Understanding Causal Mechanisms that Make Financial Systems More (in)Stable

Causal mechanisms (or processes) aim to explain why and how certain outcomes are produced by the actions of various actors embedded in various contexts. Here the emphasis is on properties of actors, their interactions and actions informed by micro and macro-level contexts. There have been wide consensus in the policy science and political science disciplines that causal mechanisms are understudied (Gerring, 2008; Capano, 2009; Howlett and Cashore, 2009; Real-Dato 2009; Falleti and Lynch, 2009; Capoccia, 2016). Moreover, the current political economy scholarship is still searching for ‘the right intellectual questions of the [global financial] crisis and to guide us toward appropriate responses’ (Green and Hay 2015: 334). On this account, it has been recently argued that there is a key lesson for politicians, policymakers, and bureaucrats who are engaged in ‘successful policy design’ (Howlett 2009, 2011): They should identify and steer a set of structural and institutional complementarities, and agency level enabling conditions guiding policy design and implementation that would dynamically guard against excessive risk taking over a period of years (Bakir, 2013, 2017).

The  policy design literature has produced much insights on the various ways in which policy means, or ‘instruments’, can by classified and combined as ‘policy mixes’ (Elmore 1987, va der Doelen 1998, Gunningham et al. 1998). This recognition that the utilization of policy instruments by governments as part of a larger policy mix adds a significant dose of nuance and realism to the study of policy instruments. Scholars of policy design have subsequently sought to understand the internal workings of the policy mix, studying complementarities and interactions between policy instruments within a mix, and emphasizing how processes of policy patching or layering can result in greater consistency, coherence and congruence in a policy mix (van der Heijden 2011; Rayner 2013; Howlett and Rayner 2013; Howlett et al. (2014).

However, there remains insufficient specification of the exact relationship between these policy instruments or instrument mixes and the policy goals which they purport to achieve. Despite the pride of place that this policy means-goals connection holds in policy design studies, the reality is that insufficient work has been done on the causal mechanisms that link the two design components. Furthermore, policy instruments do not exist in a vacuum. Policy instrument choice is often influenced by contextual elements such as political or organizational culture and social relations (Linder and Peters 1989, 1990; Salamon 1989; Howlett 2004; Woo, 2016).

This panel aims to address a pressing practical and intellectual need for 1) a better understanding of how specific causal processes effect financial stability and 2) how causal mechanisms may be designed or managed in practice through aligning and reinforcing various incentives thereby producing financial stability that would not otherwise occur. Specifically it calls for cutting-edge empirical and theoretical research on causal processes generated by structural, institutional and organisational complementarities that reinforce each other’s incentives and compensate for each other’s shortcomings that influence policy design and implementation processes and various actors’ behaviour and financial stability (See Campbell, 2011; Bakir, 2013, 2017; Woo, 2016).

It encourages conceptual and empirical contributions on (1) our conceptual understanding of mechanism-based explanations that explores why and how financial (in)stability is produced; (2) causal processes that resides at the level of the interactions between context dependent actors; (3) causal linkages between policy subsystems and policy mixes; (4) interactions among interdependent structural and institutional complementarities as causal mechanisms that inform actor behaviour and financial stability; (5) how a balance between policy mixes can be achieved so that they can mutually reinforce each other and compensate for the shortcomings of another in the realm of finance; (6) causal mechanisms in the post-GFC era that produce institutional reforms in regulatory governance arrangements such as multiple, unified, or twin peaks models; and (7) a systematic approach that enhances qualitative rigor in inductive interpretive research that makes a causal argument credible (list is not exhaustive).

Selected References

Bakir, C. (2013). Bank Behaviour and Resilience: The Effects of Structures, Institutions and Agents. Basingstoke: Palgrave Macmillan.

Bakir, C., 2017. How can interactions among interdependent structures, institutions, and agents inform financial stability? What we have still to learn from global financial crisis. Policy Sciences (forthcoming).

Campbell, J.L., 2011. The U.S. Financial Crisis: Lessons for Theories of Institutional Complementarity. Socioeconomic Review, 9 (2), 211–234.

Capano, G. (2009). Understanding Policy Change as an Epistemological and Theoretical Problem, Journal of Comparative Policy Analysis 2009, 11, pp. 7-31

Capoccia, G., 2016. When do Institutions “Bite”? Historical Institutionalism and the Politics of Institutional Change. Comparative Political Studies, 49 (8), 1095-1127.

Elmore, R.F., 1987. Instruments and Strategy in Public Policy. Review of Policy Research, 7 (1), 174–186.

Falleti, Tulia G., and Lynch, J.F., 2009. Context and causal mechanisms in political analysis. Comparative political studies, 42 (9): 1143-1166.

Gerring, J., 2008. The Mechanismic Worldview: Thinking Inside the Box. British Journal of Political Science, 38 (1), 161–179.

Green, J., and Hay, C., 2015. Towards a new political economy of the crisis: Getting what went wrong right. New Political Economy, 20 (3), 331–341.

Gunningham N., Grabosky P., and Sinclair D., 1998. Smart Regulation: Designing Environmental Policy. New York: Oxford University Press.

Howlett, M., 2004. Beyond Good and Evil in Policy Implementation: Instrument Mixes,Implementation Styles, and Second Generation Theories of Policy Instrument Choice. Policy & Society, 23 (2), 1–17.

Howlett, M., 2009. Governance Modes, Policy Regimes and Operational Plans: A Multi-Level Nested model of Policy Instrument Choice and Policy Design. Policy Sciences, 42 (1), 73–89.

Howlett, M., 2011. Designing Public Policies: Principles and Instruments, 1st edn. London: Routledge.

Howlett, M., and Cashore, B., 2009. The Dependent Variable Problem in the Study of Policy Change: Understanding Policy Change as a Methodological Problem. Journal of Comparative Policy Analysis, 11 (1), 33-46.

Howlett M., and Rayner J., 2013. Patching vs Packaging: Complementary Effects, Goodness of Fit, Degrees of Freedom and Intentionality in Policy Portfolio Design. Rochester, N.Y.: Social Science Research Network, SSRN Scholarly Paper No. ID 2273342.

Howlett M., Mukherjee I., and Woo J.J., 2014. From Tools to Toolkits in Policy Design Studies: The New Design Orientation and Policy Formulation Research. Policy & Politics, 43 (2), 291–311.

Linder SH, Peters BG (1990) Policy Formulation and the Challenge of Conscious Design. Evaluation and Program Planning, 13 (3), 303–311.

Rayner, J., 2013. On Smart Layering as Policy Design: Tackling the Biofuels Policy Mess in Canada and the United Kingdom.

Real-Dato, J., 2009. Mechanisms of Policy Change: A Proposal for a Synthetic Explanatory Framework. Journal of Comparative Policy Analysis, 11 (1), 117-143.

Salamon, L.M., 1989. Beyond Privatization: The Tools of Government Action. Washington, D.C.: The Urban Institute Press.

van der Doelen, F.C.J., 1998. The “Give-and-Take” Packaging of Policy Instruments: Optimizing, Legitimacy and Effectiveness. In: M-L. Bemelmans-Videc, R.C. Rist, and E. Vedung, eds. Carrots, Sticks , and Sermons: Policy Instruments and Their Evaluation. New Jersey: Transaction Publishers, 129–146.

van der Heijden, J., 2011. Institutional Layering: A Review of the Use of the Concept. Politics 31 (1), 9–18.

Woo, J.J., 2016. Business and Politics in Asia's Key Financial Centres: Hong Kong, Singapore and Shanghai. Singapore: Springer.

Understanding Causal Mechanisms that Make Financial Systems More (in)Stable

Causal mechanisms (or processes) aim to explain why and how certain outcomes are produced by the actions of various actors embedded in various contexts. Here the emphasis is on properties of actors, their interactions and actions informed by micro and macro-level contexts. Scholars of policy design have subsequently sought to understand the internal workings of the policy mix, studying complementarities and interactions between policy instruments within a mix, and emphasizing how processes of policy patching or layering can result in greater consistency, coherence and congruence in a policy mix. Indeed, it has been recently argued that there is a key lesson for politicians, policymakers, and bureaucrats who are engaged in ‘successful policy design’ : They should identify and steer a set of structural and institutional complementarities, and agency level enabling conditions guiding policy design and implementation that would dynamically guard against excessive risk taking over time.

This panel aims to address a pressing practical and intellectual need for 1) a better understanding of how specific causal processes effect financial stability and 2) how causal mechanisms may be designed or managed in practice through aligning and reinforcing various incentives thereby producing financial stability that would not otherwise occur. Specifically it calls for cutting-edge empirical and theoretical research on causal processes generated by structural, institutional and organisational complementarities that reinforce each other’s incentives and compensate for each other’s shortcomings that influence policy design and implementation processes and various actors’ behaviour and financial stability.

This panel encourages conceptual and empirical contributions on our conceptual understanding of mechanism-based explanations that explores why and how financial (in)stability is produced. It focuses on the following questions: (1) what are the causal processes that resides at the level of the interactions between context dependent actors; (2) what are the causal linkages between policy subsystems and policy mixes; (3) how and why do interactions among interdependent structural and institutional complementarities as causal mechanisms inform actor behaviour and financial stability; (4) how can a balance between policy mixes be achieved so that they can mutually reinforce each other and compensate for the shortcomings of another in the realm of finance; (5) what are the causal mechanisms in the post-GFC era that produce institutional reforms in regulatory governance arrangements such as multiple, unified, or twin peaks models; and (6) what are the  advances in systematic approaches that enhances qualitative rigor in inductive interpretive research that makes a causal argument credible (list is not exhaustive).