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Investing.com -- Financial crisis prevention measures must be paired with robust response plans to effectively protect economies, according to new research from the University of Surrey published in the National Bureau of Economic Research.
The study reveals that when governments and central banks focus solely on preventing excessive borrowing during economic booms without establishing clear support mechanisms for market downturns, they risk exacerbating economic damage during crashes.
Researchers simulated three different policy approaches: restricting borrowing only, providing market support during crises only, or combining both strategies. The results demonstrated that using both tools together delivers the greatest economic stability benefits, while implementing just one approach can reduce national welfare.
"Our work shows that crisis prevention and crisis response are two sides of the same coin," said Dr. Aliaksandr Zaretski, co-author of the study and Lecturer in Economics at the University of Surrey. "If you only tighten regulations in good times without preparing to intervene in a crash, you risk triggering deeper downturns."
The research also highlighted the significant scale difference between preventive measures and crisis response needs. According to the model, financial support required during market crashes is more than four times larger than the taxes used to restrict borrowing during prosperous periods.
The findings suggest that central banks and finance ministries should coordinate their preventive regulations and crisis support strategies rather than treating them as separate responsibilities. In some cases with particularly severe borrowing constraints, the study indicates that a well-designed crisis response policy alone might achieve optimal outcomes.
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