Room to Move: International Financial Markets and National Welfare States

Abstract

A central research question in international political economy concerns the influence of financial markets on government policy outcomes. To what extent does international capital mobility limit government policy choices? I evaluate the relationship between international financial markets and government policy outcomes, with a focus on the government bond market in developed democracies. Evidence includes interviews with financial market participants and a cross-sectional time-series analysis of the determinants of interest rates. This evaluation suggests that governments of developed democracies face strong but narrowly defined financial market pressures. Financial market participants are concerned with a few macroeconomic policy indicators, including inflation rates and government deficit/GDP ratios, but not with micropolicy indicators, such as the distribution of government spending across functional categories. In these areas, governments retain policymaking autonomy. I conclude by exploring the role of financial market influences within domestic politics and offering suggestions for further research.