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Political economy in finance | VOX, CEPR Policy Portal –



This column reports on recent work presented at the first edition of the CEPR conference series on the Political Economy of Finance, which focused on the politics of regulation and central banking. The conference, held on 12 February 2021 and co-sponsored by three Dutch universities (Erasmus University Rotterdam, Tilburg University, University of Amsterdam), kickstarted the PolEconFin initiative ( The PolEconFin initiative comprises a conference series and an online platform, which allows researchers to share their work with a community interested in research on the political economy of finance.

Exploring political economy topics in finance research is still relatively new. The political economy of finance looks at how the design of political institutions and the distribution of political power in society affect the development and functioning of financial systems, and vice versa (see Pagano and Volpin 2001, Perotti 2014, Lambert and Volpin 2018 for surveys). 

Early research focused on topics such as political connections in firms (Fismann 2001, Khwaja and Mian 2005, Faccio 2006) or politically motivated changes in financial regulation and development (Kroszner and Strahan 1999, Biais and Perotti 2002, Bolton and Rosenthal 2002, Pagano and Volpin 2005, Perotti and von Thadden 2006). While these contributions appeared mostly in economic journals, finance journals also started opening up to this research area in recent years.

Figure 1 shows the number of articles published in the top-three finance journals (Journal of Finance, Journal of Financial Economics, Review of Financial Studies) that study questions related to the political economy of finance. Only a handful of articles were published in the mid-2000s, but interest rose following the financial crisis. The overwhelming majority of these publications is empirical work. Taking stock of research in this area reveals increasing awareness of the importance of political economy issues in finance but also reflects that the area is far from saturated.

Figure 1 Articles on political economy of finance published in top-three finance journals

Notes: We include in this set any articles published in top-three finance journals dealing with political institutions, electoral politics, and special-interest politics. We do not include articles on policy uncertainty and asset pricing unless the article connects with political institutions and power. The six Journal of Financial Economics articles of the pre-2002 period were published in 1990, 1994, 1996, 1998, and 1999 (x2).

The goal of PolEconFin is to connect researchers in this growing area and promote their work, and the first edition of the conference series was a successful start of this initiative.

Electoral politics, credit, and regulation

The electoral consequences of financial crises are well-documented. Yet the specific mechanisms through which financial crises affect elections remain elusive. Sartre et al. (2020) and Müller (2020) focus on some mechanisms.

Sartre et al. (2020) help understand how public finance mismanagement fuels the rise of populism during financial crises. Between 1996 and 2011, more than 1,500 French municipalities contracted high-risk structured loans with the bank Dexia. In September 2011, the newspaper Libération leaked a confidential file from Dexia, detailing all toxic loans it granted to municipalities. For the municipal elections following the leak, Sartre et al. (2020) find that affected municipalities saw a rise in populist voting and an increased entry of both far-right and far-left populist politicians. Far-right benefited more in areas with more fragile economic conditions and higher growth of the immigrant population.

Müller (2020) investigates how the design of policies contributes to politicians’ re-election prospects. He shows that macroprudential policies, supposed to curtail the risks of future financial crises, were systematically loosened in the run-up to 221 general elections across 58 countries. Politicians seem to do so because they do not want to cut off voters from access to credit.

Institutions, reforms, and politics

Policy reforms result from the complex interaction between various interest groups. In his keynote lecture (available here), Francesco Trebbi (Berkeley Haas) depicts the opaque and convoluted channels through which interest groups “invest in influence” and ultimately affect economic and policy outcomes. In particular, he highlights the important, albeit under-studied, role of localised charitable giving as a means of contributing to politicians (Bertrand et al. 2020a), donations to non-profits in exchange for regulatory advocacy (Bertrand et al. 2018a, 2018b), and firm acquisition as a tool to amplify political contributions of investors (Bertrand et al. 2020b).

The success (or failure) of interest groups in shaping policy reforms also depends on various features of political institutions. Foarta and Morelli (2020) study the problem of a regulator who receives imprecise information about the regulatory problem at hand. They find that overly complex reforms are implemented when regulators perceive the problem as complicated and are highly uncertain about the incentives of interest groups initiating reform proposals. 

However, the complexity of today’s reforms increases the difficulty of understanding future problems. In this context, Foarta and Morelli (2020) also show that variation in the starting institutional conditions may lead to drastically different regulatory paths: complexity traps, cycles of complexification-simplification, or regulatory gridlock.

Perotti and Soons (2019) study the political economy of the euro monetary area, seen as an arrangement among institutionally diverse economies. In their setup, politicians in institutionally weak countries need to spend more to remain in power, so in some states, they may have to devalue the currency to avoid a default. They find that a diverse monetary union implies an implicit fiscal transfer to strong countries due to devaluation, while fiscal capacity in weaker countries is reduced just as borrowing constraints are relaxed. A credible monetary union may require fiscal transfers from strong countries during crises, yet it can be mutually beneficial. Fiscal transfers thus represent a structural feature rather than a design flaw in a diverse monetary union (see Perotti and Soons 2020 for a non-technical summary).

Governance and central banking

After the financial crisis, central banks around the world saw their responsibilities further extended to financial stability domains (Masciandaro and Romelli 2015). Distributional choices are thus increasingly left in the hands of ‘unelected’ central bankers (Tucker 2019). Goncharov et al. (2020) and Fabo et al. (2021) uncover new stylised facts about central banks, which further challenge their political independence and accountability.

Goncharov et al. (2020) document the presence of a discontinuity in the distribution of central bank profits. Based on a sample consisting of 155 central banks over 23 years, they observe that central banks are more likely to report (small) profits than losses. Measures of political and market pressures as well as central bankers’ career concerns significantly predict small profits versus losses. Small positive profits are also associated with more lenient monetary policy and higher inflation. Together, these results suggest that central banks are concerned about the sign of their profits, probably for political reasons.

Fabo et al. (2021) compare research on the macroeconomic effects of quantitative easing produced by central-bank economists and academic economists (see Kempf and Pastor 2020 for a summary). Central-bank studies report quantitative-easing effects on output and inflation that are stronger and use more positive language in their studies compared to those written by academics. Moreover, central bankers whose studies report more significant effects of quantitative easing have better career outcomes. 

Fabo et al. (2021) also conduct a survey showing substantial involvement of bank management in research production and public distribution. However, the extent to which this involvement affects research outcomes remains a question open for future research.

PolEconFin: A platform for researchers

The 2021 edition of the CEPR conference series on the Political Economy of Finance only featured a few key advances but shows how fruitful and innovative the area is. It also stressed the importance of putting the political economy at the centre of finance research. As pointed out by Francesco Trebbi in his keynote lecture, the political economy of finance is about the reinforcing feedback loop between financial power, political power, and government policy. The by-products of the loop are top income inequality, stifled innovation and competition, sluggish productivity growth, and political pushback.

However, researchers active in the political economy of finance tend to be dispersed in discrete disciplinary areas, such as macroeconomics, public economics, economic history, law, or financial economics. Only a few other conferences are currently dedicated to research in this area, such as the London Political Finance Workshop (Beck et al. 2020). 

The PolEconFin platform seeks to provide a year-round meeting point for theorists and empiricists with shared interests in this topical area and build a research community with a focus on public policy.

Interested in the initiative? Please connect via and share your work and expertise with other researchers.


Beck, T, O Saka and P Volpin (2020), “Finance and politics: New insights”,, 10 July.

Bertrand, M, M Bombardini, R Fisman, and F Trebbi (2018a), “Tax-exempt lobbying: Corporate philanthropy as a tool for political influence”,, 3 September.

Bertrand, M, M Bombardini, R Fisman, B Hackinen and F Trebbi (2018b), “Hall of mirrors: Corporate philanthropy and strategic advocacy”, NBER Working Paper 25329.

Bertrand, M, M Bombardini, R Fisman and F Trebbi (2020a), “Tax-exempt lobbying: Corporate philanthropy as a tool for political influence”, American Economic Review 110: 2065–102.

Bertrand, M, M Bombardini, R Fisman, F Trebbi and E Yegen (2020b), “Investing in influence: Investors, portfolio firms, and political giving”, working paper.

Biais, B, and E Perotti (2002), “Machiavellian privatization”, American Economic Review 92: 240–58.

Bolton, P, and H Rosenthal (2002), “Political intervention in debt contracts”, Journal of Political Economy 110: 1103–34.

Fabo, B, M Jančoková, E Kempf and Ľ Pástor (2021), “Fifty shades of QE: Comparing findings of central bankers and academics”, Journal of Monetary Economics, forthcoming.

Faccio, M (2006), “Politically connected firms”, American Economic Review 96: 369–86.

Fisman, R (2001), “Estimating the value of political connections”, American Economic Review 91 1095–102.

Foarta, D, and M Morelli (2020), “Complexity and the reform process”, working paper.

Goncharov, I, V Ioannidou and M Schmalz (2020), “(Why) do central banks care about their profits?”, working paper.

Kempf, E, and L Pastor (2020), “Fifty shades of QE: Central banks versus academics”,, 5 October.

Khwaja, A, and A Mian (2005), “Do lenders favor politically connected firms? Rent provision in an emerging financial market”, Quarterly Journal of Economics 120: 1371–411.

Kroszner, R, and P Strahan (1999), “What drives deregulation? Economics and politics of the relaxation of bank branching restrictions”, Quarterly Journal of Economics 114: 1437–67.

Lambert, T, and P Volpin (2018), “Endogenous political institutions and financial development”, in T Beck and R Levine (eds), Handbook of Finance and Development, London: Edward Elgar.

Masciandaro, D, and D Romelli (2015), “Central bank independence before and after the Great Recession”,, 28 August.

Müller, K (2020), “Electoral cycles in macroprudential regulation”, working paper.

Pagano, M, and P Volpin (2001), “The political economy of finance”, Oxford Review of Economic Policy 17: 502–19.

Pagano, M, and P Volpin (2005), “The political economy of corporate governance”, American Economic Review 95: 1005–30.

Perotti, E (2014), “The political economy of finance”, Capitalism and Society 9, Article 1.

Perotti, E, and O Soons (2019), “The political economy of a diverse monetary union”, CEPR Discussion Paper 13987.

Perotti, E, and O Soons (2020), “The euro: A transfer union from a start”,, 18 February.

Perotti, E, and E-L von Thadden (2006), “The political economy of corporate control and labor rents”, Journal of Political Economy 114: 145–74.

Sartre, E, G Daniele and P Vertier (2020), “Toxic loans and the rise of populist candidacies”, working paper.

Tucker, P (2019), Unelected power, Princeton: Princeton University Press.

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Economy sending mixed signals: Maybe a recession isn't coming – Axios



The job market is strong. Layoffs are happening. Businesses are pessimistic. Consumers are still spending.

  • If you’re having a hard time figuring out this economy, you’re not alone — it’s sending all sorts of mixed signals.

Why it matters: The inflation crisis — namely record gas prices — has plunged consumer sentiment to an all-time low.

  • Meanwhile, the Fed’s bid to wrest control of price spikes by imposing interest-rate hikes is having far-reaching effects.

The big picture: Depending on where you focus your attention, the economy can look nowhere near as bad as some people say — or that we’re heading for a total face-plant:

  • The unemployment rate is only about a point away from an all-time low, but companies like Redfin, Netflix and Coinbase are cutting workers.
  • Business optimism hit the lowest point in the 12 years of JPMorgan Chase’s Business Leaders Outlook Pulse survey, released today. But durable goods orders rose 0.7% in May, according to figures released today, signaling that companies were still spending.
  • Mortgage rates are pricing many buyers out of the housing market — but median home price growth held steady for a third straight week last week.

Reality check: The pandemic triggered a period of profound economic disruption, leaving some of the economic tea leaves harder to read than in past cycles.

  • Much of what seems today like conflicting or inconsistent data could simply be the result of an economy on the brink of change.

What they’re saying: “As people learned to live with COVID-19 and prove resilient so far to higher prices at the checkout stand, economic momentum will likely protect the U.S economy this year,” S&P Global Ratings U.S. chief economist Beth Ann Bovino said Monday in a statement. “What’s around the bend in 2023 is the bigger worry.”

The bottom line: Uncertainty is toxic for investor and consumer sentiment.

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Analysis | What Is the 'Special Debt' China Uses to Spur Its Economy? – The Washington Post



China’s government is cash-strapped with Covid-19, tax breaks and a property downturn pulling down income while spending keeps rising to pay for economic stimulus and containing virus outbreaks. One option Beijing has to fill the gap is to sell special sovereign bonds, a rarely used financing tool it last dusted off in 2020 to help lift the economy without inflating the budget deficit. Before that, they were employed during the Asian financial crisis in the 1990s and to help seed China’s sovereign wealth fund in 2007.

1. What are special sovereign bonds?

Unlike regular government debt, special bonds raise cash for a certain policy or to help solve a particular problem. They are not part of China’s official budget and thus not included in deficit calculations. The State Council, China’s cabinet, can propose the sale of such bonds, which then requires approval only by a standing committee of the National People’s Congress, which generally meets every two months, rather than the full legislative body, which meets only once a year. That means they can be issued in a more flexible way than regular bonds, which have to be planned for in the budget and approved by the annual session of the NPC. 

2. Why use this tool now?

China has a target for gross domestic product growth of around 5.5% for this year, but with Covid lockdowns and a property slump, economists say the government is nowhere close to achieving that. One way President Xi Jinping is hoping to fuel a faster recovery is by spending trillions of yuan on infrastructure projects. Funding that kind of stimulus through the budget will be challenging though, given the plunge in tax revenues this year. Part of the financing will come from China’s state-owned development banks, like China Development Bank and Agricultural Development Bank of China, which have been given an additional 800 billion yuan ($120 billion) credit line to provide loans for infrastructure investment. Special sovereign bonds could be an additional source, given some were used for that purpose in 2020. Wang Yiming, an adviser to the central bank’s monetary policy committee, highlighted special national bonds as an option. More likely, the notes may be used to bridge the fiscal gap and finance the stimulus measures the government announced in May, according to Australia & New Zealand Banking Group Ltd. analysts Betty Wang and Xing Zhaopeng.

3. How were these bonds used before?

Some 1 trillion yuan of notes were sold in 2020, early in the pandemic. Exceptionally that time, the Communist Party’s all-powerful Politburo decided to sell the bonds and the NPC gave the official go-ahead at its full session in May. Some 700 billion yuan from that sale was transferred to local governments to support their Covid control efforts and infrastructure investment, according to a report by the Ministry of Finance. The rest was brought into the central government’s general public budget for subsidizing local spending on the outbreak, it shows. Before that: 

• In 2007, 1.55 trillion yuan of special government bonds were issued to capitalize China Investment Corp., the sovereign wealth fund. The bond proceeds were used to buy currency reserves from the People’s Bank of China, and those funds then went to CIC. Some of the bonds worth around 950 billion yuan will come due in the second half of this year, Bloomberg-compiled data show.

• During the Asian financial crisis, China sold 270 billion yuan of special government bonds — at the time the country’s largest bond issue — to raise capital for its big state banks and help offset losses from nonperforming assets.

4. How might the bonds affect financial markets?

A surge of bond supply would drive down prices of the securities and push up yields. The issuance in mid-2020 helped to boost the yield on China’s 10-year government bond by more than 20 basis points in about three weeks, to a near six-month high. At the time, liquidity conditions were tight because of a deluge of local government bond supply before the special debt hit the market and the central bank’s cautious approach to monetary easing, in part to avoid fueling asset bubbles. The situation is different now. Interest rate cuts and other central bank easing measures mean the nation’s banks are flush with cash that they can use to soak up any extra bond supply. Also, local governments — which issue their own special bonds used mainly for infrastructure investment — have been ordered to sell almost all of this year’s quota of 3.65 trillion yuan of debt by the end of June. That should leave room for the market to absorb new debt issuances in the second half of 2022.

5. How much are we talking? 

Jia Kang, a former head of a finance ministry research institute, said the 1 trillion yuan sold in 2020 could serve as a “reference” for policy makers when deciding on how much to issue this year. Others think it might be more. Larry Hu, head of China economics at Macquarie Group Ltd., estimated that the Covid outbreaks this year in China likely caused a budget shortfall of 1 trillion to 2 trillion yuan. A sale that size could contribute 1-2 percentage points to gross domestic product growth given the extra financial boost it will give local governments to spend, he estimated, adding the impact on the financial market is expected to be “limited.”

More stories like this are available on

©2022 Bloomberg L.P.

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Britain's Battered Economy Is Sliding Toward a Breaking Point – BNN



(Bloomberg) — Britain under Prime Minister Boris Johnson is running into the biggest headwinds it’s faced since the 1970s, heaping pain on an economy still reeling from Brexit and the pandemic.

After suffering from unprecedented shocks in recent years, the nation is succumbing to more intractable problems marked by plodding growth, surging inflation and a series of damaging strikes.

The result is a plunge in consumer confidence that analysts warn may lead to a recession. Railway workers walked off the job in anger that their living standards are slipping, and teachers, doctors and barristers may be next.

The malaise is a far cry from the boom and “cool Britannia” reputation that Tony Blair’s government enjoyed through the early part of this century.

The headline figures make grim reading. The economy is on track to shrink in the second quarter, raising the possibility that the UK is already in a recession. Even when the outlook appeared brighter, officials estimated that growth would settle at a below-par 1.8% a year, with no end in sight to the feeble productivity that has blighted the country for over a decade.

While growth is on track to lag most major economies next year, inflation is also on the rise. Consumer prices surged by 9.1% in the year through May, the most for 40 years. 

The Bank of England expects inflation to accelerate again when energy bills are allowed to rise in the autumn, reaching more than 11%. 

It’s a blow for the UK, which led the world in growth after the pandemic, and recalls the dark days of the 1960s and 1970s when commentators and politicians identified Britain as the “sick man of Europe” because of its performance.

Those figures overshadow deeper structural problems hobbling the UK. Chief among them is productivity growth, which slowed to a crawl after the financial crisis in 2008 and 2009. Only Italy put in a worse performance.

How much a worker can produce is important because it drives the long-term potential of the economy. Low productivity limits the pace at which output can grow and depresses wage packets. Real wages took years to recover to their 2007 levels after the financial crash.

An hour of work in the UK generates around $60, according to the OECD. The figure is over $70 in the US and about $67 in France and Germany. Economists and policy makers debate the causes of the malaise but say that fixing it is crucial if Britain is to get out of the slow lane.

The gaps in performance within the UK are equally stark, with London consistently outpeforming other regions, in part due to the concentration of financial services in the capital city. Johnson came to to power in 2019 on a pledge to “level up” poorer parts of the country, but there are few signs that the policy is working.

One explanation for the productivity gap is a lack of investment. British companies spend less on things like plant, machinery and technology than those in most other major economies.

Chancellor of the Exchequer Rishi Sunak says the tax system is one of the problems and is working on a way to improve allowances companies can claim for making investments. 

Brexit uncertainty also seems to have unsettled executives, with investment flat-lining since the 2016 public vote to leave the European Union. Had they continued to spend as they did before the referendum, investment would be around 60% higher today.

Life outside the EU has also had an impact on trade as importers and exporters contend with higher trade barriers.  Despite a sharp fall in the pound since the vote, there is little evidence to suggest the external sector has benefited from increased competitiveness. 

Analysis by Bloomberg Economics shows the UK lagged behind the trade performance of other big nations before the pandemic, and has failed to fully share in the global trade rebound since then.

What Bloomberg Economics Says:

“It’s been six years since the UK voted to leave the European Union and more than one since it established a new relationship with its main trading partner. From a 16% devaluation of the pound to an eye-watering slide in trade and investment, Brexit’s impact is plain to see. The data have only reinforced our view that life outside of the EU would leave the UK worse off.”

–Ana Luis Andrade, Bloomberg Economics. Click for the INSIGHT. 

The housing market is another constraint. Prices have risen almost without break since 1995, straining affordabilty for first-time buyers. Properties are in short supply in places like London that’s long been the engine driving the national economy. 

The expense and difficulty of moving limit labor mobility, depriving companies and public services of key workers, and leave consumers channeling more wealth into the property market than their peers abroad.

Housing is the most visible drain on consumers, but wages are lagging too. Real wages adjusted for inflation are now falling at the fastest pace in 20 years. In 2019, wages in the UK trailed far behind those in the US and Canada.

Workers are rebelling, with rail unions embroiled in the biggest work stoppage since 1989 and teachers, doctors and barristers are threatening to walk off the job. 

The strife recalls the 1970s, when Harold Wilson’s Labour government put industry on a three-day week because of an energy crisis and strikes by coal miners.

©2022 Bloomberg L.P.

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