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.


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