Partisan Financial Cycles

In Politics in the New Hard Times: The Great Recession in Comparative Perspective. Edited by David A. Lake and Miles Kahler. Ithaca, NY: Cornell University Press, 2013 Forthcoming

44 Pages Posted: 27 May 2010 Last revised: 15 Nov 2012

See all articles by J. Lawrence Broz

J. Lawrence Broz

University of California, San Diego (UCSD) - Department of Political Science

Multiple version iconThere are 2 versions of this paper

Date Written: April 20, 2010

Abstract

Financial cycles of boom and bust are as old as finance itself – a fact that has led some observers to infer that human nature may be a fundamental cause of financial cycles. But “politics” also influences financial cycles by way of government policies and regulations. I argue that policies and regulations vary predictably with the partisan character of the government, creating a partisan-policy financial cycle in which conservative, pro-market governments preside over financial booms while left-wing governments are elected to office after crashes. My sample consists of all bank-centered financial crises to hit advanced countries since World War II, including the current “Subprime” crises – a total of 27 cases. I find that governments in power prior to major financial crises are more likely than the average OECD country to be right-of-center in political orientation. I also find that these governments are more likely than the OECD average to be associated with policies that predict crises: large fiscal and current account deficits, heavy borrowing from abroad, and lax bank regulation. However, once a major financial crisis occurs, the causal arrow flips and government partisanship becomes a consequence of crises. I find that the electorate moves to the left after a major financial crisis, and this leftward shift is associated with changes in government partisanship in that direction.

Suggested Citation

Broz, J. Lawrence, Partisan Financial Cycles (April 20, 2010). In Politics in the New Hard Times: The Great Recession in Comparative Perspective. Edited by David A. Lake and Miles Kahler. Ithaca, NY: Cornell University Press, 2013 Forthcoming . Available at SSRN: https://ssrn.com/abstract=1616374 or http://dx.doi.org/10.2139/ssrn.1616374

J. Lawrence Broz (Contact Author)

University of California, San Diego (UCSD) - Department of Political Science ( email )

9500 Gilman Drive
Code 0521
La Jolla, CA 92093-0521
United States

HOME PAGE: http://pages.ucsd.edu/~jlbroz/

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