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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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Creating a transparent digital economy and rebuilding trust | World Economic Forum – World Economic Forum



  • The digital economy in the US is expanding four times faster than the overall economy.
  • Yet consumers remain concerned about the way data is collected and how it’s used to influence behaviour.
  • Companies and regulators must strengthen data privacy and enhance transparency to build trust and protect the benefits of digital innovation.

The benefits of digitization are growing. Even before COVID-19 struck, digital goods and services were expanding four times faster than the overall economy in the US. Then video conferencing, online shopping, telemedicine and the like, enabled tens of millions of people around the world to adapt after the pandemic erupted last year. Today the five largest US technology stocks account for nearly a quarter of the value of the S&P 500 Index while China’s big three account for nearly a third of the value of the MSCI China Index.

Yet consumers worry about the way companies capture their data and influence everything from their news and music feeds to the advertisements suggesting what they should buy and where. The majority of consumers say they prefer to maintain their privacy and avoid sharing information with companies, according to Oliver Wyman Forum’s Global Consumer Sentiment Survey.

Without deep reform of the way companies treat data and governments regulate it, this mistrust threatens to become for the digital economy what carbon dioxide is for the physical world: an unseen pollution that threatens the sustainability of data ecosystems. And like carbon, those apprehensions have externalities that can cause societal harm. Willingness to share health information to contain the coronavirus declined as the pandemic worsened last year.

A tipping point in data mistrust?

According to a survey of US consumer attitudes toward 400 brands by Lippincott, the brand consultancy arm of Oliver Wyman, people rate major global social media brands lower than others in healthcare, finance, media, retail, and consumer products, on questions including whether the brand understands my needs, shares my values, always has my interests at heart, and does more good than bad for society. Consumers also express less willingness to share data with those companies than with firms in the other industries.

That finding may seem paradoxical given that people in practice share large amounts of data, some very personal, with social media companies. Yet each new breach or misinformation campaign erodes public trust and risks a tipping point in consumer willingness to share.

Political pressure is growing for tighter regulation. The European Commission has drafted legislation that would enhance consumer rights and protections and crack down on potential monopolistic behaviour by tech platforms. The CEOs of several big social media firms told a recent congressional hearing that they were open to reforms of the liability shield they enjoy under US law.

The pace and volume of data collection and sharing has accelerated, demonstrating the need for better mechanisms to protect citizens’ rights and inspire trust.

To that end, a new whitepaper explores a potential approach to tackling this issue and forging trust. The whitepaper, Data-driven economies: Foundations for a common future, identifies key enablers that can build multistakeholder data sharing frameworks.

It recommends creating new data governance models that combine data from various origins, including personal, commercial and/or government sources. It highlights use cases from industries and jurisdictions around the world to illustrate the possibilities data sharing unlocks for multiple stakeholders and the public good.

The paper was created in connection with the Data for Common Purpose Initiative, a first-of-its-kind global initiative formed to design a governance framework to responsibly enhance the societal benefit from data. The initiative aims to find ways to exchange data assets for the common good, while protecting individual parties’ rights and the equitable allocation of risks and rewards.

Focus on transparency, consumer choice and competition

Companies should take the lead in rebuilding trust, and that starts with transparency. A seven-country survey by the Oliver Wyman Forum found that providing transparency about how data is shared was one of the two top priorities of consumers, with 51% saying it would make them feel comfortable giving mobility companies access to their data.

Firms should be open about the types of information they collect, the steps they take to keep it secure, how the data will be used, what benefits consumers can expect, and whether data will be shared and for what purposes. Equally, firms should specify wherever possible what data they will not collect. These disclosures should be in everyday language, not dense legalese. And companies should consider working with nonprofits or civil society organizations to reinforce transparency by auditing data practices.

Data-sharing also should be reasonable. One way to ensure that would be to share only anonymous data. Fifty-one percent of respondents to the Oliver Wyman Forum mobility survey said this assurance would make them more comfortable sharing data. And given the ubiquity of information sources available, anonymized data is sufficient for many tasks, such as serving relevant ads to consumers.

Transparency needs to extend beyond data itself to the algorithms companies use to tailor news feeds, sell advertising, and make decisions on things like hiring and lending. Pressure is growing for new rules to enforce accountability and prevent algorithmic bias, but industry doesn’t have to wait for regulators or legislators to act. Reassuring consumers that the choices and information they receive are sound and fair should promote responsible data-sharing and build trust.

Finally, companies should reinforce transparency with empowerment. That means giving consumers the ability to access their data, to decide whether it can be shared with third parties, and to request that data be deleted or made portable so a customer can take it to another service provider. Companies also might work with other organizations to foster the creation of data trusts or cooperatives, which would store data and give consumers greater control over how it is used.

Pressure is growing for new rules to enforce accountability and prevent algorithmic bias, but industry doesn’t have to wait for regulators or legislators to act.

—Lorenzo Miláns del Bosch.

For policymakers, building trust and ensuring a level playing field should be the guiding principles of any new regulatory initiatives. Existing measures like Europe’s General Data Protection Regulation and the California Privacy Rights Act have strengthened privacy protections but don’t address issues like misinformation or algorithmic accountability.

Filling that gap won’t be easy considering today’s political polarization and the sensitivity and lack of global standards on issues like free speech. But a few key principles should guide policymakers.

Start by measuring the effectiveness of existing regulations in building trust. Then ensure that new regulations are designed to promote greater choice. Measures that empower consumers or require algorithmic accountability should have enforcement mechanisms proportional to the size of the firm. Imposing the same burdens on start-ups as on tech giants can stymie innovation and competition.

Rebuilding trust won’t be easy, but the risks of inaction are far greater. It’s time for technology companies and policymakers to get to work.

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Biden approval ratings on Covid and economy fall in new CNBC All-America survey – CNBC



President Joe Biden held on to his overall approval rating in the latest CNBC All-America Economic Survey but showed weakness in two key areas as the public’s views on the economy and the outlook for the virus soured.

In the poll of 802 American adults nationwide, 48% approved of the job Biden is doing as president, up a point from the first quarter. But his disapproval numbers grew to 45% from 41%.

The biggest change came in views on his handling of the coronavirus, where approval dropped 9 points to 53%; Biden’s economic approval fell to 42%, a decline of 4 points, or just beyond the poll’s 3.5-point margin of error.

“I think it all comes down to COVID,” said Jay Campbell, a partner at Hart Research Associates and Democratic pollster for the survey. “If the COVID situation had continued to improve the way it was improving in the first quarter, all of these numbers would look very different. And ultimately, someone has to be responsible for that. And right now it’s Joe Biden.”

The president’s ratings declined along with worsening views on the economy and the virus. The poll, conducted at the end of July, shows 51% of the public pessimistic about the economy and the outlook, the highest level since 2015. Just 22% give the economy positive marks and are optimistic.

“Surging Covid and rising inflation are creating a bleaker outlook throughout the next 12 months than we’ve measured since the 2008 recession,” said Micah Roberts, partner with Public Opinion Strategies and the Republican pollster for the survey. “Forty-three percent say the economy will get worse in the next year, tied for the highest we have measured since June 2008.”

Inflation also a concern

A bright spot: 59% said they believe they can find another job in the area where they live at similar or better pay. The confidence was evident across racial, income and age groups but was especially strong among 18-to-34-year-olds, a sign of a tight job market.

Asked about the most pressing two issues, respondents chose the coronavirus as their top concern, followed by a tie between immigration and inflation and then a tie between climate change and crime. Infrastructure, where the president has focused considerable efforts, is the least most important issue, chosen by just 4%.

The top priorities of the public overall mask substantial differences by party. While the virus and climate change are the main issues for Democrats, neither ranks in the top five for Republicans. Instead, Republicans says immigration, crime and inflation are their top issues. Independents said the virus was their top area of concern, followed by immigration, crime and inflation.

When it comes to the virus, Americans say that because of the delta variant they are concerned the nation could implement new restrictions: 73% said they are concerned there could be new lockdowns, 68% worried about a new surge in deaths and hospitalizations, 55% worried about mask mandates and 50% said it could delay the return of workers to their offices.

Inflation looks to be taking a bite out of spending. Eighty-six percent of respondents said they have taken at least one step to combat the rise in prices. The most frequent means has been to reduce spending on discretionary items, like eating out, but respondents also said they were driving less, traveling less and saving less money.

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Economic Growth Looks Good For Now, But Families Need More – Forbes



The economy is in a good spot right now, but Congress needs to act quickly to strengthen the recovery further. Millions of people are still looking for a job and face financial hardship such as evictions without continued strong economic growth. At the same time, the pandemic has changed face again with the Delta variant ripping through the country, creating a lot uncertainty over the future path of the economy. Amid these challenges, Congress can enact additional measures to ensure a continued strong recovery that benefits all households.

The economy grew at a strong pace in the first half of 2021. Gross domestic product (GDP) growth amounted to an annual rate of 6.5% between March and June 2021. This was slightly faster than the already fast annual growth rate of 6.3% in the first three months of 2021. GDP in the second quarter of 2021 had finally caught up to and exceeded, by about one percent, the inflation-adjusted GDP level recorded for the last three months of 2019 before the pandemic started. The accelerated recovery in the first half of 2021 helped to regain the losses of economic activity associated with the pandemic faster than would have otherwise been the case.

Faster economic growth in the first half of 2021 came about in large part because of President Biden’s American Rescue Plan enacted in March 2021. Gross domestic product has exceeded what analysts forecast for 2021 prior to passage of the American Rescue Plan, for instance. In particular, Harvard University’s Jason Furman, former chair of President Obama’s Council of Economic Advisors, and Wilson Powell III report that the U.S. economy grew as much in the first half of the year as analysts had predicted for the entire year 2021. The massive relief bill enacted in March did exactly what it was supposed to do by putting the economy on a path to a quicker recovery, while helping struggling families deal with the ongoing fallout from the pandemic.

The economy still has room to grow in the short term. Supply chain bottlenecks in particular held back economic activity in the spring of 2021. Businesses, for example, depleted inventories as they often found it difficult procure intermediate and final products to sell. The depletion of inventories reduced economic growth by 1.1 percentage points. GDP growth would have been 7.6% instead of the reported 6.5% between March and June 2021 if businesses had not reduced their inventories. Similarly, new housing activities fell amid lumber and other material shortages, reducing GDP growth by another 0.5 percentage points. As supply bottlenecks gradually ease, the economy will likely overcome some of these headwinds and boost growth.

This short-term momentum will not be enough to address the looming challenges. Congress still needs to invest more in a prolonged strong economic recovery that benefits all American families, even in the context of these recent good news. First, millions of Americans are still out of work. Second, the economy would have likely grown after 2019 absent the pandemic and thus need to go some ways to catch up to where it would have been. The Congressional Budget Office predicted in January 2020 that the economy would be 1.8% larger in the second quarter of 2021 than it actually was. Third, modest productivity growth and massive inequality marked the economic performance prior to the pandemic. Households struggled with paying their bills, even amid low unemployment before the pandemic hit. Building on the current strong performance to ensure a continued robust recovery also means correcting these imbalances that persisted after the Great Recession from 2007 to 2009. Congress’s work in building a strong, inclusive recovery is not yet done.

Passing the Bipartisan Infrastructure Framework (BIF) currently making its way through Congress and the $3.5 trillion budget resolution are key to achieving robust, equitable growth. Those measures will provide public investments in a wide range of infrastructure that has been neglected for too long and that the private sector will not fully finance. Roads, bridges, and access to affordable internet are just some of the investments that will translate into faster innovation, lower costs and higher productivity and economic growth. Congress will also tackle climate change and thus reduce costs of extreme weather events for people and businesses. Lower costs will again translate into faster economic growth over time. It is good to know that the administration and many members of Congress understand that their work is not done with two quarters of remarkably strong growth. American families have waited too long for a return to strong, inclusive long-term economic growth.

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