Michael A. Gavin (2020). ``Global club goods and the fragmented global financial safety net,'' International Studies Quarterly, 64(4), pp. 798–807. https://doi.org/10.1093/isq/sqaa062. Supplementary appendix.
It is generally regarded that a robust global financial safety net is a global public good. Yet public goods models that explain the existence of the global financial safety net cannot also explain why it is highly fragmented and provisioned so inequitably. This study shows that the global financial safety net's existence, fragmentation, and inequitable coverage can be explained by modelling the global financial safety net as a global club good. The primary finding of the model is that when a state has a monopoly on the provision of a non-rival and excludable good (i.e., a club good), separate multilateral and bilateral club governance structures emerge, each with a unique structure and cost. Brief case studies of the global financial safety net provisioned by the International Monetary Fund, the Federal Reserve, and the Bank for International Settlements support the model.
Michael A. Gavin (2020). ``Independent central banks and banking crisis liquidity'', The Review of International Organizations, 15(1), pp. 109–131. https://doi.org/10.1007/s11558-018-9324-5. Data. Code. Placebo analysis. Tables. Figures.
This study develops and tests a formal model that shows why central banks protected from direct government borrowing supply a larger financial safety net for commercial banks during a crisis. This result is derived from a novel model of central bank independence grounded in the rules governing access to the central bank’s balance sheet, rather than in the politics of inflation. Subsequent analysis shows that this result is mediated by the degree of leverage in the banking system, but only in democracies where government borrowing restrictions are credible. Supporting quantitative evidence comes from an event study on a large sample of emerging market banking crises between 1980-2009.
Bernard, Jean-Thomas, Michael Gavin, Lynda Khalaf, and Marcel Voia (2015). "Environmental Kuznets curve: Tipping points, uncertainty and weak identification." Environmental and Resource Economics 60(2), pp. 285-315. https://doi.org/10.1007/s10640-014-9767-y.
Populism and de facto central bank independence (w Mark Manger) (R&R, Comparative Political Studies)
Although central bank independence is a core tenet of monetary policy-making, it remains politically contested: In many emerging markets, populist governments are in frequent public conflict with the central bank. At other times, the same governments profess to respect the monetary authority’s independence. We model this conflict drawing on the crisis bargaining literature. Our model predicts that populist politicians will often bring a nominally independent central bank to heel without having to change its legal status. To provide evidence, we build a new data set of public pressure on central banks by classifying over 9000 analyst reports using machine learning. We find that populist politicians are more likely than non-populists to exert public pressure on the central bank, unless checked by financial markets, and also more likely to obtain interest rate concessions. Our findings underscore that de jure does not equal de facto central bank independence in the face of populist pressures.
The International Monetary Fund and central bank capabilities (w Carolina Garriga) (under review)
Countries use economic reforms to signal policy commitments and leverage international institutions to bolster the credibility of such commitments. Yet, less is known about how changes in the stature of international institutions alter the incentives to send particular signals. This paper formally models how the IMF’s stagnating lending capacity incentivizes countries to signal their commitment to financial stability via enhanced central bank lender of last resort powers. Our model predicts that countries are more likely to use these central bank reforms as signals when their access to IMF financing is waning. Statistical analyses using original data on central bank lender of last resort powers and a novel measure of country borrowing capacity from the IMF support our model’s empirical implications. Our findings demonstrate how changes in the capabilities of international institutions can alter state signalling behavior.
Central bank capabilities and the IMF: Economic complements, political substitutes (w Carolina Garriga)
Do central bank capabilities complement or substitute for the International Monetary Fund in emerging and developing economies? We utilize our original database of central bank lender of last resort capabilities to test two hypotheses. First, we hypothesize that states that expand their central bank's lender of last resort capabilities are less likely to approach the IMF for financing. Second, we hypothesize that crisis-mitigating central bank liquidity provision will be higher when central banks have stronger lender of last resort capabilities. Across a battery of quantitative tests, we find strong evidence for the first hypothesis. We also find strong evidence for the second hypothesis using an event study during the initial response to the Covid-19 pandemic in early 2020. We draw two important conclusions from our research: (i) IMF financing and national central bank liquidity actions are politically substitutable, even if they are economically complementary; and (ii) central bank actions are enabled/constrained by legislation and the politics this entails, just as other areas of central bank institutional design.
Inadequate instruments: how not to estimate IMF program effects (w Mark Manger)
How can we measure the social and economic impacts of IMF programs? Inspired by Lang (2016), the current most popular approach, utilized in more than two dozen recent studies, asserts that as the size of the IMF's balance sheet expands, so too does the menu of states the IMF lends to. Proclaiming that this is a plausibly exogenous source of variation in the propensity of states to seek IMF financing, these studies estimate the economic and social effects of IMF programs utilizing shifts in the IMF's balance sheet as the shift component in a shift-share instrumental variables strategy. Our research shows that in this context this shift-share strategy is untenable. Theoretically, we develop a formal model to show that potential borrowers pool on not borrowing from the IMF when sufficient private financing is available, irrespective of the liquidity position of the IMF. Through a battery of quantitative tests, we find strong evidence for our model. We conclude that it is ultimately the failure to account for borrower country strategic behaviour that dooms the shift-share strategy as a method to estimate the effects of IMF programs. More broadly, our research contributes to ongoing methodological debates regarding the status of the shift-share instrumental variables strategy and the conditions under which this strategy is admissible.
The global financial safety net: Why politics leaves it fragmented, inequitable, and unsustainable
Creditor and debtor relationships entail asymmetric power dynamics. Would-be borrowers are necessarily in a weaker position relative to would-be creditors given that the latter has the power to approve or deny the extension of credit. I argue that such a power asymmetry exists with respect to the global financial safety net and that large financial powers have a self-interest to leverage this power asymmetry to their advantage.
The book develops a political economy model of the global financial safety net grounded in asymmetric creditor-debtor relations. The global financial safety net provider chooses between three regime types: (i) an autarky regime that entails no global financial safety net; (ii) a public goods regime consisting of a multilateral arrangement or customized bilateral arrangements; and, (iii) a club goods regime comprised of a multilateral arrangement for some, and customized bilateral arrangements for others. I find that the club goods regime is the most likely as this regime gives large financial powers the greatest utility.
My research finds that the politics pushing for the club goods regime renders the global financial safety net fragmented and results in highly inequitable access. It also leaves emerging and developing state financial systems at a structural disadvantage and prone to instability.
Financial Safety Nets in Emerging Market Economies
Conference Presentations (selected)
“De Facto and De Jure Central Bank Independence," co-presented with Mark Manger at the American Political Science Association Annual Conference, Washington, D.C., USA, September 2019
“Global and domestic financial safety nets: economically additive, politically substitutable options for financial stability promotion,” the Political Economy of Finance conference for early career researchers, Oxford University, October 2018
“Global & Domestic Financial Safety Nets and Banking Crises," presented at the American Political Science Association Annual Conference, Boston, USA, September 2018
“Where are All the Banking Crises?” presented at the Midwest Political Science Association Annual Conference, Chicago, USA, April 2018
“Central Bank Financial Strength and Banking Crises in Emerging Market Presentations Economies” co-presented with Mark Manger at the American Political Science Association Annual Conference, San Francisco, USA, September 2017
“Why is There No International Lender of Last Resort?” presented at the Midwest Political Science Association Annual Conference, Chicago, USA, April 2017
“Politics and Financial Risk in Emerging Market Economies,” presented at the Friday International Relations Seminar and Tea! (FIRST) in the Department of Political Science, University of Toronto, September 30, 2016
“Capital Flows, Exchanges Rates, and the Political Economy of High Beta Presentations Economies” presented at the American Political Science Association Annual Conference, Philadelphia, USA, September 2016
“Capital Flows, Exchanges Rates, and the Political Economy of High Beta Economies” (with Mark Manger) co-presented at the European Political Science Association Annual Conference, Vienna, Austria, June 2015
“The Environmental Kuznets Curve: Tipping Points, Uncertainty, and Weak Identiﬁcation” (with Jean-Thomas Bernard, Lynda Khalaf, and Marcel Voia) presented at Computational and Financial Econometrics Annual Conference, London, UK, December 2010
Visiting Researcher, Graduate School of Public and
International Affairs, The University of Ottawa
Michael A. Gavin
Researcher, Global Economic Policy Lab
Munk School of Global Affairs and Public Policy
The University of Toronto