Suchergebnisse

This survey reviews how a recent political economy literature helps explaining variation in governance, competition, funding composition and access to credit. Evolution in political institutions can account for financial evolution, and appear critical to explain rapid changes in financial structure, such as the Great Reversal in the early XX century, unlike time-invariant legal institutions or cultural traits. Future research should model the sources and consequences of financial instability, and to predict how major redistributive shocks will shape regulatory choices and financial governance.

We analyze the political economy of monetary unification among countries with different quality of institutions. Countries with stronger institutions have lower public spending and better productive incentives, even under a stronger currency. Governments under weaker institutions spend more and must occasionally devalue. In a diverse monetary union prices and flows adjust quickly while institutional differences persist, so the common exchange rate has large redistributive effects. Public spending in the weaker country is less constrained and may rise, so productive incentives are reduced by both a fiscal and common exchange rate effect. A weak country government may agree to a common currency that reduces productive capacity as it enables more public spending. Strong country production benefits from a weaker currency, but in a crisis the survival of the monetary union may require fiscal transfers, justified by the implicit gains. Even when a diverse monetary union is on aggregate beneficial to all countries, firms in weaker countries and savers in stronger countries lose.

We analyze the political economy of monetary unification among countries with different quality of institutions. Countries with stronger institutions have lower public spending and better investment incentives, even under a stronger currency. Governments under weaker institutions spend more so must occasionally devalue. In a MU market prices and ows adjust quickly but institutional differences persist, so a diverse monetary union (DMU) has redistributive effects. The government in the weaker country expands spending, and investment may be reduced by the fiscal and common exchange rate effect. Strong country production benefits from the weaker currency but needs to offer fiscal support in a crisis. In equilibrium the required support is incentive compatible due to the devaluation gain. Some governments may join a DMU even if it depresses productive capacity to expand public spending. Even in a DMU beneficial for all countries, firms in weaker countries and savers in stronger countries may lose.

Can a wealth shift to emerging countries explain instability in developed countries? Investors exposed to political risk seek safety in countries with better property right protection. This induces private intermediaries to offer safety via inexpensive demandable debt, and increase lending into marginal projects. Because safety conscious foreigners escape any risk by running in some good states, cheap foreign funding leads to larger and more frequent runs. Beyond some scale, foreign runs also induce domestic runs in order to avoid dilution. When excess liquidation causes social losses, a domestic planner may limit the scale of foreign inflows or credit volume.