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This thesis consists of three chapters investigating the interactions between the financial and real sector. It provides new evidence on (i) the correlation between portfolio investment integration and business cycle synchronization, (ii) financial regulation and how it is driven by the business cycle, and (iii) electoral incentives influencing financial regulators.
Chapter 1 analyses the correlation between cross-border portfolio investment integration and business cycle synchronization. Using data on 29 advanced economies’ cross-border financial asset holdings, it shows that portfolio investment integration correlates positively with business cycle synchronization when faced with idiosyncratic shocks. However, it correlates negatively when faced with common or global shocks.
Chapter 2, coauthored with Gonçalo Pina, employs a text-mining approach to build a new dataset on regulatory actions against the US financial advisor industry. Employing a Bartik shift-share instrument, it provides causal evidence that regulatory actions are driven by the business cycle.
Chapter 3, coauthored with Gonçalo Pina, discusses the political economy of regulatory actions against the US financial advisor industry. It shows that regulators consistently delay punishment against firms prior to gubernatorial elections.
An issue that the European Union continues to face is how to coordinate the economic and fiscal policies of its member states. Recent reforms that created the European Semester require additional information concerning member states’ fiscal plans for the Commission and Council to review more rigorously. Spain has developed similar provisions for its regions. In this paper, Mark Hallerberg and Diego Salazar-Morales consider the possible lessons arising from the emerging federation in Spain for the European framework. They analyse the performance of Spain’s fiscal federalist framework with a special emphasis on its coordination and political relationship with the autonomous regions. Their findings suggest that coordination agreements are negatively correlated with balances, indicating that such agreements are indicators of fiscal problems and also that they did not contribute to lower deficits. Moreover, they find that politics, rather than fiscal rules and frameworks, led to differing fiscal performance. The paper concludes with lessons from Spain’s experience for the European Union.
This dissertation asks three interrelated questions about economic policy coordination: (1) Why do we see persistent macroeconomic imbalances that make international coordination necessary? (2) What kind of economic policies does the European Union promote in its member states via its coordination framework, the European Semester? (3) What determines whether governments implement recommendations issued under the Semester?
The first paper argues that economic ideas, and their emphasis in media reporting, help secure public support for policies that result in external imbalances. It finds that the dominant interpretations of current account balances in Australia and Germany concur with distinct perspectives: external surpluses are seen as evidence of competitiveness in Germany, while external deficits are interpreted as evidence of attractiveness for investments in Australia. Survey experiments in both countries suggest that exposure to these diverging interpretations of the current account has a causal effect on citizens’ support for their country’s economic strategy.
The second and third papers analyse policy recommendations under the European Semester, arguably the most ambitious example of economic policy coordination worldwide. The findings show that the European Union does not use the Semester to promote a single economic model across all member states. Recommendations do not uniformly recommend more reliance on the market or the state. Rather, they tend to suggest fiscal restraint and less protection for labour market insiders, while simultaneously promoting measures that benefit vulnerable groups in society. During the second decade of EMU, recommendations have gradually become more favourable of state intervention.
The fourth paper investigates possible reasons for (non-)compliance with the Semester. It argues that recommendations are more likely to be implemented when their policy direction is in line with national governments’ economic ideology. The analysis shows that recommendations advocating less state intervention in the economy are more likely to be implemented under right-wing governments.
This paper considers whether political business cycles existed in East European accession countries during the period 1990-9. Based on the Mundell-Fleming model expanded in Clark and Hallerberg (2000), we argue that the type of exchange rate regime and the relative independence of the central bank affects the instruments governments use to influence the economy before elections. In our empirical analysis, we find that accession countries with dependent central banks and flexible exchange rates have looser monetary policies in electoral periods than in non-electoral periods. If a country has a fixed exchange rate regime, it manipulates its economy in election years through running larger budgets instead of through looser monetary policy. The presence of such cycles in Eastern Europe has implications for the introduction of the euro in EU accession countries.
Following the establishment of the World Trade Organisationin January 1995, American and European trade relationships werefor a timecharacterised by ‘competitive interdependence’,astheUS and EUsimultaneously aimedtoadvance their commercial interests inthird countries. Under conditions of competitive interdependence, trade actorsresort to certain policy choices to gain advantage for their producers while restricting others’ ability to enter a market (Sbragia, 2010).In the last decade, however, European and American trade policymakers have facedthe challenges of a more competitive world and the emergence of newer trade powers such as China. Both actors have veered away frommultilateral deals as their preferred trade policy choices. In this paper, weuse the Sbragia (2010) framework to analyse the trade policy shifts made bythe EU and the US in the last decade. We argue that what had been a competitive interdependence relationship has recently changed toa trilateral structure in which both the EU and the US have focused their attention on countering Chinese competition. Moreover, China’s emergence has also pushed the USto reinvigorate the role of unilateralism and the EU to bolsterbilateralism as they both seek to secure their commercial shares worldwide.
Our paper focuses on the development of fiscal institutions in Central and East European countries from 1998 to 2007. Following the Europeanisation literature as well as the expectations that the European Union established in its dialogue with prospective members through annual “Preaccession Economic Programmes,” one would anticipate that there would have been reform of fiscal institutions in the run-up to EU accession. Unlike in most other policy fields, there is an additional incentive to continue reform once a country has joined the EU, which is eurozone membership. This paper explains how we measure fiscal institutions and fiscal reforms. We provide time series data on the fiscal institutions each country has had in place, and, based on a new set of surveys and interviews we conducted, we compare the state of these fiscal institutions in 2007, or after the countries had acceded to the EU, with the institutions in place before accession. We find that preparations for the EU accession prior to 2004 did lead to some changes in budget process in this set of countries. The carrot of EMU membership after acceding to the EU, however, has so far not had the same effect--the pace of reform has since stalled, with most countries leaving the same fiscal institutions in place.In some countries further reforms to develop medium-term fiscal frameworks are either planned or are in a process of being initiated but it is too early to say if the reforms will truly materialise and transform the frameworks into a vehicle that would impose a serious constraint for government spending.
Authoritarian Regimes and Financial Crises: Explaining Autocratic Regime Survival and Collapse
(2022)
The common notion that financial crises pose serious threats to autocratic regime stability has been challenged over the last decades both on theoretical and empirical grounds by the extensive number of authoritarian regimes that seem to be absolutely impervious to financial and economic shocks. So, why do financial crises only sometimes lead to autocratic regime collapse? What mechanisms do (de)stabilize authoritarian regimes during financial crises? And under what conditions is autocratic regime breakdown likely to happen?
This dissertation addresses these questions by bringing together insights from the democratization, comparative autocracy, and political economy strands of research. It argues that the relationship between financial crises and autocratic regime breakdown is highly conditional, and depends on a complex interplay of economic and political factors. In three standalone papers, this dissertation scrutinizes the entire process of crises induced autocratic regime instability and regime collapse, and examines the effects of different economic and political factors on the probability of autocratic regime survival and collapse during specific types of financial crises.
The key findings of this dissertation demonstrate that the destabilizing effects of financial crises may vary by crisis type, that in response to financial crises, policymakers in autocracies can implement crisis policies that prolong authoritarian rule, and that institutions by which autocracies govern may immunize them from political risks during financial crises, or, by contrast, may precipitate elite defection and regime collapse.
Overall, this dissertation provides many new theoretical and empirical insights into the sources of autocratic regime survival and breakdown during financial crises. It also provides one more evidence that economic and political problems do not exist in isolation from one another, rather they are linked together in complex networks of weirdly tangled cause-effects relationships, which we do not yet fully understand.
Recent events in international finance illustrate the close connection between the viability of a country's major private financial institutions and the sustainability of its sovereign debt. We explore the precise nature of this connection and the ways in which it shapes investors’ expectations of sovereign creditworthiness. We consider how investors use the overall level of information available about the private financial sector—and the potential risks it poses to government finances—when making decisions about investing in sovereign debt. We expect that governments providing more information about the private financial sector will have lower, and less volatile, borrowing costs. In order to test this argument, we create a new Financial Data Transparency (FDT) Index measuring governments’ willingness to release credible financial system data. Using the FDT and a sample of high-income OECD countries, we find that such transparency reduces sovereign borrowing costs. The effects are conditional on the level of public indebtedness. Transparent countries with low debt enjoy lower and less volatile borrowing costs.