Thomas Oatley

Redistributive Cooperation: Market Failure, Wealth Transfers, and the Basle Accord

Theories of international cooperation rely on claims about joint gains to argue that governments create international institutions to mitigate information and enforcement problems and realize efficient solutions. We present a model in which politicians propose international institutions to resolve domestic political dilemmas and suggest that the international institutions they propose are sometimes intentionally redistributive. We apply both approaches to the Basle Accord and conclude that domestic politics rather than international market failure motivated American policymakers to propose international regulation, that through international regulation the United States sought to redistribute income from Japanese to American commercial banks, and that, therefore, the Basle Accord did not offer joint gains. Agreement was reached only after the United States used financial market power to eliminate the regulatory status quo. The Basle Accord is an instance of redistributive cooperation. The case suggests that domestic politics should supplant aggregate benefits in explanations of why governments propose and create international institutions.

How Constraining is Capital Mobility? The Partisan Hypothesis in an Open Economy

A growing literature argues that international financial integration has eliminated the possibility for distinct partisan macroeconomic strategies. I test this hypothesis by reformulating the partisan hypothesis in an open-economy context and conducting pooled timeseries analysis of budget balances, real interest rates, and capital controls for fourteen OECD countries between 1970 and 1994. The analysis provides little evidence that financial integration has eliminated distinct partisan macroeconomic policies. Under fixed exchange rates leftist governments run larger deficits than rightist governments and use capital controls to reduce interest rate premia. Under floating exchange rates leftist governments pursue looser monetary policies than rightist governments. While partisan distinctions do weaken in the 1990s in countries with fixed exchange rates, this is attributed to the recession of the early 1990s and to important institutional changes in the European Union. International financial integration, therefore, does not prevent governments from pursuing distinct partisan macroeconomic policies.

The Reductionist Gamble: Open Economy Politics in the Global Economy

International political economy (IPE) should transition to “third-wave” scholarship because Open Economy Politics (OEP), which dominates current American IPE scholarship, can generate inaccurate knowledge. OEP can produce inaccurate knowledge because it studies domestic politics in isolation from international or macro processes. This methodological reductionism is often inappropriate for the phenomena IPE studies because governments inhabit a complex social system. As a result, the political choices that OEP strives to explain are typically a product of the interplay between domestic politics and macro processes. When OEP omits causally significant macro processes from empirical models, the models yield biased inferences about the domestic political relationships under investigation. Although scholars tolerated such errors when the gains from OEP were large, these errors are less tolerable now that OEP has matured. Consequently, the field should transition toward research that is nonreductionist, problem-driven, and pluralistic.

The Political Economy of Global Finance: A Network Model

Although the subprime crisis regenerated interest in and stimulated debate about how to study the politics of global finance, it has not sparked the development of new approaches to International Political Economy (IPE), which remains firmly rooted in actor-centered models. We develop an alternative network-based approach that shifts the analytical focus to the relations between actors. We first depict the contemporary global financial system as a network, with a particular focus on its hierarchical structure. We then explore key characteristics of this global financial network, including how the hierarchic network structure shapes the dynamics of financial contagion and the source and persistence of power. Throughout, we strive to relate existing research to our network approach in order to highlight exactly where this approach accommodates, where it extends, and where it challenges existing knowledge generated by actor-centered models. We conclude by suggesting that a network approach enables us to construct a systemic IPE that is theoretically and empirically pluralist.

Central bank independence and inflation: Corporatism, partisanship, and alternative indices of central bank independence

A well-developed theoretical literature suggests that central bank independence causes low inflation. Empirical work supporting this hypothesis is unsatisfactory, however, for two reasons: statistical analysis has only recently begun to include control variables, and important political variables that are related to inflation have not yet been included; analysis has not yet undertaken a systematic comparison of alternative indices of central bank independence. This paper addresses both weaknesses by testing the explanatory power of eight indices of central bank independence in a political-economic model of inflation. The results suggest that while support for the central bank independence hypothesis survives a relatively inclusive set of control variables, support for the hypothesis is not independent of the particular index upon which analysis relies.

Monetary Politics: Exchange Rate Cooperation in the European Union

A single currency--and the necessary prior condition of exchange rate cooperation and the stabilization of exchange rates--has been an elusive goal of many European leaders for more than twenty years. While much of the literature on exchange rate cooperation within the European Union focuses on the integration of national economies as the driving force, Thomas Oatley draws on public choice models to develop an explanation of exchange rate cooperation based on domestic politics. The author then tests hypotheses derived from this model in a detailed consideration of the various efforts to stabilize currencies since the 1970s. Oatley argues that monetary policy has distributional effects and is used by policy makers to achieve domestic policy goals. Thus domestic politics plays an important role in defining the approach leaders take to monetary integration. Oatley suggests that leaders supported the creation of the European Monetary System because governments saw a link to the Bundesbank as a useful instrument to help slow the growth of wages, redistribute income from labor to capital, and achieve domestic stabilization. The later collapse of the System reflected the unwillingness on the part of many leaders to continue to follow the Bundesbanks lead as well as the Bundesbanks own reservations about monetary integration.Given the rising strife in countries such as France over the domestic costs of monetary integration, Oatleys domestic politics explanation will be useful in understanding the continued efforts of European policy makers to work towards an integrated currency. This book should appeal to political scientists and economists interested in international cooperation, the European Union and exchange rate systems.Thomas Oatley is Assistant Professor of Political Science, University of North Carolina.

Real Exchange Rates and Trade Protectionism

Real exchange rate movements are robustly related to the rise and fall of trade protectionism. I demonstrate this by presenting a theoretical model that incorporates the real exchange rate into a standard factor proportions model of trade policy preferences. The model demonstrates why some firms trade policy preferences, and thus total demands for protectionism, change in response to real exchange rate movements. I evaluate the model with data on antidumping investigations in six industrialized countries between the late 1970s and 2004. The exercise suggests that the real exchange rate hypothesis offers a more compelling explanation for protectionist waves than the business cycle hypothesis.

Why is Stabilization Sometimes Delayed?: Reevaluating the Regime-Type Hypothesis

Existing work on the politics of stabilization has failed to find compelling evidence of a regime-type effect. This article reformulates and reevaluates the regime-type hypothesis. It is argued that regime type does not have an independent impact on the timing of stabilization. Instead, regime type influences the extent to which societal opposition and distributive conflict will delay stabilization. Societal opposition and distributive conflict are likely to delay stabilization in democratic regimes, because governments must worry about maintaining power. Such societal dynamics are less likely to delay stabilization in authoritarian regimes. Using a sample of 92 high-inflation episodes, precisely these regime-specific dynamics surrounding the politics of stabilization were found. Governments in democratic regimes want to stabilize rapidly but often cannot overcome societal opposition and distributive conflict to do so. Authoritarian regimes are substantially less constrained by societal opposition and distributive conflict but have less incentive to stabilize rapidly.

Multilateralizing Trade and Payments in Postwar Europe

Europes postwar shift to multilateral trade and payments arrangements was complicated by three factors. Distributional problems and uncertainty about the state of the world made European governments reluctant to adopt multilateral arrangements without financial support from the United States. An enforcement problem made U.S. policymakers reluctant to finance a European multilateral trading system. The severity of these problems was reduced by institutional designs that combined flexibility, centralization, and particular decision rules. Centralization and flexibility reduced uncertainty and softened distributive conflict. Centralization and particular decision rules solved the enforcement problem that U.S. policymakers faced.

The Domestic Rooting of Financial Regulation in an Era of Global Capital Markets

The financial crisis that began in 2007 has forced academics and policymakers to reexamine regulatory policy at the domestic and international levels. In an op-ed in the Washington Post during the height of the crisis, Prime Minister Gordon Brown (as he then was) called for ‘crossborder supervision of financial institutions; shared global standards for accounting and regulation; a more responsible approach to executive remuneration that rewards hard work, effort and enterprise but not irresponsible risk-taking; and the renewal of our international institutions to make them effective early-warning systems for the world economy’ (Brown 2008). Similar responses were not only common following the current crisis, they continue a history of introspection following financial upheavals: in the United States (US), the GlassSteagall Banking Act of 1933 -which established federal deposit insurance and separated commercial from investment banking -was a response to the waves of bank failures that exacerbated the Great Depression. In 2010, the United Kingdom (UK) reacted to the subprime financial crisis by moving to abolish its primary financial regulator, the Financial Services Authority, and giving its authority to several other agencies including the Bank of England and the Consumer Protection and Markets Authority, a new prudential supervision authority. At the international level, the Basel Committee on Banking Supervision was formed to provide a platform for national governments to coordinate policy after policymakers mis-handled the liquidation of the German Bank Herstatt in 1974, thereby sparking an international controversy. The Basel Capital Accord (Basel I), which established minimum capital adequacy requirements across the G-10 countries, was agreed following the exposure of banks in the G-10 countries to the Latin American debt crises in the 1980s. The Revised Common Framework (Basel II) followed the East Asian financial crises in the 1990s. The Basel Committee has