Pro-Cyclical Regulation and its Consequences in the Credit Crisis

Abstract

As it is widely agreed in modern scientific literature, governments can influence and amortize the consequences of business cycles to national economies. Grounding on the New-Keynesian point of view the best way of doing it, is implementing the counter-cyclical fiscal policy, i.e. in times of economic slow-down government expenditures and overall tax level diminish and in the period of economic growth government expenditures and taxes simultaneously increase. However, this kind of fiscal policy is subject to adoption not in all countries. The analysis of scientific literature revealed, that economically weaker countries due to various financial limitations are forced to implement the opposite of the counter-cyclical policy – the pro-cyclical policy, which in times of economic slow-down accelerates the negative effects and in most cases results in credit crisis. The aim of the article is to reveal and analyze the core consequences of credit crisis if the country adopts a pro-cyclical strategy. Those include: congelation of all types of credits, difficulties for businesses to obtain credits; declining values in real estate and contraction of the whole construction sector; high loss of property rights (foreclosure) rates and default rates on credits; diminishing consumption of households and businesses; numerous close-downs of small and medium enterprises (SMEs); rise in unemployment; growing emigration, brain-drain and etc. Conducting the analysis of consequences of credit crisis in pro-cyclical economies the methods of comparative analysis and systematization of scientific literature and statistical data were employed. DOI: 10.5901/mjss.2013.v4n9p602