Regulatory Cycles: Revisiting the Political Economy of Financial Crises

90 Pages Posted: 21 Mar 2018

See all articles by Jihad C. Dagher

Jihad C. Dagher

International Monetary Fund (IMF) - Research Department

Multiple version iconThere are 2 versions of this paper

Date Written: January 2018

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. 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 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. Post-crisis regulations do not always survive the following boom. The interplay between politics and financial policy over these cycles deserves further attention. History suggests that politics can be the undoing of macro-prudential regulations.

Keywords: Political economy, Political economy, Financial crises, Financial Regulation, Boom-Bust Cycles, Economic Models of Political Processes: Rent-Seeking, Elections, Legislatures, and Voting Behavior, Positive Analysis of Policy-Making and Implementation, General, Government Policy and Regulation, General

JEL Classification: D72, D78, G10, G18, N00, P16

Suggested Citation

Dagher, Jihad C., Regulatory Cycles: Revisiting the Political Economy of Financial Crises (January 2018). IMF Working Paper No. 18/8. Available at SSRN: https://ssrn.com/abstract=3145026

Jihad C. Dagher (Contact Author)

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

700 19th Street NW
Washington, DC 20431
United States

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