme.

There needs to be a conversation between law and monetary and fiscal stimulus measures, Listokin argues. Moreover, law can also act as a macroeconomic instrument in itself, in form of expansionary legal policy. As examples of such potential measures, he mentions private spending mandates and counter-cyclical bankruptcy law. Those solutions, however, are complicated to implement and bear some risks, which makes them only worth considering when other measures fail and stakes are high.

Bruegel’s Deputy director, Maria Demertzis, engaged in the conversation, offering some insight from the European perspective. She also questioned the structural reform vs. the time-sensitive business cycle management potential of law.

During the Q&A session, Yair Listokin answered questions about the distributional effects of expansionary legal policies, as well as private law solutions.

Notes by Zuzanna Gwadera

event materials

Presentation by Prof. Yair Listokin