Title:Does Globalization Lead to Policy Convergence? An Analysis of the Nexus between Politics and Financial Markets   (PDF 4.9MB)

Author(s): Thomas Sattler

Paper number and date: WP 10-4, October 2010

Abstract: Despite strong pressures from international nancial markets, political parties continue to propose policies that di er considerably. This article examines to what extent actual government policies have converged notwithstanding the distinct policies that parties embrace in their party manifestos, and whether potential policy convergence can be traced back to nancial openness. To answer these questions, the study analyzes stock market reactions to elections in industrialized democracies since the 1950s. If actual policies of government parties continue to diverge, stock prices should increase after a success of a nominally market-friendly party. Moreover, stocks should respond more strongly the more open the economy is to nancial ows because capital has better exit options. If actual policies have converged, the impact of nominal policy positions on stocks vanishes in more open economies because actual policies are similar for all governments. The results imply that overall policies have weakly converged.

Key Words: Globalization; Policy Convergence; Elections; Stock Markets


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