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Financial policymaking after crises: public vs. private interests

Author

Listed:
  • Saka, Orkun
  • Ji, Yuemei
  • De Grauwe, Paul
Abstract
What drives actual government policies after financial crises? In this paper, we first present a simple model of post-crisis policymaking driven by both public and private interests. Using the most comprehensive dataset available on de-facto financial liberalization over seven policy domains across 94 countries between 1973 and 2015, we then establish that financial crises can lead to more government intervention and a process of re-regulation in financial markets. Consistent with a demand channel from public (interests) to policymakers, we find that post-crisis interventions are common only in democratic countries. However, by using a plausibly exogenous political setting -i.e., term limits- muting policymakers' accountability, we show that democratic leaders who do not have re-election concerns are substantially more likely to intervene in financial markets after crises, in ways that promote their private interests. These privately-motivated interventions cannot be associated with immediate crisis response, operate via controversial policy domains and favour incumbent banks in countries with more revolving doors between political and financial institutions.

Suggested Citation

  • Saka, Orkun & Ji, Yuemei & De Grauwe, Paul, 2020. "Financial policymaking after crises: public vs. private interests," LSE Research Online Documents on Economics 118861, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:118861
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    File URL: http://eprints.lse.ac.uk/118861/
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    More about this item

    Keywords

    financial crises; reform reversals; democracies; term-limits; special-interest groups;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • P11 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Planning, Coordination, and Reform
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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