Title of Workshop: The Political Economy of Financial Markets and Crises
Subject Area: Analytical Politics / Political Economy
Workshop Directors:
Dr. Michael Bechtel
Dr. Thomas Sattler
Senior Researcher
Lecturer
Center for Comparative and International Studies
School of Politics and International Relations
ETH Zurich
University College Dublin
8092 Zurich
Dublin 4
Switzerland
Ireland
Email: michael.bechtel@ir.gess.ethz.ch
Email: thomas.sattler@ucd.ie
How do financial markets react to political events such as elections or regulatory
decisions? And what are the political repercussions of financial market events such as a
financial crisis? These questions are of interest to political scientists and political economy
scholars for a number reasons. First, the connection between politics and financial markets,
including stock or foreign exchange markets, is a crucial link in the causal chain implicitly or
explicitly underlying most political science research on the consequences of economic
globalization (Mosley 2000, 2003; Sattler et al. 2008). Second, movements in financial
markets in response to political events or decisions essentially reflect the distributional effects
of domestic and international politics (McGillivray 2003). These distributional effects are at
the very heart of political competition and conflict between interest groups, political parties or
governments, but they often are difficult to nail down empirically. Third, financial market
responses to politics allow us to gauge the economic costs that arise from political processes
and events (e.g. political violence or electoral uncertainty), and thus reflect the welfare
consequences of politics (Bernhard and Leblang 2006).
A thorough understanding of the relationships between politics and financial markets
is particularly relevant when we want to evaluate the causes and consequences of the current
financial crisis, as well as its potential solutions. The political origins of the crisis, e.g. the
political motivation to promote private home ownership in the United States or personal ties
between financial firms, and regulating and oversight agencies, require greater attention if
such financial turmoil is to be avoided in the future. The considerable linkages between the
financial sector and government agencies may also be a major reason why most governments
seem unable to effectively regulate financial sectors despite the massive social costs that have
resulted from the crisis. It is essential to establish how strong these linkages are and to what
1 extent they prevent regulatory decisions that would be in the interest of society as a whole.
Another important aspect is the decision of investors to reallocate their funds internationally
in response to political and regulatory decisions. This is important because an optimal
regulation would reduce the risk of financial operations and at the same time prevent a
massive outflow of capital.
Systematic research on politics and financial markets is fairly new, but has attracted
fast growing attention during that last decade. This research examines how different types of
financial markets, i.e. foreign exchange, stock and bond markets, respond to political
decisions and events and vice versa (Bechtel 2009; Bechtel and Schneider forthcoming;
Bernhard and Leblang 2002; Freeman et al. 2000; Fuess and Bechtel 2007; Hays et al. 2003;
Herron 2000; Leblang and Mukherjee 2005). Related research has examined the role of
political events and decisions for the outbreak of crises, mostly currency crises (Blomberg et
al. 2005; Block 2003; Eichengreen et al. 1995; Leblang and Bernhard 2000; Leblang 2003;
Sattler and Walter 2008, forthcoming). This literature suggests that non-transparent political
institutions and crony business-government relations have adverse financial welfare effects
(Faccio et al. 2006; Fisman 2001; Johnson and Mitton 2003) and were important factors for
the emergence of international crises, e.g. the Asian Financial Crisis in 1997/98 (Eichengreen
1996; Haggard 2000a, 2000b; Satyanath 2006). The role of politics in domestic financial
crises has been less prominent in this research tradition and should be urgently addressed. Our
workshop aims at providing a forum for interesting new research in this exciting and fast
growing research area.
The participants will be researchers from Europe and the United States who are
interested in the political economy of financial markets. Several scholars have already
indicated their willingness to contribute to the workshop: William Bernhard (University of
Illinois), John Freeman (University of Minnesota), Nathan Jensen (Washington University),
David Leblang (University of Virginia) and Shanker Satyanath (New York University). From
Europe, interested researchers include Thomas Bernauer (ETH Zurich), Christian Fahrholz
(University of Jena), Roland Fuess (European Business School) and Gerald Schneider
(University of Konstanz). These scholars have already made major contributions to existing
research on the political economy of financial markets, which has been published in renowned
international political science journals. Besides these people from our wider network, we
expect to attract researchers from Europe and overseas who are working on the political
economy of financial markets in general and/or who are working on the causes and
consequences of the current crisis. We also hope to receive submissions from advanced Ph.D.
2 students and junior researchers who would benefit from advice from the senior political
scientists listed above.
The workshop will be open to both theoretical and empirical papers. Researchers can,
for example, present formal theoretical analyses that yield insights into the effects of political
decisions and events on financial markets or vice versa. Empirical work can use a quantitative
approach to confront theories with evidence or present case studies to gain insights into
important cases. Ideally, we are seeking to attract sets of theoretical and empirical papers that
complement each other.
We intend to submit applications for funding of our workshop to the Swiss National
Science Foundation (Bechtel) and at the Irish Research Council for the Humanities and Social
Sciences (Sattler). The submission deadlines for workshop funding at these institutions are
about six months before the conference, which would be sufficient time for applications in
case that the ECPR is interested in offering our workshop at the 2011 Joint Sessions in St.
Gallen.
Michael Bechtel is a senior researcher (‘Oberassistent’) at ETH Zurich who has done
extensive research on various aspects of financial market reactions to politics. He has
published in the Journal of Politics, International Organizations, and Public Choice. Thomas
Sattler is a permanent Lecturer at the University College Dublin who has done research on
currency crises and government room to maneuver in open economies. His research has been
published in Comparative Political Studies, the European Journal of Political Research, and
Economics & Politics.
Our proposal is supported by the ECPR Standing Group ‘Analytical Politics and
Public Choice’ (APPC).
References
Bechtel, Michael. 2009. "The Political Sources of Systematic Investment Risk: Lessons from
a Consensus Democracy." Journal of Politics 71 (2):661-77.
Bechtel, Michael, and Gerald Schneider. forthcoming. "Eliciting Substance from 'Hot Air':
Financial Market Responses to EU Summit Decisions on European Defense."
International Organization.
Bernhard, William, and David Leblang. 2002. "Democratic Processes and Political Risk:
Evidence from Foreign Exchange Markets." American Journal of Political Science
46:316-33.
Bernhard, William T., and David Leblang. 2006. Democratic Processes and Financial
Markets: Pricing Politics. New York: Cambridge University Press.
Block, Steven A. 2003. "Political Conditions and Currency Crises in Emerging Markets."
Emerging Markets Review 4:287-309.
3 Blomberg, S. Brock, Jeffry A. Frieden, and Ernesto Stein. 2005. "Sustaining Fixed Rates: The
Political Economy of Currency Pegs in Latin America." Journal of Applied Economics
8:203-25.
Eichengreen, Barry. 1996. Globalizing Capital: A History of the International Monetary
System. Princeton: Princeton University Press.
Eichengreen, Barry, Andrew K. Rose, and Charles Wyplosz. 1995. "Exchange Rate Mayhem:
The Antecedents and Aftermath of Speculative Attacks." Economic Policy 10
(21):249-312.
Faccio, Mara, Ronald W. Masulis, and John J. McConnell. 2006. "Political Connections and
Corporate Bailouts." Journal of Finance 61 (6):2596-635.
Fisman, Raymond. 2001. "Estimating the Value of Political Connections." American
Economic Review 91 (4):1095-102.
Freeman, John R., Jude C. Hays, and Helmut Stix. 2000. "Democracy and Markets: The Case
of Exchange Rates." American Journal of Political Science 44 (3):449-68.
Fuess, Roland, and Michael Bechtel. 2007. "Partisan Politics and Stock Market Performance:
The Effect of Expected Government Partisanship on Stock Returns in the 2002
German Federal Election " Public Choice 135 (3-4):131-50.
Haggard, Stephen. 2000a. The Political Economy of the Asian Financial Crisis. Washington,
D.C.: Institute for International Economics.
———. 2000b. "The Politics of the Asian Financial Crisis." Journal of Democracy 11
(2):130-44.
Hays, Jude C., John R. Freeman, and Hans Nesseth. 2003. "Exchange Rate Volatility and
Democratization in Emerging Market Countries." International Studies Quarterly
47:203-28.
Herron, Michael C. 2000. "Estimating the Economic Impact of Political Party Competition in
the 1992 British Election." American Journal of Political Science 44 (2):320-31.
Johnson, Simon, and Todd Mitton. 2003. "Cronyism and Capital Controls: Evidence from
Malaysia." Journal of Financial Economics 67:351-82.
Leblang, David. 2003. "To Devalue or to Defend? The Political Economy of Exchange Rate
Policy." International Studies Quarterly 47:533-59.
Leblang, David, and William Bernhard. 2000. "The Politics of Speculative Attacks in
Industrial Democracies." International Organization 54:291-324.
Leblang, David, and Bumba Mukherjee. 2005. "Government Partisanship, Elections, and the
Stock Market: Examining American and British Stock Returns, 1930-2000." American
Journal of Political Science 49 (4):780-802.
McGillivray, Fiona. 2003. "Redistributive Politics and Stock Price Dispersion." British
Journal of Political Science 33 (3):367-95.
Mosley, Layna. 2000. "Room to Move: International Financial Markets and National Welfare
States." International Organization 54 (4):737-73.
———. 2003. Global Capital and National Governments: Cambridge University Press.
Sattler, Thomas, John R. Freeman, and Patrick T. Brandt. 2008. "Political Accountability and
the Room to Maneuver: A Search for a Causal Chain." Comparative Political Studies
41 (9):1212-39.
Sattler, Thomas, and Stefanie Walter. 2008. "Wirtschaftspolitischer Handlungsspielraum im
Zeitalter der Globalisierung: Eine Empirische Untersuchung am Beispiel von
Währungskrisen." Politische Vierteljahreschrift 49 (3):464-90.
———. forthcoming. "Monetary Credibility vs. Voter Approval: Political Institutions and
Exchange-Rate Stabilization during Crises." Economics and Politics.
Satyanath, Shanker. 2006. Globalization, Politics, and Financial Turmoil: Asia's Banking
Crisis. Cambridge: Cambridge University Press.
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