The authors examine the conditions under which democratic events, including elections, cabinet formations, and government dissolutions, affect asset markets. Where these events have less predictable outcomes, market returns are depressed and volatility increases. In contrast, where market actors can forecast the result, returns do not exhibit any unusual behavior. Further, political expectations condition how markets respond to the political process. When news causes market actors to update their political beliefs, market actors reallocate their portfolios, and overall market behavior changes. To measure political information, Professors Bernhard and Leblang employ sophisticated models of the political process. They draw on a variety of models of market behavior, including the efficient markets hypothesis, capital asset pricing model, and arbitrage pricing theory, to trace the impact of political events on currency, stock, and bond markets. The analysis will appeal to academics, graduate students, and advanced undergraduates across political science, economics, and finance.
Since the collapse of the Bretton Woods system, countries have been able to choose from a variety of exchange-rate arrangements. We argue that politicians' incentives condition the choice of an exchange-rate arrangement. These incentives reflect the configuration of domestic political institutions, particularly electoral and legislative institutions. In systems where the cost of electoral defeat is high and electoral timing is exogenous, politicians will be less willing to forgo their discretion over monetary policy with a fixed exchange rate. In systems where the costs of electoral defeat are low and electoral timing is endogenous, politicians are more likely to adopt a fixed exchange-rate regime. Consequently, differences in domestic political systems can help account for variations in the choice of exchange-rate arrangements. We test this argument using constrained multinomial logit and binomial logit on a sample of twenty democracies over the period 1974–95. Domestic political institutions have a significant effect on exchange-rate regime choice, even after controlling for systemic, macroeconomic, and other political variables.
In recent decades, countries have experimented with a variety of monetary institutions, including alternative exchange-rate arrangements and different levels of central bank independence. Political economists have analyzed the choice of these institutions, emphasizing their role in resolving both the time-inconsistency problem and dilemmas created by an open economy. This “first-generation” work, however, suffers from a central limitation: it studies exchange-rate regimes and central bank institutions in isolation from one another without investigating how one monetary institution affects the costs and benefits of the other. By contrast, the contributors to this volume analyze the choice of exchange-rate regime and central bank independence together and, in so doing, present a “second generation” of research on the determinants of monetary institutions. The articles incorporate both economic and political factors in explaining the choice of monetary institutions, investigating how political institutions, democratic processes, political party competition, and interest group pressures affect the balance between economic and distributional policy objectives.
Although central banks possess a similar function across the industrial democracies, their institutional structures—their levels of independence—differ greatly. My explanation of this variation emphasizes the informational asymmetries of monetary policymaking. Government ministers have informational advantages in the policy process, potentially creating conflicts with backbench legislators and, in a multiparty government, coalition partners. An independent central bank can help alleviate these conflicts. Politicians will choose an independent bank (1) if government ministers, party legislators, and coalition partners have different monetary policy incentives and (2) if government ministers fear that party legislators and coalition partners will withdraw their support over a policy dispute. I statistically test the argument against the cross-national variation of central bank institutions. I also use the theoretical framework to examine episodes of institutional choice and reform in Germany, Britain, and Italy.
Members of the European Parliament (MEP) typically follow one of two career paths, either advancing within the European Parliament itself or returning to higher office in their home states. We argue that these different ambitions condition legislative behavior. Specifically, MEPs seeking domestic careers defect from group-leadership votes more frequently and oppose legislation that expands the purview of supranational institutions. We show how individual, domestic-party, and national level variables shape the careers available to MEPs and, in turn, their voting choices. To test the argument, we analyze MEPs' roll-call voting behavior in the 5th session of the EP (1999EP ( -2004 using a random effects model that captures idiosyncrasies in voting behavior across both individual MEPs and specific roll-call votes. * We thank Brian Gaines, Jude Hays, Robert Pahre, Kevin Quinn, Tom Rudolph, and Guy Whitten for helpful assistance. We also acknowledge the funding support of the European Union Center at the University of Illinois.1 Politicians are ambitious. Some legislators wish to remain in their current positions for multiple terms, others aspire to other offices, and still others expect to serve in politics for only a short time (Schlesinger 1966). Those career ambitions shape behavior. A legislator's expectations about future office affect the choices she makes while serving in her current position (Hibbing 1986). Demonstrating empirical support for the importance of political ambition, however, is not straightforward. While research has focused on behavior across legislatures with a variety of career ladders (see e.g. Black 1972, Rhode 1979, Epstein, Brady, Kawato & O'Halloran 1997, Samuels 2003, those studies center on a single country, limiting the possible variation in career-oriented behavior. Since only a small number of other positions are likely to arouse the ambitions of serving legislators, it is difficult to disentangle how the characteristics of the legislature, its members, and the opportunity structure interact to influence legislative behavior. 1We take advantage of a unique institutional laboratory to investigate how ambition affects vote choice: the European Parliament (EP). The EP houses politicians from all member states of the European Union (EU), each with a different set of national political institutions, party systems, and political opportunity structures. Members of the European Parliament (MEP) typically follow one of two career paths (Stolz 2001, Scarrow 1997. Some MEPs prefer to advance within the EP itself, gaining seniority and access to key leadership positions.Other MEPs view their time in the EP as a valuable stepping-stone to higher office in their home state. We argue that these different career ambitions condition legislative behavior within the EP. Those MEPs seeking to remain in the EP further their careers by pleasing EP group leaders and will work to expand the authority of Europe's supranational institutions relative to member-state governments. MEPs expecting to retu...
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