Working Paper: CEPR ID: DP15413
Authors: Orkun Saka; Yuemei Ji; Paul De Grauwe
Abstract: What drives actual government policies after financial crises? In this paper, we fi rstpresent a simple model of post-crisis policymaking driven by both public and privateinterests. Using the most comprehensive dataset available on de-facto financial liberalizationover seven policy domains across 94 countries between 1973 and 2015, wethen establish that fi nancial crises can lead to more government intervention and aprocess of re-regulation in financial markets. Consistent with a demand channel frompublic (interests) to policymakers, we fi nd that post-crisis interventions are commononly in democratic countries. However, by using a plausibly exogenous political setting-i.e., term limits- muting policymakers' accountability, we show that democraticleaders who do not have re-election concerns are substantially more likely to intervenein financial markets after crises, in ways that promote their private interests. Theseprivately-motivated interventions cannot be associated with immediate crisis response,operate via controversial policy domains and favour incumbent banks in countries withmore revolving doors between political and financial institutions.
Keywords: financial crises; reform reversals; democracies; term limits; special interest groups
JEL Codes: G01; G28; P11; P16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial crises (G01) | increased government interventions (H10) |
| financial crises (G01) | reregulation in financial markets (G18) |
| public interests (H40) | policymakers' interventionist behavior (D72) |
| democratic leaders (no term limits) (D72) | interventions favoring private interests (P14) |
| term limits (K16) | reduced political accountability (D72) |
| public demand for stability + private incentives (D72) | post-crisis policymaking (H12) |