Thomas Sattler

Do Markets Punish Left Governments

The political economy literature finds that stock markets drop after left-wing and increase after right-wing electoral victories. This study shows that the size of this reaction strongly depends on the political constraints that the incoming government faces. When constraints are high, the discretion of governments to implement their preferred policies is low, which implies that election outcomes are less relevant for financial investors. The analysis of an original dataset of stock market reactions to 205 elections since the 1950s confirms this conjecture. Stocks drop considerably after the election of a left government and increase after the election of a right government, but only in low-constraints countries. These partisan effects on stocks are highly persistent and even become stronger over time when additional information about the composition of the incoming government becomes available. However, the effects of elections on stocks fully disappear when political constraints are high.

Democratic accountability in open economies

We analyze democratic accountability in open economies based on different hypotheses about political evaluations and government responsiveness. Specifically, we assess whether citizens primarily rely on government policies or if they focus on economic outcomes resulting from these policies to evaluate governments. Our empirical analysis relies on Bayesian structural vector autoregression models for the British economy, aggregate monthly measures of public opinion, and economic evaluations from 1984 to 2006. We find that voters continuously monitor and strongly respond contemporaneously to changes in monetary and fiscal policies, but less to changes in macroeconomic outcomes. Voters also respond to policies differently when institutions change. When the Bank of England became politically independent, citizens shifted their attention toward fiscal policy, and the role of monetary policy in their evaluations decreased significantly. Finally, politicians respond to voting behavior by adjusting their policies in a sensible way. When vote intentions and approval decrease, the government reacts to the public by adjusting fiscal policy and, before the Bank of England became independent, also monetary policy.

Explaining Public Support for International Integration: How Do National Conditions and Treaty Characteristics Interact with Individual Beliefs?

In democratic societies, international integration requires popular approval. What determines the level of public support for international integration? We argue that national economic performance and the stringency of the proposed integration treaty modify the effects of two individual characteristics on public support: knowledge about the treaty and trust in the incumbent government. Poor economic performance amplifies the positive effect of treaty knowledge because informed citizens value international integration as collective insurance. However, reducing the stringency of the integration treaty through concessions undermines the positive effects of both treaty knowledge and trust in government because concessions mitigate concern even among uninformed and suspicious citizens. To test the theory, we estimate a random utility model on survey data on two repeated referenda on European integration: Maastricht I and II (Denmark, 1992/1993) and Lisbon I and II (Ireland, 2008/2009).

What Is Litigation in the World Trade Organization Worth

Conventional wisdom holds that the creation of international, court-like institutions helps countries to peacefully settle trade conflicts, thereby enhancing overall welfare. Many have argued, however, that these institutions remain ultimately ineffective because they merely reflect the distribution of power in the anarchic international system. We argue that international litigation provides economic spillovers that create opportunities for judicial free-riding and explore empirically how litigation in the World Trade Organization affects bilateral trade between countries involved in a trade dispute. We use a matching approach to compare the dynamics of trade flows between countries that experienced a panel ruling with trade relations of observably similar country pairs that did not experience a ruling. Based on this comparison we find that sectoral exports from complainant countries to the defendant increase by about

Fiscal Consolidation under Electoral Risk

7.7 billion in the three years after a panel ruling. However, countries that have proactively filed a complaint and carried the main costs of litigation do not systematically gain more than less-active third parties that merely joined an existing trade dispute. This suggests that international judicial institutions can provide positive economic externalities and may thereby lead to a less power-based distribution of the gains from trade.

Does WTO Dispute Settlement Enforce or Inform

The European debt crisis has uncovered a serious tension between democratic politics and market pressure in contemporary democracies. This tension arises when governments implement unpopular fiscal consolidation packages in order to raise their macroeconomic credibility among financial investors. Nonetheless, the dominant view in current research is that governments should not find it difficult to balance demands from voters and investors because the economic and political costs of fiscal consolidations are low. This would leave governments with sufficient room to promote fiscal consolidation according to their ideological agenda. We reexamine this proposition by studying how the risk of governments to be replaced in office affects the probability and timing of fiscal consolidation policies. The results show that governments associate significant electoral risk with consolidations because electorally vulnerable governments strategically avoid consolidations towards the end of the legislative term in order to minimize electoral punishment. Specifically, the predicted probability of consolidation decreases from 40% after an election to 13% towards the end of the term when the governments margin of victory is small. When the electoral margin is large, the probability of consolidation is roughly stable at around 35%. Electoral concerns are the most important political determinant of consolidations, leaving only a minor role to ideological concerns. Governments, hence, find it more difficult to reconcile political and economic pressures on fiscal policy than previous, influential research implies. The results suggest that existing studies underestimate the electoral risk associated with consolidations because they ignore the strategic behavior that our analysis establishes.

Fiscal consolidation under electoral risk: FISCAL CONSOLIDATION UNDER ELECTORAL RISK

Whereas some researchers emphasize how World Trade Organization (WTO) dispute settlement reduces complexity and clarifies legislation, others argue that dispute rulings promote co-operation by providing an enforcement mechanism. This article identifies empirical implications from these distinct arguments and tests them on WTO disputes from 1995 to 2006. The studys analytical approach combines a three-step coding of dispute escalation with a strategic bargaining model and statistical backwards induction to account for governments’ forward-looking behavior. It finds strong support for the argument that WTO dispute settlement primarily serves as an enforcement device. It finds much less support for the argument that dispute settlement reduces complexity and clarifies trade law. These results suggest that the role of WTO dispute settlement in generating information on acceptable trade policy standards is less relevant than proponents of the complexity argument tend to assume.

Sind WTO-Konflikte im Bereich des Umwelt- und Verbraucherschutzes eskalationsträchtiger als andere WTO-Konflikte?

The European debt crisis has uncovered a serious tension between democratic politics and market pressure in contemporary democracies. This tension arises when governments implement unpopular fiscal consolidation packages in order to raise their macroeconomic credibility among financial investors. Nonetheless, the dominant view in current research is that governments should not find it difficult to balance demands from voters and investors because the economic and political costs of fiscal consolidations are low. This would leave governments with sufficient room to promote fiscal consolidation according to their ideological agenda. We reexamine this proposition by studying how the risk of governments to be replaced in office affects the probability and timing of fiscal consolidation policies. The results show that governments associate significant electoral risk with consolidations because electorally vulnerable governments strategically avoid consolidations towards the end of the legislative term in order to minimize electoral punishment. Specifically, the predicted probability of consolidation decreases from 40% after an election to 13% towards the end of the term when the governments margin of victory is small. When the electoral margin is large, the probability of consolidation is roughly stable at around 35%. Electoral concerns are the most important political determinant of consolidations, leaving only a minor role to ideological concerns. Governments, hence, find it more difficult to reconcile political and economic pressures on fiscal policy than previous, influential research implies. The results suggest that existing studies underestimate the electoral risk associated with consolidations because they ignore the strategic behavior that our analysis establishes.

Globalization and Government Short-Term Room to Maneuver in Economic Policy. An Empirical Analysis of Reactions to Currency Crises

Dieser Beitrag befasst sich mit der Hypothese, dass WTO-Konflikte im Umwelt- und Verbraucherschutzbereich (UVS) schwieriger zu losen sind und damit haufiger eskalieren, weil die Beschaffenheit der umstrittenen policies graduelle Konzessio- nen des Beklagten an den Klager sowie Kompensationen an verlierende Interessen- gruppen innerhalb des beklagten Staates erschwert. Wir testen diese Hypothese mit Daten zu 506 WTO-Konfliktdyaden im Zeitraum 1995-2003 mit Hilfe von Selek- tions-Modellen. Die Resultate zeigen, dass ceteris paribus und im Widerspruch zu unserer Hypothese sowie gangigen Annahmen in der Fallstudien-basierten Litera- tur UVS-Konflikte weniger haufig von der Konsultations- auf die Panel- oder Appel- late Body-Stufe eskalieren als Nicht-UVS-Konflikte. Sie zeigen aber auch, dass UVS-Konflikte, wenn sie einmal den Eskalationsschritt zum Panel durchlaufen haben, haufiger in compliance-Dispute munden. Mittels neuer Daten, eines verbes- serten methodischen Instrumentariums sowie eines inkrementell weiterentwickelten theoretischen Arguments demonstrieren wir somit den Bedarf nach einem starker ausdifferenzierten theoretischen Modell, das die Varianz in der Konflikttrachtigkeit zwischen den einzelnen WTO-Eskalationsstufen erklart.

Dispute-Escalation in the WTO: Are Conflicts Over Environment, Health and Safety Regulation Riskier?

This article assesses the popular view that currency crises represent a prime example of the constraints that globalization imposes on government room to maneuver. We show that governments in fact have the possibility to respond to speculative pressure in different ways. Whether or not policymakers succumb to this pressure is not solely determined by economic factors but also a question of political considerations. Political preferences, institutions, and events significantly affect policy responses to currency crises. Our results suggest that national governments retain substantial short-run policy autonomy even in highly internationalized policy areas such as monetary and exchange rate policy.