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The Role of Politics in Crisis in Financial Markets

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  • Paola Montero Ledezma

    (Universidad Privada Boliviana)

Abstract

In this paper, we embed the key political mechanisms, specific to developing countries, into a political-economic model of financial crises. In this setup, financial market failures allow opportune government intervention to restore optimal allocation of resources. However, bad public policies could provoke financial crises. We find that the political interests and individuals’ 1-dimensional heterogeneity, in terms of productivity, lead to different preferred policies between the median-productive and mean-productive economic agents, which might in turn induce to bad public intervention. Therefore, the larger the difference between these two reference individuals, the higher the probability of financial crises. We also discuss some features of the financial crises in Argentina (2001-2002) and its similarities with our model.

Suggested Citation

  • Paola Montero Ledezma, 2018. "The Role of Politics in Crisis in Financial Markets," Investigación & Desarrollo, Universidad Privada Boliviana, vol. 18(1), pages 5-21.
    • Handle: RePEc:iad:wpaper:0118
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    More about this item

    Keywords

    Financial Crises; Political Economy; Emerging Markets; Government Intervention.;
    All these keywords.

    JEL classification:

    • B23 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Econometrics; Quantitative and Mathematical Studies

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