If the Financial System Is Complex, How Can We Regulate It?

Abstract

The great financial crisis that erupted in 2007 has shaken not only the world economy but also the so-called mainstream of economics. As a major corollary, the issue of how financial markets are or should be regulated is in the eye of the storm. In this article, we discuss a new approach to economic analysis that is gradually emerging from the current debate, that of complexity, which is gaining ground especially in finance, particularly in the field of network analysis. We discuss the relationship between economic complexity and economic policy from the perspective of the search for new regulatory tools of financial systems. Our main point is that the complexity approach to financial markets by way of network analysis may represent a major stride in our understanding of these systems but also that we should be aware that this approach poses formidable challenges to policy design.

Keywords:

• complex adaptive systems
• financial networks
• macroprudential regulation