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Article

The Political Economy of Financial Markets  

Federico Maria Ferrara and Thomas Sattler

The relationship between politics and financial markets is central for many, if not most, political economy arguments. The existing literature focuses on the effect of domestic and international political interests, institutions, and policy decisions on returns and volatility in stock, bond, and foreign exchange markets. This research bears implications for three major debates in political science: the distributive effects of politics, globalization and state autonomy, and the political roots of economic credibility and its tensions with democratic accountability. While the study of politics and financial markets is complicated by several theoretical and empirical challenges, recent methodological innovations in political research provide a window of opportunity for the development of the field.

Article

Signaling in Foreign Policy  

Erik A. Gartzke, Shannon Carcelli, J Andres Gannon, and Jiakun Jack Zhang

Costly signaling offers a solution to many foreign policy dilemmas. Though most commonly studied in the context of the bargaining theory of war, signaling can also play an important role in nonzero-sum interactions such as those characterized by chicken (e.g., nuclear deterrence) and the prisoner’s dilemma (e.g., tariff reductions). A rich game theoretic literature explains how actors can signal credibly in these situations. The most prominent strategies are sinking costs (actions that are costly ex ante) or tying hands (actions that are costly ex post). These strategies are theoretically elegant but have generated considerable controversy when studied empirically. One controversy concerns the existence of hand-tying domestic audience costs under different regime types. A second controversy involves the degree to which sinking costs increase or decrease the risk of war. These controversies speak to the inherent tension between theories of strategic interactions and measuring their outcomes in the foreign policy process, where some events are off the equilibrium path and thus unobserved. The limited availability of foreign policy data was a major hindrance in earlier empirical efforts. Even as the quality of this data has improved, focus has been on the outcomes of conflict (crisis onset, escalation to war, victory, defeat) rather than the strategy. This is problematic given that all crises are sequential in nature and understanding the action–reaction cycle is vital to illuminating patterns of war, capitulation, and settlement. The frontier of research in the signaling literature is in bridging this gap. The advent of big data and machine learning has enabled more systematic empirical analysis of strategic moves by various foreign policy actors, including signaling. Some researchers, such as Lindsay & Gartzke, are harnessing these new data and methods to explore the means of signaling. Other scholars are beginning to ask questions about the efficacy of public versus private signaling, the role of ambiguity, and dyadic versus multi-actor signaling. This new wave of research seeks to nudge signaling closer to the concerns of foreign policy practitioners.

Article

Perfect Deterrence Theory  

Frank C. Zagare

Perfect deterrence theory and classical deterrence theory are two theoretical frameworks that have divergent empirical implications and dissimilar policy recommendations. In perfect deterrence theory, threat credibility plays a central role in the operation of both direct and extended deterrence relationships. But credible threats are neither necessary nor sufficient for deterrence to prevail, and under certain conditions, the presence of a credible threat may actually undermine deterrence. In perfect deterrence theory, the cost of conflict and status quo evaluations are also important strategic variables. Classical deterrence theorists tend to fixate on the former and ignore the latter. This theoretical oversight precludes a nuanced understanding of the dynamics of deterrence.

Article

The Concept of Deterrence and Deterrence Theory  

Patrick M. Morgan

Deterrence is an old practice, readily defined and described, widely employed but unevenly effective and of questionable reliability. Elevated to prominence after World War II and the arrival of nuclear weapons, deterrence became the central recourse for sustaining international and internal security and stability among and within states in an era of serious conflict. With regard to the presence of nuclear weapons in particular but also to deal with non-nuclear violent conflict, deterrence has been employed to prevent (or at least limit) the destruction of states, societies, and ultimately humanity. The greatest success has been that no nuclear weapons have been used for destructive purposes since the end of World War II in 1945. Deterrence has been widely used below the nuclear level but with very uneven results. Deterrence has been intensively studied and tested as to its use in terms of strategy in international relations, the maintenance of stability in international relations, the conduct of violence and warfare in both international and domestic contexts, and in political affairs. Since deterrence is the use of threats to block or reduce the inflicting of serious harm, the existence of capacities for inflicting harm are readily maintained and periodically applied, so available deterrence capabilities provide a degree of continuing concern and a regular desire to at least do away with nuclear weapons and threats. A brief period in the ending of the Cold War saw a serious effort to reduce the reliance on deterrence, particularly nuclear deterrence, in international politics but it was soon replaced by serious movement in the opposite direction. Yet efforts to reduce the need for and use of deterrence continue. Extensive efforts have been applied in the development of theories of deterrence, particularly to generate empirical theory in order to better understand and apply deterrence but without arriving at widely accepted results. This is the result of the considerable complexity of the subject, the activity involved, and the behavior of the practitioners. The conduct of deterrence is now broader and deeper than before. It is under greater pressure due to technological, political, and cultural developments, and operates in a much more elaborate overall environment including space, cyberspace, and oceanic environs. Thus the goal of developing effective empirical theory on deterrence remains, at various levels, still incompletely attained. The same is true of mastering deterrence in practice. Nevertheless, deterrence remains important and fascinating.