The Role of Political Economy in Shaping Post-Crisis Financial Regulations and Economic Recovery

Abstract

Financial crises represent critical junctures where the vulnerabilities of the world's market system become apparent, thus necessitating strict governmental intervention through regulatory reforms. Conventional economics usually regards financial regulations as a technical procedure to address risks. In contrast, this paper argues that the process of economic stability can be wholly achieved in the domain of political economy. The central question of focus here concerns how changes in ideological beliefs, institutional settings, and lobbying by special interest groups affect financial regulations as a response mechanism to systemic financial crises. The primary objective of this paper is to evaluate the role of political economy in the formulation of financial regulations after the 2008 financial crisis and their subsequent outcomes for economic stability. Using a methodology centered on qualitative and analytical techniques under the Political Economy Analysis framework, this paper gathers data from global financial institutions and comparable country cases. Key research insights reveal that the Regulatory Sine Curve leads to the weakening of regulation systems caused by their temporally distant nature from the crisis environment, usually characterized by a greater focus on growth rather than stability. The conclusion reached is that recovery can be successfully maintained as long as the government ensures its regulatory institutions remain immune to the impacts of political lobbying and special interest groups.