Studies on Issues in Political Economy Since the Global Financial Crisis
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A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Jäger, Kai Research Report Studies on Issues in Political Economy since the Global Financial Crisis ifo Beiträge zur Wirtschaftsforschung, No. 71 Provided in Cooperation with: Ifo Institute – Leibniz Institute for Economic Research at the University of Munich Suggested Citation: Jäger, Kai (2016) : Studies on Issues in Political Economy since the Global Financial Crisis, ifo Beiträge zur Wirtschaftsforschung, No. 71, ISBN 978-3-95942-020-4, ifo Institut - Leibniz-Institut für Wirtschaftsforschung an der Universität München, München This Version is available at: http://hdl.handle.net/10419/167368 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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Bibliografische Information der Deutschen Nationalbibliothek Die Deutsche Nationalbibliothek verzeichnet diese Publikation in der Deutschen Nationalbibliografie; detaillierte bibliografische Daten sind im Internet über http://dnb.d-nb.de abrufbar ISBN-13: 978-3-95942-020-4 Alle Rechte, insbesondere das der Übersetzung in fremde Sprachen, vorbehalten. Ohne ausdrückliche Genehmigung des Verlags ist es auch nicht gestattet, dieses Buch oder Teile daraus auf photomechanischem Wege (Photokopie, Mikrokopie) oder auf andere Art zu vervielfältigen. © ifo Institut, München 2016 Druck: ifo Institut, München ifo Institut im Internet: http://www.cesifo-group.de Preface This dissertation was prepared by Kai Jäger while he was working at the Ifo Institute. It was completed in June 2016 and accepted as a doctoral thesis by the Department of Economics at the University of Munich in November 2016. It includes four studies broadly connected to the causes and consequences of the Global Financial Crisis of 2007- 8 from a political economy perspective. Chapter 2 analyzes the political roots of massive foreign reserves accumulation, which has contributed to the American credit boom before the financial crisis. The study shows that elections tend to explain why democracies have acquired less foreign reserves than authoritarian regimes. Basel III was a regulatory consequence of the Global Financial Crisis, which is scheduled to impose liquidity requirements as a prudential measure for commercial banks. Chapter 3 examines whether these liquidity requirements could have an unintended negative effect on monetary stability. Based on a new dataset of reserve and liquidity requirements, the results show that inflation is more robust to changes in the velocity of money if reserve and liquidity requirements are low. Increases in the velocity of money are associated with higher inflation rates if reserve and liquidity requirements are high. The ability of partisan politics to shape economic policies according to ideolog- ical goals has been regularly questioned in an era of globalization and austerity. Chapter 4 suggests that government ideology still has a pronounced impact on economic policy- making based on a sample of OECD and new EU member states. Chapter 5 analyzes why major business leaders in France and Germany have publicly supported the euro in the weeks before a bailout program got enacted by the European Council in July 2011. The study shows that direct corporate interest did not appear to matter. Instead, business lead- ers appeared to be more likely to join the campaign if they were well-connected in busi- ness and political networks. The findings suggest that managers disregarded their short- term economic interest to improve their long-term ties with political decision-makers. Keywords: Financial Crisis, Political Economy, Foreign Reserves, Political Busi- ness Cycle Theory, Veto Players, Basel III, Reserve Requirements, Money Demand, Price Stability, Partisan Politics, Economic Freedom, Euro, Rent-Seeking, Lobbying, Social Network Analysis. JEL-Codes: D72, D85, E5, E41, F31, H1, H5. Acknowledgement I am grateful to Niklas Potrafke for chairing my dissertation and to Michael Munger for remaining “aboard” and being my second reviewer. I appreciate that I could rely on both for their continuous support. I would also like to thank Christoph Trebesch for agreeing to be my third reviewer. In addition to Professor Potrafke, I would also like to thank my colleagues at the Ifo Institute, who made my short stay in Munich pleasant: Manuela Krause, Marina Riem, Philipp Kaiser, Björn Kauder, Pepe, Markus Reischmann, Christoph Schinke, Horst Schwemmer, and our team assistant Sabine Kolbinger. I would also like to express my deep gratitude to Jeff Friedman and Jeff Hummel from whom I have learnt a lot. I am also grateful to the Institute of Humane Studies and the Charles Koch Foundation for their generous financial support throughout my graduate career. Last but not least, I would like to thank my family and friends for their love and sup- port. Studies on Issues in Political Economy since the Global Financial Crisis Inaugural-Dissertation zur Erlangung des Grades Doctor oeconomiae publicae (Dr. oec. publ.) an der Ludwig-Maximilians-Universität München 2016 vorgelegt von Kai Jäger Referent: Prof. Dr. Niklas Potrafke Korreferent: Prof. Michael C. Munger, Ph.D. Promotionsabschlussberatung: 16. November 2016 i Contents 1 Introduction 1 References 10 2 The Role of Regime Type in the Political Economy of Foreign Reserve 13 Accumulation 2.1 Introduction 14 2.2 The benefits and cost of foreign reserve accumulation 17 2.3 Institutional explanations for reserve accumulation 21 2.4 Empirical section 27 2.5 Conclusion 39 References 41 Appendix: Additional tables 48 3 Solving Milton Friedman’s Conundrum on Price Stability: The Ne- 53 glected Role of Reserve Requirements 3.1 Introduction 54 3.2 The evolving functions of reserve requirements 57 3.3 Solving Friedman’s Conundrum: How deregulating reserve require- 61 ments foster price stability 3.4 Empirical section 65 3.5 Conclusion 76 References 78 Appendix: Additional tables 83 ii 4 Economic Freedom in the Early 21st Century: Government Ideology 95 Still Matters 4.1 Introduction 96 4.2 Does government ideology still matter? 97 4.3 Drawing a more comprehensive picture: Economic freedom and gov- 99 ernment ideology 4.4 Empirical analysis 104 4.5 Conclusion 113 References 115 Appendix: Additional tables 119 5 Sources of Franco-German Corporate Support for the Euro: The Ef- 123 fects of Business Network Centrality and Political Connections 5.1 Introduction 124 5.2 Corporate interest in the establishment of EMU 125 5.3 The advent of the Euro crisis and the campaign “The Euro is neces- 127 sary” 5.4 Theoretical explanations 127 5.5 Data and methods 134 5.6 Empirical analysis 141 5.7 Conclusion 145 References 147 Appendix: Additional tables 152 6 Concluding Remarks 155 iii List of Figures 1.1 Change of foreign reserves in EMEs and current accounts of the United 2 States and EMEs in billions (USD), 1997-2013 1.2 Comparative development of reserve requirements, 1990-2013 4 1.3 Business network of French and German CEOs in 2011 8 2.1 Development of global foreign reserves, 1980-2013 14 2.2 Simulated effects on changes in reserves/GDP 34 2.3 Marginal effect of an upcoming election conditional on the number of 36 veto players in democracies based on Table 2.3, model 3 2.4 Marginal effect of an upcoming election conditional on the number of 36 veto players in authoritarian regimes based on Table 2.3, model 5. 3.1 The relationship between inflation and velocity of M2 in the United 54 States, 1959-2013 3.2 Global development of reserve requirements, 1990-2013 (monthly aver- 58 ages) 3.3 The velocity offsetting effect 62 3.4 Money multiplier effect and reserve requirements 64 3.5 Marginal effect of a percentage change in velocity on changes in 72 M2/GDP conditional on reserve requirements based on Table 3.2, model 4. 3.6 Marginal effect of a percentage change in velocity on the inflation rate 73 conditional on reserve requirements based on Table 3.3, model 4. 4.1 Average development of modified EFW Index and of the three policy 104 areas 4.2 Mean changes in EFW