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Regulatory Cycles: Revisiting the Political Economy of Financial Crises

88 Pages Posted: 1 May 2016 Last revised: 3 Dec 2017

Jihad C. Dagher

International Monetary Fund (IMF) - Research Department

Date Written: October 18, 2017

Abstract

Financial crises are traditionally analyzed as purely economic phenomena. The political economy of financial booms and busts remains both under-emphasized and limited to isolated episodes. The policy discussions and economic literature generated by the most recent wave of financial crises have been usually cast in technical terms and tended to overlook political forces that shape regulations over time. The narrative tends to revolve around the view that financial innovations are much ahead of regulators. This paper examines the political economy of financial policy during ten of the most infamous financial booms and busts since the 18th century, and presents consistent evidence of pro-cyclical regulatory policies by governments. Financial booms, and risk-taking during these episodes, were often amplified, if not ignited, by political regulatory stimuli, credit subsidies, and an increasing light-touch approach to financial supervision. The regulatory backlash that ensues from financial crises can only be understood in the context of the deep political ramifications of these crises. In cases where the regulatory response weakened over time, this usually happened mostly during the course of the following boom. The interplay between politics and financial policy over these cycles, and their institutional underpinnings, deserve further attention. History suggests that politics can be the undoing of macro-prudential regulations.

Keywords: regulation, financial crises, cycles, boom-busts, politics, political economy, Dodd-Frank Act, Great Depression, Great Recession, Housing boom

JEL Classification: D72, D78, G1, G18, N00, P16

Suggested Citation

Dagher, Jihad C., Regulatory Cycles: Revisiting the Political Economy of Financial Crises (October 18, 2017). Available at SSRN: https://ssrn.com/abstract=2772373

Jihad Dagher (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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