Calming the Markets: When technocratic appointments signal credibility
Who do prime ministers prioritise during financial crises; voters or the market? The political economy literature finds that international financial actors closely watch and react to political developments such as elections, particularly during times of financial turmoil. Particularly during financial crises prime ministers are between a rock and a hard place. On the one hand, voters demand social protection against economic uncertainty. On the other hand, the government’s creditors threaten to sell the country’s sovereign debt if they fear that the government will be unable to repay them, further destabilising the economic situation. Prime ministers have to choose between responding to voters’ demands and managing investors’ expectations on the government’s fiscal policy. How do prime ministers handle this complex situation? How do they send a credible signal to the markets regarding their future policy, even when they lack the democratic mandate for implementing a budget of fiscal austerity? We take a novel approach to this question and show that prime ministers can positively influence investors’ confidence in their government through ministerial appointments. The appointments of non-partisan technocrats to the finance portfolio act as signals to investors that a competent and market-friendly environment exists. With an event study analysis that employs new data on the background of finance ministers in 21 Western and Eastern European democracies, we find that investors reward technocratic appointments by reducing a country’s borrowing costs, independently of societal discontent and even of political instability. Our findings shed light to a so-far unexplored effect of international financial markets on domestic politics.
Date: 18 May 2018, 12:30 (Friday, 4th week, Trinity 2018)
Venue: Manor Road Building, Manor Road OX1 3UQ
Venue Details: Seminar Room A
Speaker: Despina Alexiadou (University of Strathclyde)
Organising department: Department of Politics and International Relations (DPIR)
Part of: Politics Research Colloquium
Booking required?: Not required
Audience: Members of the University only
Editors: Holly Omand, Minna Lehtinen