| This dissertation explores the relationship between international financial markets and government policy outcomes, with an emphasis on advanced industrial democracies. I seek to determine the extent to which national governments are constrained by external financial market pressures in the 1980s and 1990s and to delineate the implications of this constraint for domestic policy outcomes. I conclude that governments of developed democracies face a strong but narrow financial market constraint: financial market participants are concerned with and react strongly to aggregate monetary and fiscal policy outcomes. Provided governments conform to financial market preferences in these few areas, however, they are relatively unconstrained by financial market pressures in many other policy areas.;In Chapter 1, I develop hypotheses regarding the strength (the capacity of financial market participants to react to policy changes) and scope (the number of policy indicators considered by financial market participants) of the financial market constraint. I expect that high levels of international capital mobility will produce a strong financial market constraint. And, because of the types of investment risk that are salient to financial market participants, the financial market constraint facing developed democracies is narrow, while that facing emerging market economies is broad. I evaluate these hypotheses using several types of evidence: in the second half of Chapter 1, I use data from interviews with financial market participants who are active in the market for government bonds. In Chapter 2, I undertake a quantitative assessment, using pooled cross-sectional time series analysis for the 1981–1995 period, of the strong but narrow argument. Chapter 3 extends this research to emerging market economies. Using simple statistical analyses, an evaluation of sovereign credit ratings, and an additional set of interview data, I examine the hypothesis that governments of emerging market economies face a strong and broad financial market constraint. In each of these chapters, the evidence generally confirms my initial expectations.;In the final two chapters of the dissertation, I examine the ways in which national governments implement policies that affect the nature of the financial market constraint. Do these policies simply reflect financial market pressures, or do governments have autonomy regarding their choices of policies? I examine three types of government policies—those that alter macroeconomic outcomes, those that protect certain classes of investors from investment risk, and those that insulate governments from financial market pressures. I conclude that, particularly in developed democracies, governments remain able to make choices regarding these policies, and these choices reflect domestic distributional considerations. |
