Research Statement
Kelly Philip Wurtz
Trinity College
My research interests intersect the fields of international relations and comparative politics, with an emphasis on international political economy. My main focus is on the political causes and consequences of capital mobility. I am interested in the public policy responses at the national and international level to increasing flows of capital. Once states have chosen to integrate into international capital markets, how do they structure their domestic supervision of those markets, and what attempts, if any, do they make to coordinate this response with those of other countries? In the short term, my research agenda is to refine the results of my dissertation into a series of articles to submit for publication. In the medium term, I plan to explore several issues raised, but not explored, in my dissertation related to basic regulation of banking systems, including the causes and consequences of deposit insurance and the relationship between remittance flows and foreign currency deposit accounts. Finally, my next long-term project will investigate the regulatory dimensions of the European side of the current financial crisis, both in terms of the origins of the crisis and the regulatory responses to the crisis.
Dissertation Research
In my dissertation, “Depositing Credibility: Capital Account Liberalization, Political Responsiveness, and Foreign Currency Deposits,” I explore how politicians respond to increasing competition from external currencies and show that their responses are contingent upon the institutional environment in which their choices are made. Institutions, including property rights regimes and rules determining political responsiveness, serve as intervening variables that influence how governments engage with and respond to increasing levels of capital mobility. When governments face institutional incentives to listen to the vast majority of their citizens, they are likely to respond differently than if they only care about a small subset of the population by providing regulations that benefit the average citizen, rather than a narrow elite.. Moreover, when this is combined with strong, credible protection of property rights, they have the viable option of fighting unstable macroeconomic conditions by allowing their residents to open unrestricted bank accounts denominated in foreign currencies. In other words, allowing unrestricted foreign currency deposits becomes one more item in the toolbox of credibility-building mechanisms that governments have to deal with inflation. However, for those governments possessing weak protection of property rights, a lack of credible commitment to stable macroeconomic policies makes unrestricted deposits highly unlikely and restricted deposits the more likely outcome.
I test this argument using discrete-time, event-history duration analysis on a new dataset of regulations of resident foreign currency deposit accounts. I coded the data, which covers a sample of developed and developing countries, from the International Monetary Fund’s Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER). My analysis utilizes both binary, cross-sectional time-series set ups as well as multinomial approaches that model competing risks among the choices of regulatory structure. The first article from my dissertation will present the results from the competing risks analysis.
The empirical results provide a political-economic explanation for what form of deposit regulations politicians are likely to choose, as well as when those regulations are most likely to change. Governments and the individuals that populate those governments are not machines translating economic forces from the international economy, nor do they only aggregate demands of competing domestic interest groups into public policy. Banking regulations emerge from the strategic interaction of politicians, their constituencies, and the surrounding economic climate. Recognizing this interaction brings the issue of credibility to the front of the question.
In my empirical analysis, I find support for my three-part argument about where and when one should find governments allowing unrestricted foreign currency deposit accounts. These sorts of accounts are most likely where: a) politicians respond to the interests of the broad population rather than a narrow, elite subset of their citizens (as measured by the size of the winning coalition); b) where protections of property rights are credibly respected (proxied by the quality of the legal system); and c) when the country has experienced unstable macroeconomic conditions (measured by the standard deviation of logged inflation). When all three of these conditions hold, the provision of unrestricted FC deposit accounts can be used like other forms of monetary delegation as a strategy for governments to create credibility on their commitment to pursuing stable macroeconomic policies.
Like other forms of delegation, however, this strategy is more effective in some contexts than others. If the level of macroeconomic instability is too extreme, unrestricted deposits are unlikely to be effective commitment devices. Additionally, for those governments that have previously liberalized partially to allow restricted deposits, unrestricted deposits are unlikely to be good candidates for creating credibility. For these governments, I find that once they allow restricted deposits, they tend to remain there for some time and are more likely to engage in complete liberalization during periods of low levels of inflation variability. The second paper from the dissertation will expand the analysis on partial reform.
Regulations on resident FC deposit accounts, however, are a form of capital control that applies only domestic residents; thus, it is not surprising that allowing these accounts is also related to the broader process of capital account liberalization. The story, however, is not entirely straightforward, as I find that countries that are already have more open capital accounts are less likely to allow unrestricted accounts. Those countries that were in the process of opening their capital accounts were more likely to allow unrestricted deposits. The magnitude of these effects, however, was not as large as the magnitude of my key explanatory variables.
However, one variable that was consistently related to both restricted and unrestricted deposit accounts was worker remittance flows. Thus, the third paper from the dissertation will explore the use of foreign currency accounts to attract and retain remittance flows. Specifically, whether higher levels of remittances lead to liberalization of foreign currency deposits or if these accounts are used to encourage higher levels of remittances.
Dissertation Extensions
The evidence presented in my dissertation provides insight into the role of political incentives in shaping the regulatory environment of the financial sector. Our comparative understanding of banking system regulations remains in its infancy, although it is increasingly receiving more attention, both in terms of theoretical discussions and development of comparative, quantitative data. While my project focused on a single aspect of bank activity, the empirical support for the analytic story driven by political responsiveness is suggestive for future research into the emerging regulatory environment in both developing and developed nations.
Extant analyses of the political economy of banking regulations tend to view the process as an either/or situation where politicians are motivated either by concerns of overall efficiency and social welfare or narrow, special interest group pressure. My research suggests that the situation is not so cut-and-dry, and that political institutions are important for shaping the way in which politicians set the rules of the game for financial regulation. One paper will build upon the recent work on delegation of banking regulatory authority to separate or autonomous agencies. My dissertation suggests that when politicians are more responsive to a broad audience, they would be more likely to delegate authority to autonomous agencies, while those with narrow responsiveness would be more likely to not delegate at all, or to delegate to separate, but controllable agency that could be shaped to benefit the politicians’ special interests.
Having created a new dataset on foreign currency deposit regulations, additional papers will incorporate this data as a right-hand side, explanatory variable, beginning with the issue of deposit insurance. The classic debate over deposit insurance involves balancing concerns about moral hazard and risky behavior by deposit-holding institutions with promoting system stability and preventing bank runs. Incorporating insurance of foreign currency deposits will allow further insight into the effects of de facto dollarization on currency and banking crises, as well as our understanding of the political economy of deposit insurance.
One paper will examine the role of credibility in the choice of expanding deposit insurance to include foreign currency deposits. Governments that are less credible on the property rights protection might be more likely to include foreign currencies in their deposit insurance schemes to assure depositors and encourage them to place their holdings in the banking system. Moreover, less credible governments might be more likely to adopt explicit insurance schemes in general. On the other hand, if these policies were viewed skeptically as well by the general populace, governments might be less likely to adopt insurance at all.
A second paper will look at how variation in deposit insurance coverage for foreign currency deposits affects the behavior of firms and individuals, as the presence of credible insurance coverage could encourage higher levels of FC deposits. The mixture of regulatory arrangements, with some countries lacking any deposit insurance at all, some insuring only local currency, and others covering foreign currencies as well provides the possibility of a quasi-experiment set up to isolate the effects of insurance for FC deposits. Beyond potentially increasing the level of actual deposits, the (potential) moral hazard effects of insurance could create specific causal mechanisms connecting FC deposits to banking and financial crises. Comparing the behavior in countries where insurance includes FC deposits to those that do not, should allow leverage over whether any potential moral hazard effects are the result of insurance in general, or on FC deposits specifically.
A third paper will investigate how concerns about credibility affect government treatment of bank deposits in the midst of financial crises. There is significant variation in how governments treat bank deposits of both domestic and foreign currencies in the wake of financial and banking crises. Governments do no not consistently react by freezing deposits. Moreover, even when governments do step in to freeze accounts, their behavior is not always uniform; in some cases they freeze both domestic and foreign currency deposits, while in other cases they target only one or the other. Consistent with the argument in this dissertation, I would expect those governments with more credibility in respecting property rights to be less likely to freeze deposits overall. I would also expect that those governments that have liberalized to allow unrestricted deposits would also be less likely to freeze foreign currency deposits, given the resulting negative impact such intervention would have on the governments’ reputation. In other words, if my dissertation is correct that the decision to liberalize is motivated by attempts to create credibility, then those concerns should carry over in the persistence and durability of liberalization.
Finally, while my dissertation explores the institutional foundations of credibility, I am also interested in how non-material factors and questions of identity influence monetary credibility. In a co-authored working paper with Andrew Poe, “Currencies and the Aesthetics of Nationalism,” we combine insights from international political economy and normative political theory to explain the choice of imagery on the banknotes of the Euro. Ultimately, it is our claim that there is a specific relationship between currencies and the aesthetics of nationalism, and that the European Union, as a super-national polity, must engage in a different style of politics that overcomes both the economic interests and the historical legacy of the nation-building strategies of member states. We use empirical evidence drawn from the EU decisions on the physical appearance of the Euro and public opinion data on attitudes toward the Euro to test our theory.
Long-term plans
In the wake of current global credit crisis, the need for effective regulation of domestic and international of banking systems is clear. For my next long-term project, I plan on examining the regulatory dimensions of the current crisis and the resulting political dynamics of the eventual national- and international-level responses to the crisis. My primary interest is to focus on the European side of question, as it should provide interesting variation across different national experiences of the crisis, domestic regulatory environments, and preferences over short- and long-term policy responses; all within the context of intra-regional and international bargaining and policymaking. Many of the significant policy issues surrounding the crisis have yet to be resolved, but whether or not governments achieve their goals or not, these issues will make for fruitful research grounds as I wrap up my dissertation and related extensions and move on to the next big project.
