Political Regimes and Currency Crises

This paper examines the relationship between political regime type and currency crises. Some theories suggest that democratic regimes, owing to their greater political transparency and larger number of veto players, should have a lower risk of currency crisis than dictatorships. Alternative arguments emphasize the advantages of political insulation and rulers with long time horizons, and imply that crises should be most likely in democracies and least common in monarchic dictatorships. We evaluate these competing arguments across four types of political regimes using a time‐series cross‐sectional dataset that covers 178 countries between 1973 and 2009. Our findings suggest that the risk of currency crisis is substantially lower in monarchies than in democracies and other types of dictatorship. Further analyses indicate that the adoption of prudent financial policies largely account for this robust negative association between monarchies and the probability of currency crises. This suggests that political regimes strongly influence financial stability, and perverse political incentives help explain why currency crises are so common.     

Forms of democracy and economic growth volatility

Using a panel of 140 countries over the 1975–2007 period, we disaggregate democracies across five institutional dimensions (government forms, electoral rules, state forms, number of veto players, and age of democracies), to study the precise forms of democracy that may explain the lower economic growth volatility (EGV) in democracies compared to dictatorships, usually emphasized by the literature. We find that, while all government forms decrease EGV to the same extent, proportional electoral rules outperform majoritarian and mixed electoral rules, suggesting a role for a more inclusive political decision-making process. In addition, EGV is significantly lower in unitary states, suggesting a role for a limited separation of power between the central government and the local authorities, while the effect of the number of veto players and the age of democracies is significant only in developed countries. Consequently, the choice between various forms of democracy may not be neutral for EGV, and, possibly, for countries' development path.     

Domestic institutions and the ratification of international agreements in a panel of democracies

A recent literature explores how domestic institutions affect politicians’ incentives to enter into international agreements (IAs). We contribute to this field by systematically testing the impact of a broad set of domestic institutional design features. This allows us to compare new and established political economy explanations of IA entry. For this purpose, 99 democracies are analyzed over the period 1975–2010. We find that domestic institutions determine countries’ disposition to enter into IAs, as predicted by political economic theory. For example, democracies with majoritarian electoral institutions are less likely to conclude IAs than other democracies. Countries also conclude more IAs when their democratic institutions are long-lived and they lack an independent judiciary. However, programmatic parties and the number of domestic veto players are not associated with IA-making. The key take-away of this study is that specific domestic institutions matter for how frequently states make formal deals with each other.     

A MODEL OF AN OPPORTUNISTIC-PARTISAN POLITICAL BUSINESS CYCLE

According to political business cycle theory, separate opportunistic and partisan approaches exist. It is obvious, as seen from theoretical and empirical points of view, that politicians aim for both opportunistic as well as partisan goals. This paper presents a model of a pre‐election political business cycle that manifests an indication of competence and a post‐election political business cycle that occurs because of the uncertainty of an election's winner monetary policy. In the pre‐election period competent governments expand the economy. The post‐election cycle depends on whether a leftist or a conservative government is in power in the pre‐election period, and if they are re‐elected or not.     

Political budget cycles,incumbency advantage,and propaganda

This paper combines incumbency advantage and political budget cycle theory. An opportunistic politician is given two instruments: deficit‐financed transfers and propaganda. Unlike earlier analytical models, but in accordance with the empirical literature, government manipulations do actually improve re‐election chances. However, the optimal level of government manipulation depends on country characteristics, in particular the competence dispersion among potential candidates. This may explain why it is easier to detect political budget cycles in, for instance, developing countries or new democracies. Results are robust to alternative competence distribution and propaganda cost assumptions.     

Do business cycle peaks predict election calls in Canada?

This paper examines the empirical regularity that in Canada business cycle peaks and federal elections have tended to arise together over the long post-Confederation time period following 1867. We argue that rather than being simultaneous, the two events are related sequentially and that causality can be identified properly if the selection issue associated with observed events is addressed carefully. Our results suggest that business cycle peaks lead federal elections rather than the other way around. Such a finding reinforces the hypothesis of strategic election timing for such countries and is insightful in helping to explain why the presence of a political business cycle is harder to establish for parliamentary governments where the date of the next election is under the control of the incumbent governing party than in democratic systems where governing durations and election dates are fixed.     

Can television bring down a dictator? Evidence from Chile’s “No” campaign

Can televised political advertising change voting behavior in elections held in authoritarian regimes? We study the case of Chile, where the opposition used television campaigns weeks before the election that ended the seventeen-year dictatorship known as the Pinochet regime. Using national surveys conducted before the election and administrative electoral data, we provide evidence of a positive effect of television exposure on opposition votes. When compared to similar estimates in democracies, the effect of campaigns in Chile appear large. These results suggest that televised political campaigns can help to defeat dictators at the polls.     

Hoarding of international reserves: It's a neighbourly day in Asia

To explain why Asian countries seem to have been hoarding international reserves, especially since the 1997 crisis, we consider various regional neighbourhood effects. One such effect is that of “catching up with the Joneses”. We revisit that effect by analysing several refinements of it. We also consider the fear of the kind of contagion that the crisis‐hit countries saw in 1997. Finally, we look at the possibility of a regional financial cycle, in which the conditions that led to the crisis might have been correlated across countries. We find that refining the Joneses effect to take account of trade links strengthens its power to explain the build‐up of reserves. We also observe that a country that finds itself more vulnerable than its regional neighbours would tend to accumulate more reserves. Finally, we find that a common regional factor related to current‐account balances spurs further reserve accumulation. Contrary to previous analyses, our results suggest that only a couple of Asian countries have been holding excessive reserves. Some were actually holding less reserves than would be optimal in the presence of neighbourhood effects.     

Government Partisanship and Property Rights: Cross‐Country Firm‐Level Evidence

Property rights are essential to economic development but vary with the political environment. We develop and test the claim that government partisanship influences the security of business firms' property rights: the perceived security of property rights increases when right‐wing parties take power and declines with the election of left‐leaning parties. Unlike research that uses country‐level aggregates to draw inferences about the determinants of secure property rights, we analyze survey responses of over 7,400 firm owners from 73 countries using a novel difference‐in‐differences approach. We find that the political partisanship of the government in power strongly affects individual perceptions of property rights: firm owners are more likely to perceive that their property rights are secure under right‐leaning governments. Our results are robust to firm‐ and country‐level economic performance as well as controls for political institutions that might induce more stability to property rights, such as the number of checks and balances (veto players) in a system. Overall, our results indicate that business owners' beliefs about the security of property rights are highly responsive to changes in government partisanship.     

European development banks and the political cycle

This paper investigates whether the lending activity of European development banks is affected by opportunistic political behavior, by looking at the change in loans extended by these entities in election years. The empirical analysis leverages on a unique manually collected dataset that includes all the development banks headquartered in Europe, for the period 2002–2015.A comparison with the rest of the European banking system reveals that while the political view of development banks cannot be supported as a general rule, it finds empirical evidence in flawed democracies, where large development banks actually tend to increase their lending activity in election years.     

Veto players and foreign aid provision

This study investigates how the political institutions of developed economies influence their foreign assistance. Specifically, we argue that the number of effective veto players has a negative effect on the volume of aid provision. To provide foreign assistance, the incumbent government in a donor country must have unanimous support from all effective veto players in policy making. Thus, it has more barriers to overcome when the polity is characterized by many and preference-wise heterogeneous veto players. By examining the official development assistance outflows of 27 OECD countries for the period of 1977–2006, we find empirical patterns that corroborate our argument.     

Defective democracy and the political budget cycle

Using a panel of democracies from 1987 to 2016, this study examines the effect of a defective democracy on the political budget cycle. To separate defective democracies from embedded democracies, we apply cluster analysis to the central elements of democracy. We find that the political budget cycle is significant only in defective democracies. Our finding indicates that the electoral cycle can persist even though democracies become old and economies become advanced. We also find that, of the central elements of democracy, weak rule of law and an ineffective government mainly explain the political budget cycle in defective democracies.     

What is Driving Reserve Accumulation? A Dynamic Panel Data Approach

Foreign reserve accumulation is a widespread phenomenon of recent years, particularly among emerging economies. Using a panel of 136 countries for the period 1973–2003, we demonstrate the need of using both a dynamic specification of the reserve demand equation and the system GMM estimator. These improvements change the results found by previous studies. Openness, regional imitation, persistence, an inverted U-shaped relationship between reserves and income level, and financial deregulation are the factors driving reserve hoardings. In contrast, reserves yield, and both trade and financial volatility are not statistically significant. Surprisingly, we find that countries with flexible exchange rate regimes have higher ratios of reserves to GDP. This result is robust to alternative exchange rate regime classifications.     

Dissertation abstract: Essays on veto bargaining games

This dissertation experimentally analyzes the outcomes of multilateral legislative bargaining games in the presence of a veto player. The first essay examines veto power—the right of an agent to unilaterally block decisions but without the ability to unilaterally secure his/her preferred outcome. Using Winter’s (1996) theoretical framework, I consider two cases: urgent committees where the total amount of money to be distributed shrinks by 50% if proposals do not pass and non-urgent committees where the total amount of money shrinks by 5% if proposals do not pass. Committees with a veto player take longer to reach decisions (are less efficient) than without a veto player and veto players proposals generate less consensus then non-veto players proposals, outcomes on which the theory is silent. In addition, veto power in conjunction with proposer power generates excessive power for the veto player. This suggests that limiting veto players’ proposer rights (e.g., limiting their ability to chair committees) would go a long way to curbing their power, a major concern in committees in which one or more players has veto power. Finally, non-veto players show substantially more willingness to compromise than veto players, with players in the control game somewhere in between. I relate the results to the theoretical literature on the impact of veto power as well as concerns about the impact of veto power in real-life committees. The second essay discusses in detail the voting patterns in the veto and control games reported in the first essay. The empirical cumulative density functions of shares veto players accepted first degree stochastically dominates that of shares for the controls and the empirical cdfs of shares the controls accepted first degree stochastically dominate that of shares for non-veto players. Random effect probits support this conclusion as well. In addition, regressions imply favorable treatment of voting and proposing between non-veto players which, however, does not result in larger shares in the end. Coalition partners consistently demand more than the stationary subgame perfect Nash equilibrium share except for veto players in non-urgent committees. JEL Classification C7, D7, C78, D72 Dissertation Committee: John H. Kagel, Advisor Massimo Morelli Alan Wiseman Stephen Cosslett     

Elections, Opportunism, Partisanship and Sovereign Ratings in Developing Countries

We empirically examine whether and how opportunistic and partisan political business cycle (“PBC”) considerations explain election‐period decisions by credit rating agencies (“agencies”) publishing developing country sovereign risk‐ratings (“ratings”). Analyses of 391 agency ratings for 19 countries holding 39 presidential elections from 1987–2000, initially suggest that elections themselves prompt rating downgrades consistent with opportunistic PBC considerations, that incumbents are all likely to implement election‐period policies detrimental to post‐election creditworthiness. But more refined analyses, integrating both opportunistic and partisan PBC considerations in a unified framework, suggest that election‐period agency downgrades (upgrades) are more likely as right‐wing (left‐wing) incumbents, become more vulnerable to ouster by challengers. Together, these results underscore the importance of integrating both opportunistic and partisan PBC considerations into any explanation of election‐period risk assessments of agencies and, perhaps, other private, foreign‐based financial actors important to the pricing and allocation of capital for lending and investment in the developing world.     

Social transfers and conditionalities under different regime types

This paper examines the implications of political factors for social policy choices. Specifically, we explore the link between regime type and adoption of unconditional transfers versus transfers conditioned on beneficiaries’ investments in human capital. Due to the direct nature of benefits, unconditional transfers are more likely to be used to buy off opposition and prevent social unrest. As transfers that are conditioned on education and health pay off only in a relatively distant future, they are rarely initiated for political motives and rather defined by interests of long-term development and human capital accumulation. Using the new dataset on Non-Contributory Social Transfer Programs (NSTP) in developing countries, we find that transfers are indeed chosen so as to be unconditional under less democratic regimes. There is some evidence that conditional transfers are more likely to be adopted in democracies. In particular, democracies tend to increase the number of conditional schemes once any social transfer program is introduced.     

Discussing the political survival of Romanian ministers since 1989—Do economic conditions matter?

Political longevity in young democracies has attracted the attention of scholars and practitioners alike due to several particular characteristics of such democracies, such as a low level of trust, a low level of credibility, corruption, economic difficulties, a less well‐established rule of law and an increased bureaucracy. In such a context, we studied the tenure duration of Romanian ministers since 1989, as well as their accumulated political longevity in ministerial offices. Using proportional hazards regression, we observed some peculiarities in the young Romanian democracy in comparison with more established regimes. We observed that left‐wing majorities tend to increase the probability of seat changes and thus diminish tenure longevity. We also observed that good economic conditions may lead to the substitution of certain types of ministries, while higher inflation rates tend to shorten tenure longevity for Romanian ministers. Moreover, our estimations support the finding that Romanian ministers tend to have shorter tenures as the number of past ministerial functions increases and that the burden of simultaneously managing various ministries significantly contributes to the shorter political longevity of a given minister. Finally, recent ministers have had longer tenures than those in the first years after the fall of communism in Eastern Europe in 1989.     

Political business cycles when real activity is persistent

Theoretical and empirical analyses of endogenous policy making have not addressed the implications of output or unemployment persistence. This paper investigates how political business cycles in models with nominal frictions and inflationary biases under rational expectations are affected by persistence. It turns out that even moderate degrees of persistence may turn the political business cycle upside down: Policies are expansionary as long as the election is far away and turn restrictive as the election draws close.     

Employment and Gubernatorial Elections during the Gilded Age

The theory of political business cycles predicts economies will experience a short-run expansion during an election period. Cross-sectional evidence from 1870, 1880, 1890, 1900, and 1910, does not reveal statistically significant differences in gainful employment rates between states with and without a gubernatorial election in that year. Pooled regression analysis suggests gubernatorial elections are positively correlated with the state employment rate, but an annual fixed effect model designed to account for differences over time in the measurement of gainful employment mitigates this conclusion.     

Rewarding the introduction of multiparty elections

Do aid donors reward the adoption of multiparty elections? Are multiparty elections rewarded in both democracies and electoral authoritarian regimes? How do the rewards for institutional reforms compare to the rewards for substantive improvements in governance and political rights? These questions are of particular interest given both the spread of democracy and the emergence of autocracies with multiparty elections for the executive and legislature as the modal form of authoritarianism. To answer these questions, we examine temporal dynamics in aid flows before and after transitions to multiparty elections and the strategic allocation of aid rewards to specific sectors depending upon electoral competition and substantive improvements in governance and political rights. We find that, in the post-Cold War era, bilateral and multilateral donors reward the adoption of multiparty elections in both democracies and electoral authoritarian regimes while also rewarding substantive improvements in governance and political rights. Sector specific analyses reveal that multiparty elections are rewarded with greater democracy aid and economic aid in both democratic and electoral authoritarian regimes. Nevertheless, the quality of elections matters: the adoption of democratic elections receives greater aid gains than the adoption of authoritarian elections.