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

63 Pages Posted: 20 Oct 2015  

Manuel Funke

Free University of Berlin (FUB)

Moritz Schularick

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

Christoph Trebesch

Ludwig Maximilian University of Munich; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: October 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: economic voting, financial crises, polarization, policy uncertainty

JEL Classification: D72, E44, G01

Suggested Citation

Funke, Manuel and Schularick, Moritz and Trebesch, Christoph, Going to Extremes: Politics after Financial Crises, 1870-2014 (October 2015). CEPR Discussion Paper No. DP10884. Available at SSRN: https://ssrn.com/abstract=2676590

Manuel Funke (Contact Author)

Free University of Berlin (FUB) ( email )

Kaiserswerther Str. 16-18
Berlin, Berlin 14195
Germany

Moritz Schularick

University of Bonn - Department of Economics ( email )

Bonn
Germany

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Christoph Trebesch

Ludwig Maximilian University of Munich ( email )

Schackstr. 4
Munich, 80539
Germany

HOME PAGE: http://https://sites.google.com/site/christophtrebesch/

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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