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
In this paper, we discuss whether and how bank lobbying can lead to regulatory capture and have real consequences through an overview of the motivations behind bank lobbying and of recent empirical evidence on the subject. Overall, the findings are consistent with regulatory capture, which lessens the support for tighter rules and enforcement. This in turn allows riskier practices and worse economic outcomes. The evidence provides insights into how the rising political power of banks in the early 2000s propelled the financial system and the economy into crisis. While these findings should not be interpreted as a call for an outright ban of lobbying, they point in the direction of a need for rethinking the framework governing interactions between regulators and banks. Enhanced transparency of regulatory decisions as well as strenghtened checks and balances within the decision-making process would go in this direction.
Mr. Tito Boeri, Ms. Prachi Mishra, Mr. Chris Papageorgiou, and Mr. Antonio Spilimbergo
Populists claim to be the only legitimate representative of the people. Does it mean that there is no space for civil society? The issue is important because since Tocqueville (1835), associations and civil society have been recognized as a key factor in a healthy liberal democracy. We ask two questions: 1) do individuals who are members of civil associations vote less for populist parties? 2)does membership in associations decrease when populist parties are in power? We answer thesequestions looking at the experiences of Europe, which has a rich civil society tradition, as well as of Latin America, which already has a long history of populists in power. The main findings are that individuals belonging to associations are less likely by 2.4 to 4.2 percent to vote for populist parties, which is large considering that the average vote share for populist parties is from 10 to 15 percent. The effect is strong particularly after the global financial crisis, with the important caveat that membership in trade unions has unclear effects.