Financial instability threatens the global economy. The volatility of capital movements across national borders has led many observers to argue for a reformed "global financial architecture," a body ...of consistent rules and institutions to prevent financial crises. Yet regulators have a decidedly mixed record in their attempts to create global standards for the financial system. David Andrew Singer seeks to explain the varying pressures on regulatory agencies to negotiate internationally acceptable rules and suggests that the variation is largely traceable to the different domestic political pressures faced by regulators.
InRegulating Capital, Singer provides both a theory of the effects of domestic pressures on international regulation and a detailed analysis of regulators' attempts at international rulemaking in banking, securities, and insurance. Singer addresses the complexities of global finance in an accessible style, and he does not turn away from the more dramatic aspects of globalization; he makes clear the international implications of bank failures and stock-market crashes, the rise of derivatives, and the catastrophic financial losses caused by Hurricane Katrina and the events of September 11.
This article argues that the international financial consequences of immigration exert a substantial influence on the choice of exchange rate regimes in the developing world. Over the past two ...decades, migrant remittances have emerged as a significant source of external finance for developing countries, often exceeding conventional sources of capital such as foreign direct investment and bank lending. Remittances are unlike nearly all other capital flows in that they are stable and move countercyclically relative to the recipient country's economy. As a result, they mitigate the costs of forgone domestic monetary policy autonomy and also serve as an international risk-sharing mechanism for developing countries. The observable implication of these arguments is that remittances increase the likelihood that policy makers adopt fixed exchange rates. An analysis of data on de facto exchange rate regimes and a newly available data set on remittances for up to 74 developing countries from 1982 to 2006 provides strong support for these arguments. The results are robust to instrumental variable analysis and the inclusion of multiple economic and political variables.
Certain governments have been faster than others in relaxing their restrictions on the cross-border movement of capital. How can we explain the timing and extent of financial liberalization across ...countries since the 1970s? We argue that IMF stabilization programs provide a window of opportunity for governments to initiate financial reforms, but that policy makers are more likely to seize this opportunity when welfare expenditures are high. Large loans from the IMF shield policy makers from the costs of financial reform, while welfare expenditures provide credibility to the government's ex ante promises of compensation to individuals who are harmed by the reforms. We test this hypothesis on data for 87 countries from 1975 to 2002. We employ a spatial autoregressive error sample selection model which accounts for the nonrandom participation of countries in IMF programs as well as the processes of international policy diffusion. The results provide strong support for the interactive effect of IMF programs and domestic welfare expenditures on financial liberalization.
If governments choose economic policies that often run counter to their public commitments, are those commitments meaningless? We argue that government proclamations can be critical in signaling ...economic policy intentions. We focus on the realm of exchange rate policy, in which countries frequently implement an exchange rate regime that differs from the officially declared regime. We argue that the official exchange rate regime is one of the most important signals of a government's economic policy preferences. When a government makes a de jure public commitment to a fixed exchange rate, it sends a signal to domestic and international markets of its strict monetary-policy priorities. In contrast, a government that proclaims a floating exchange rate signals a desire to retain discretion over monetary policy, even if it has implemented a de facto fixed rate. We use data on 110 developed and developing countries from 1974 to 2004 to test two hypotheses: first, that governments that adopt de facto fixed exchange rates will experience less inflation when they back up their actions with official declarations; and second, that governments that abide by their commitments—as demonstrated by a history of following through on their public declarations of a fixed exchange rate regime—will establish greater inflation-fighting credibility. Within developing countries, democratic institutions enhance this credibility. Results from fixed-effects econometric models provide strong support for our hypotheses.
Since 1989, twenty-five countries have adopted a monetary policy rule known as inflation targeting (IT), in which the central bank commits to using monetary policy solely for the purpose of meeting a ...publicly announced numerical inflation target within a particular time frame. In contrast, many other countries continue to conduct monetary policy without a transparent nominal anchor. The emergence of IT has been almost completely ignored by political scientists, who instead have focused exclusively on central bank independence and fixed exchange rates as strategies for maintaining price stability. We construct a simple model that demonstrates that countries are more likely to adopt IT when there is a conformity of preferences for low-inflation monetary policy between the government and the central bank. More specifically, the combination of a right-leaning government and a central bank without bank regulatory authority is likely to be associated with the adoption of IT. Results from a spatial autoregressive probit model estimated on a time-series cross-sectional data set of seventy-eight countries between 1987 and 2003 provide strong statistical support for our argument. The model controls for international diffusion from neighboring countries by accounting for spatial dependence in the dependent variable, but our results indicate that domestic interests and institutions—rather than the influence of neighboring countries—drive the adoption of IT.We thank David Bearce, Bill Bernhard, Cristina Bodea, Lawrence Broz, Bill Clark, Nate Jensen, Phil Keefer, David Leblang, Eric Reinhardt, Shanker Satyanath, Jerome Vandenbussche, Robert Walker, Tom Willett, and the editors and anonymous reviewers for helpful comments and suggestions. We also thank Sergio Bejar and Jon Bischof for research assistance. Earlier versions of this article were presented at the first annual International Political Economy Society meeting, the 11th annual conference of the International Society for New Institutional Economics, and the 2007 annual meeting of the Midwest Political Science Association; we thank the conference participants for their feedback and suggestions. Mukherjee thanks the Niehaus Center for Globalization and Governance at Princeton University for research support.
In the past fifteen years, financial regulators from the developed
world have attempted to create international regulatory standards in a
variety of financial issue areas. Their negotiations are ...notable for
the stark variation in the preferences of regulators toward
international regulatory harmonization. Certain regulators actively
resist any attempts at regulatory harmonization, while others are vocal
in their advocacy for an international agreement. When will regulators
seek to harmonize their rules with their foreign counterparts? I
propose a principal-agent framework for analyzing regulator behavior
that views international harmonization as a means of satisfying
domestic political pressures. The framework predicts that regulators
are more likely to seek international regulatory harmonization when
confidence in the stability of financial institutions is declining, and
when competitive pressures are increasing from foreign firms facing
less stringent regulations. I explore the consistency of the framework
with two important cases in the history of international financial
regulation: the negotiations among bank regulators leading up to the
1988 Basel Accord on bank capital adequacy, and the negotiations among
securities regulators over capital adequacy for securities firms
between 1988 and 1992.I thank Gabe
Aguilera, David Bach, Ethan Bueno de Mesquita, Dan Carpenter, Bill
Clark, Mark Copelovitch, Jeff Frieden, Dan Gingerich, Dan Ho, Devesh
Kapur, Joseph N. R. Sanberg, Ross Schaap, Allan Stam, Matt Stephenson,
two anonymous reviewers, and the editors of IO for helpful comments,
discussions, and feedback. I am also indebted to the thirty current and
former regulators and financial industry executives who participated in
interviews to advance this project. Finally, I thank the Weatherhead
Center for International Affairs and the Center for European Studies
for research funding.
Are equity markets just another facet of global finance, or are they unique in their responses to—and influences on—government policies and institutions? Recent work has explored the impact of ...political factors on bond market behavior and foreign direct investment, but little attention has been paid to stock markets. On the basis of the particular concerns of equity investors, we hypothesize a positive association between stock-market valuations and levels of democracy, shareholder rights, legal traditions, and capital-account liberalization, a negative association with real interest rates, and no association with fiscal deficits or surpluses. We assess our expectations by analyzing the political and institutional determinants of aggregate price-to-earnings ratios for a sample of up to 37 countries from 1985 to 2004, using both cross-sectional and time-series cross-sectional analyses. We find support for most, but not all, of our hypotheses. Our findings suggest that we must disaggregate the effects of different asset markets to understand the impact of economic globalization on government policies.
One of several articles in a special journal section discussing international political economy and the great recession. Adapted from the source document.
This article argues that the institutional mandates of central banks have an important influence on inflation outcomes in the advanced industrialized countries. Central banks that are also ...responsible for bank regulation will be more sensitive to the profitability and stability of the banking sector and therefore less likely to alter interest rates solely on the basis of price stability objectives. When bank regulation is assigned to a separate agency, the central bank is more likely to enact tighter monetary policies geared solely toward maintaining price stability. An econometric analysis of inflation in 23 industrial countries from 1975 to 1999 reveals that inflation is significantly higher in those countries with central banks that are vested with bank regulatory responsibility, although this effect is conditional on the choice of exchange rate regime and the relative size of the banking sector. We also conduct a case study of the Bank of England, which lost its bank regulatory authority to a new agency in 1998. We find that the new Labour government under Tony Blair imposed the institutional change on the Bank of England in part to remove the bank stability bias from its monetary policymaking. These findings suggest that the mandates of central banks not only have important influences on macroeconomic outcomes, but may also be modified in the future by governments seeking to impose their own monetary policy preferences.
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