Understanding Political Economy of Financial Markets

The relationship between politics and financial markets is central to a substantial number of discussions, if not the vast majority. How do financial markets react to political events such as elections and regulatory agency decisions? And what type of political repercussions may be anticipated from financial market events, such as a financial crisis?

Political scientists and academics who research political economy are interested in the answers to these questions for several reasons.

The relationship between politics and financial markets, such as stock and foreign currency markets, is a key link in the causal chain tacitly or explicitly underpinning the economic activities, globalization and crises.

The Political Economy of Financial Markets: How does it work? 

1. First, knowing the relationship between politics and financial markets, such as the stock and foreign currency markets, is essential to comprehending the Political Economy of Financial Markets.
2. Second, how financial markets respond to political events or decisions shows how local and international politics impact resource allocation. These distributional effects are at the heart of political competition and conflict between interest groups, political parties, and governments, yet it may be difficult to objectively nail them down owing to their basic nature.
3. Lastly, full knowledge of the interrelationships between politics and financial markets is crucial for evaluating the origins and effects of the present financial crisis as well as its possible remedies. Because politics and financial markets are intricately interwoven, this is the case.

Summary of the Mechanism Offered by Political Economy of Financial Markets:

• Political economics is the academic field that examines how economic systems, such as capitalism and communism, operate in the real world.
• The objective of those who study political economics is to develop a knowledge of how history, culture, and customs influence an economic system.
• Global political economy is the study of how political considerations affect economic connections on a global scale.

How concerned are individuals who earn their profession trading in the stock market with politics, and what are their political leanings? 

According to this theory, the value of a portfolio of investments is dependent not only on the expected return but also on its standard deviation. This second factor is known as the portfolio’s associated risk. Politics is crucial for traders because the outcomes of political processes may have a direct influence on the future returns and volatility of assets held by financial investors. This indicates that the results of political processes are significant to merchants.

What part does political economy play in the operation of financial markets?

Since regulations have an immediate influence on the profitability of enterprises, stock markets, for instance, are very sensitive to political maneuverings on regulations.

Bond markets are more directly influenced by monetary and fiscal politics since inflation and budget deficits are often considered among the most influential forecasters of bond yields. Consequently, bond markets are more susceptible to monetary and fiscal policy.

In as much as currency markets are impacted by disparities in national inflation rates, they have a propensity to respond similarly to diverse government policies. However, international politics also have a significant impact, since it is the primary place where international forums coordinate their economic strategies.

What are the most significant distinctions between political economy of financial markets and more conventional economics theories?

In contrast, political economy retains a broader scope and a more comprehensive approach compared to traditional economics. As a consequence, political economics evaluates every topic in terms of its inherent power structures and class connections. The conclusion of this research is a more thorough understanding of the examined topic matter and surrounding connection networks.

Political economics may thus be seen as both a multidisciplinary and an interdisciplinary topic of study. The 2008 financial crisis has highlighted the necessity for extensive studies into the current financial system, its fundamental defects, new solution alternatives, and the urgency of establishing a new international financial architecture.

The Influence of Political Economy of Financial Markets on Actual Economy:

Political processes have significant distributive effects since politics influences the economic transactions of private persons and governments to engage in economic transactions via the allocation of taxes and expenditures. Initially, market fluctuations are a reflection of investors’ expectations of the effect of politics on economic actors. This effect may be evaluated at the market level by using both broad stock market indexes and industry-specific indices. Alternately, it may be computed by studying the stocks of a single company or a group of companies.

Second, volatility in the financial markets is the principal source of local and worldwide distributive conflicts. This is especially relevant in the context of the macroeconomic adjustment that follows a financial crisis.

Financial markets are a major source of heated political conflicts over distributive outcomes, making them essential to the study of politics. This is why financial markets are important to the study of politics. This becomes particularly apparent in the context of different forms of financial crises, such as those affecting banks, currencies, or sovereign debt, as well as combinations of these crises. Fear among market agents, as seen by declines in share prices and currency depreciations, requires governments and central banks to implement policies geared to restore investor confidence in each circumstance. This approach is fraught with high levels of conflict since it involves determining how the costs of resolving the crisis should be allocated.