Financial regulatory cycles: A political economy model

Pooya Almasi, Jihad Dagher and Carlo Prato

Journal of Financial Intermediation, 2025, vol. 63, issue C

Abstract: A historical look at financial boom-bust cycles shows that pro-cyclicality in financial regulation is a common and recurring pattern. This paper shows that inefficient regulatory cycles can naturally arise when electoral concerns are introduced into a simple model of financial intermediation. We explore how financial innovations, public opinion and policymakers’ incentives shape financial regulation within this framework. We show that in the presence of incompetent politicians, competent politicians take regulatory risks to signal their competence. This amplifies the influence of public opinion on policy, leading to an ex ante inefficient pro-cyclicality in financial regulation.

Keywords: Financial regulation; Boom-bust cycles; Elections; Financial innovations (search for similar items in EconPapers)
JEL-codes: D72 D82 G18 G21 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:63:y:2025:i:c:s1042957325000324

DOI: 10.1016/j.jfi.2025.101164

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