Visiting Researcher, Graduate School of Public and
International Affairs, The University of Ottawa
Economist, Department of Finance
Government of Canada
Michael A. Gavin
Michael A. Gavin and Mark Manger (2023). "Populism and de facto central bank independence",
Although central bank independence is a core tenet of monetary policymaking, 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 data set of public pressure on central banks by classifying over 9000 analyst reports using machine learning. We find that populists 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
Michael A. Gavin (2020). ``Global club goods and the fragmented global financial safety net,'' International Studies Quarterly, 64(4), pp. 798–807. 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.
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.
The political origins of central banking: financing government vs. the private sector (under review)
This article introduces CBFunctions, the first dataset of its kind cataloguing the functions central banks performed between 1400-1914. Comprising 75 central banks established worldwide, CBFunctions contributes new and intriguing observations to the historical evolution of central banking. I focus on one set of observations in this article: the rise of private sector financing and relative decline of government financing beginning in the mid-18th century. Given the theoretical ambiguity behind this shift in lending priorities, a Nash bargaining model is developed which accounts for variation in the interests of a regime’s supporting coalition. Survival analysis confirms the model's predictions: military-supported regimes establish government-financing central banks, business-supported regimes prefer central banks that lend to the private sector, and aristocratic-supported regimes do not establish central banks of any type. These findings contribute new insights to central banking history and emphasize how the onset of capitalism fundamentally reoriented the politics of central banking.
Do central banks constrain or inform? Historical central banks and mechanisms for credible commitment (under review)
Lending to governments involves a certain leap of faith, as creditors may have few options to recoup their losses should a government default. An overwhelming consensus in the literature argues that central banks improve sovereign repayment commitments by constraining government largesse. However, data limitations mean that the constraints view is supported only by select historical case studies. In this article I argue that government sovereign debt credibility derives from costly signalling. However, testing whether constraints or signalling render government commitments more credible is difficult because central banks both constrain governments and signal commitments to economic orthodoxy. A test therefore needs to find aspects of central banking on which these approaches predict opposing outcomes. My new database on historical central bank functions allows such as test: the constraints view predicts interest rates on sovereign debt will be lower when their central bank lends to the government while the signalling view predicts lower interest rates when a government's central bank lends to the private sector. Empirical results on interest rate dynamics and flow-through effects to the rate of inflation unequivocally support the signalling view.
Beyond conditionality: The IMF's balance sheet and central bank design (with Carolina Garriga) (under review)
A large literature explores how loan conditionalities and policy recommendations embedded in IMF lending programs influence country behavior and policy choices. We argue that the IMF's influence extends beyond these intentional efforts. This paper shows that the relative decrease in the IMF's lending capacity structures incentives for emerging and developing economies to strengthen their domestic institutions for financial stability. This lending capacity channel is an unintentional bi-product of the politics shaping the IMF's balance sheet. We motivate our argument using a formal model where a decline in the IMF's lending capacity generates incentives for potential IMF borrowers to signal their commitment to financial stability via strengthening their central bank's capabilities to act as a lender of last resort. We test our theory using original data on central banks’ lender of last resort powers for 60 developing countries between 1994 and 2020. We find robust support for the main empirical implication of our model. Placebo tests on other reforms of central bank governance provide additional support to our argument. Our findings imply that IMF influence extends beyond conditionality, shaping incentives for countries even when they are not actively participating in an IMF program.
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
“Beyond conditionality: how the IMF's balance sheet unintentionally impacts central bank design," presented with at the American Political Science Association Annual Conference, Montreal, Canada, September 2022
“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