Information and financial crisis policy-making

Christopher Gandrud (City University London) & Micheál O'Keefe (Central Bank of Ireland)
Christopher Gandrud (City University London) & Micheál O’Keefe (Central Bank of Ireland)

When designing responses to swiftly contain financial shocks, elected politicians in government generally rely on expert advice from finance officials. But what if the preferences of finance experts diverge from the goals that governments have in mind? Christopher Gandrud and Micheál O’Keefe argue that the information governments receive from bureaucrats may, at times, misguide them into formulating policies with undesired consequences. In their article “Information and financial crisis policy-making” published in the Journal of European Public Policy, Christopher and Micheál develop a signalling game to understand why the Irish government responded to the financial crisis with a blanket guarantee of bank liabilities in 2008, a decision, which eventually turned into one of the most expensive bailouts in history. Their analysis shows that staff at the Irish Department of Finance, the financial regulator and bank officials disagreed on policy and sent the Irish prime minister conflicting information. Devoid of a clear picture of the situation the government then chose a policy it actually did not want, illustrating that good information “may be purposefully hard to come by during crises, even in economically advanced democratic economies.”