Going to Extremes: Politics after Financial Crises, 1870-2014

62 Pages Posted: 11 Nov 2015

See all articles by Manuel Funke

Manuel Funke

Free University of Berlin (FUB)

Moritz Schularick

University of Bonn - Department of Economics; Centre for Economic Policy Research (CEPR)

Christoph Trebesch

Kiel Institute for the World Economy; Centre for Economic Policy Research (CEPR)

Date Written: October 15, 2015

Abstract

Partisan conflict and policy uncertainty are frequently invoked as factors contributing to slow post-crisis recoveries. Recent events in Europe provide ample evidence that the political aftershocks of financial crises can be severe. In this paper we study the political fall-out from systemic financial crises over the past 140 years. We construct a new long-run dataset covering 20 advanced economies and more than 800 general elections. Our key finding is that policy uncertainty rises strongly after financial crises as government majorities shrink and polarization rises. After a crisis, voters seem to be particularly attracted to the political rhetoric of the extreme right, which often attributes blame to minorities or foreigners. On average, far-right parties increase their vote share by 30% after a financial crisis. Importantly, we do not observe similar political dynamics in normal recessions or after severe macroeconomic shocks that are not financial in nature.

Keywords: financial crises, economic voting, polarization, policy uncertainty

JEL Classification: D720, G010, E440

Suggested Citation

Funke, Manuel and Schularick, Moritz and Trebesch, Christoph, Going to Extremes: Politics after Financial Crises, 1870-2014 (October 15, 2015). CESifo Working Paper Series No. 5553. Available at SSRN: https://ssrn.com/abstract=2688897

Manuel Funke

Free University of Berlin (FUB) ( email )

Van't-Hoff-Str. 8
Berlin, Berlin 14195
Germany

Moritz Schularick (Contact Author)

University of Bonn - Department of Economics ( email )

Bonn
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Christoph Trebesch

Kiel Institute for the World Economy ( email )

P.O. Box 4309
Kiel, D-24100
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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