Moral Hazard and Financial Crises: Evidence from US Troop Deployments

36 Pages Posted: 14 Sep 2015 Last revised: 6 Jun 2016

See all articles by Michaël Aklin

Michaël Aklin

University of Pittsburgh - Department of Political Science

Andreas Kern

Georgetown University - McCourt School of Public Policy

Date Written: September 29, 2015

Abstract

International lenders of last resorts are often accused to create financial instability because they generate moral hazard. The evidence for this is thin and plagued with measurement error. Examining the case of the US, we use the number of American troops hosted by third countries to measure how strongly the US is committed to them. We find that increasing the number of US troops by one standard deviation above the mean raises the probability of a financial crisis in the host country by about 12 to 14 percentage points. We also investigate the channels through which moral hazard materializes. Countries with more US troops conduct more expansionary fiscal and monetary policies, implement riskier financial regulations, and receive more capital, especially from US banks. These findings are inconsistent with reverse causality.

Keywords: financial crisis, moral hazard, US troops

Suggested Citation

Aklin, Michaël and Kern, Andreas, Moral Hazard and Financial Crises: Evidence from US Troop Deployments (September 29, 2015). Available at SSRN: https://ssrn.com/abstract=2659631 or http://dx.doi.org/10.2139/ssrn.2659631

Michaël Aklin (Contact Author)

University of Pittsburgh - Department of Political Science ( email )

4600 Posvar Hall
Pittsburgh, PA 15260
United States

Andreas Kern

Georgetown University - McCourt School of Public Policy ( email )

37 and O Streets, NW
Old North, Suite 413
Washington, DC 20057
United States

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