Three essays on banking regulation, financial crisis and sovereign debt

This thesis consists of three chapters on macroeconomics and international economics. The first studies the effectiveness of macroprudential policies in a New Keynesian dynamic stochastic general equilibrium framework with financial frictions. Profit-maximizing banks with endogenous leverage ratio expand credit lending during economic booms and become increasingly vulnerable to unanticipated economic shocks. Countercyclical macroprudential instruments are found to be effective in dampening economic fluctuations and stabilizing the credit cycle. However, a policy regulating the loan-to-value ratio of the residential households causes a credit shift towards the business sector. Optimal simple rules are selected using welfare analysis to provide practical implications for the evaluation, estimation and future implementation of macroprudential policies in alleviating economic risk of financial intermediaries. The second chapter examines the impact of political risk on sovereign default. An economic model with endogenous default decisions shows that political instability increases the likelihood of sovereign default. A quantitative analysis using data from 68 countries in the period from 1970 to 2010 finds that both short and long-run aspects of the political environment have significant effects. The findings suggest that a country is more likely to experience default when i) it has a relatively younger political regime in place; ii) it faces a higher chance of political turnover; and iii) it has a less democratic political system. The third chapter investigates the bidirectional relationship between banking and sovereign debt crisis. An economic model with financial intermediaries and a government sector shows that sovereign default may cause a banking crisis as banks hold a large amount of government bonds. Nevertheless, a significant amount of bailouts or bank guarantees may constrain the short-term liquidity of the government sector and trigger a sovereign debt crisis. Empirical studies using the credit default swap spreads of the Eurozone support the two-way linkage. Quantitative results also show increasing spillover effects across borders as globalization leads to greater integration of financial markets

Big Trouble for the Big Three: An Audience Perspective of the Appropriateness and Effectiveness of the Big Three Automakers’ Image Repair Strategies

Indiana University-Purdue University Indianapolis (IUPUI)The importance of image management has created the need to for organizations to continually work in order to improve their image or defend it against perceived threats. Since organizations engage in a constant struggle to preserve their reputation, it is important to understand the persuasive discourse associated with image repair strategies. In addition, a successful rhetor must also acknowledge the importance of perception of the appropriateness and effectiveness of the apologetic discourse from the perspective of an audience. Focus groups were conducted and analyzed in order to better understand the perceived appropriateness and effectiveness of the image repair strategies employed by the Big Three Automakers as perceived by the audience. The findings of this study complement the original findings of Benoit and Drew’s quantitative study assessing the appropriateness and effectiveness of image repair strategies in an interpersonal setting. However, there were observable differences between the studies in terms of the perception of both the appropriateness and effectiveness of bolstering and the effectiveness of differentiation. The implications of these differences can be important in developing a better understanding of the utilization of image repair strategies in the apologetic discourse of organizations. Specifically, the results demonstrate how the audience determines the appropriateness and effectiveness of the strategies and how rhetors are able to successfully use different strategies based in context

Sub-National Borrowing, Is It Really a Danger?

Due to widespread decentralization of spending responsibilities, increasing revenue power and borrowing capacity of sub-national governments, sub-national borrowing has become an increasingly important source of sub-national finance. While there are arguments for and against giving sub-national authorities room for raising their own financial resources, appropriate sub-national borrowing regulatory framework can reduce chances of defaults and fiscal crises. This dissertation investigates the effectiveness of sub-national borrowing regulations in maintaining fiscal sustainability. More precisely, it tests the hypothesis that is sub-national borrowing is restricted to financing capital investments (the “golden rule”), and if the sub-national governments are provided with some measure of revenue autonomy, then the sub-national borrowing should not endanger fiscal sustainability. Based on the sub-national government panel data for 57 countries between 1990 and 2008 and applying the system GMM estimator and the survival analysis, this dissertation provides support for this hypothesis. The results suggest that the “golden rule” is effective in maintaining fiscal sustainability at both general and sub-national government level. Sub-national tax autonomy, however, seems to have positive but very small marginal effect on fiscal sustainability. The obtained results also emphasize the risk of the soft budget constraint and the moral hazard. Significant central government financing may give encouraging signs to the sub-national governments to over-borrow and to expect being bailed out by the central government. The results obtained in this dissertation imply following policy recommendations. First, sub-national government borrowing does not have to endanger fiscal sustainability if the borrowing regulation framework is well designed and according to specific country circumstances. Second, reducing fiscal dependence on central government financing reduces the risk of moral hazard and improves the effectiveness of borrowing control in maintaining fiscal balance at the sustainable level

The Past as Future? The Contribution of Financial Globalization to the Current Crisis of Neo-Liberalism as a Development Strategy

Bretton Woods was grounded in the Keynesian view that financial markets are innately too unstable to be given free rein. This view, which also shaped the financial policies of developing countries during the 1st post-war quarter-century, was gradually displaced during the 2nd post- war quarter-century by Neo-liberalism, with financial market liberalization and heavy reliance on freely mobile international capital as its leading components. However, their adoption by the industrialized countries has been associated with exchange rate misalignments, excessive debt leveraging, asset price bubbles, slower and more unstable output and employment growth, and increased income concentration; and additionally in the developing countries by more frequent financial crises, exacerbated by over-indebtedness that forces many of them to adopt pro-cyclical macroeconomic policies that deepen their output and employment losses. This paper contends that the association reflects causality, rooted fundamentally in the innate propensity of financial dynamics to go off track along the lines of Minsky’s Financial Instability Hypothesis, an elaboration of Keynes’s view. An open economy extension of this hypothesis explains the frequency of banking/currency crises in the 2nd quarter-century in the developing countries far better than the convoluted “blame the victim” post-mortems that until recently have been the staple of the IMF. Its recent publications show the IMF analysts moving part way toward the Keynesian view of financial instability, but with a major disconnect between the empirical findings and their implications for theory and policy. As yet there is neither overt abandonment of the efficient market theorizing that had underpinned the IMF’s earlier enthusiasm for financial liberalization, nor candid reconsideration of its opposition to capital controls and other dirigiste policies implied by the Keynesian view. Probably this is because IMF policies are not “owned” by its bureaucracy or membership at large, but by the major financial center countries. Still, the worried discussions among these center countries that global financial discord could lead to deeper financial crises, debt deflation, intensified beggar-my-neighbor trade and currency competition, and the formation of antagonistic regional blocs have a 1930s aura. Optimistically, this could lead again, as at Bretton Woods, to coordinated stabilization policies, among at least the Big Three financial powers, that would also ease the way for developing countries to return to dirigiste development strategies. More likely, a reprise of the 1930s will be needed to create the political climate for accepting all this. Given the odds, developing countries should carve out their own policy space, with capital controls as prerequisite for widening that space.

G20 and recovery and beyond: an agenda for global governance for the twenty‐first century.

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