Electoral Cycles in Prudential Regulation

Electoral Cycles in Prudential Regulation

A newly emerged consensus holds that policy makers should use macroprudential regulation to prevent financial crises or soften their impact on the real economy. Despite their widespread use, little is known about the political constraints that come with such tools. In this paper, I present evidence of a strong electoral cycle in changes to prudential regulation around 217 elections across 58 countries from 2000 through 2014. Regulation is substantially less likely to tighten for tools aimed at mortgage and consumer credit, particularly in periods with optimistic growth forecasts, higher bank profitability, or an increasing credit-to-GDP gap. In contrast to measures of monetary policy, I find very limited evidence that central bank independence has a moderating effect on this electoral cycle in prudential tools. Taken at face value, these results suggest that time-varying financial regulation may be subject to more severe political pressures than previously acknowledged.

Karsten Müller


June 2, 2018

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