DP15413 Financial Policymaking after Crises: Public vs. Private Interest

Author(s):	Paul De Grauwe, Yuemei Ji, Orkun Saka
Publication Date:	October 2020
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Programme Areas:	International Macroeconomics and Finance
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=15413

What drives actual government policies after financial crises? In this paper, we first 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 financial 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 find 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.