How do governments' institutional choices affect the operation of financial market pressures? In the previous chapter, I consider some of the means by which domestic political institutions affect government responses to financial market pressures. In this chapter, I consider another facet of the impact of national institutions on financial market–government interactions. I evaluate various institutional means by which governments can alter their relationship with global capital markets. Particularly in the advanced capitalist democracies, governments have choices regarding the extent to and ways in which they interact with global capital markets. Nations are differently integrated into the global capital market; the choices governments make regarding integration are at least partly exogenous to economic globalization, as well as to purely economic considerations. They reflect instead domestic political contests. In other words, I suggest that, in many cases, governments can and do respond to international market pressures by changing some institutions, rather than by changing economic policies.

I evaluate three types of policies: policies that alter market participants' expectations regarding macroeconomic outcomes, policies that insulate particular groups of investors from certain kinds of investment risks, and policies that insulate governments from activity in international financial markets. In general, I argue that, particularly in advanced capitalist democracies, governments have some significant degree of choice regarding these policies: they are not forced by financial market pressures to make particular institutional changes.