Discussion paper

DP15413 Financial Policymaking after Crises: Public vs. Private Interest

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.

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Citation

Saka, O, Y Ji and P De Grauwe (2020), ‘DP15413 Financial Policymaking after Crises: Public vs. Private Interest‘, CEPR Discussion Paper No. 15413. CEPR Press, Paris & London. https://cepr.org/publications/dp15413