Financial Crisis, Creditor-Debtor Conflict, and Political Extremism

78 Pages Posted: 10 Jan 2019

See all articles by Gyozo Gyongyosi

Gyozo Gyongyosi

Kiel Institute for the World Economy

Emil Verner

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: November 2018

Abstract

This paper studies the impact of debtor distress during a financial crisis on support for the populist far right. We use foreign currency borrowing of households in Hungary, combined with a large and unexpected exchange rate depreciation, as a natural experiment to generate a shock to household debt burdens. Exploiting zip code level variation in the prevalence of foreign currency household loans, we show that a 10 percent unexpected rise in debt-to-income increases the vote share of the far-right party Jobbik by 3.2 percentage points. Foreign currency debt exposure accounts for 20 percent of the overall rise in the far-right vote share. This result is robust to a variety of alternative explanations for increased far-right support and is corroborated by survey data on debtors and far-right supporters. We present evidence that conflict between creditors and debtors over the resolution of the crisis is an important mechanism in the electoral success of the far right.

Keywords: far-right parties, political extremism, populism, financial crisis, household debt, foreign currency debt, creditor-debtor conflict

JEL Classification: D10, D72, E44, F34, G01

Suggested Citation

Gyongyosi, Gyozo and Verner, Emil, Financial Crisis, Creditor-Debtor Conflict, and Political Extremism (November 2018). Available at SSRN: https://ssrn.com/abstract=3289741 or http://dx.doi.org/10.2139/ssrn.3289741

Gyozo Gyongyosi

Kiel Institute for the World Economy ( email )

Kiellinie 66
Kiel, Schleswig-Hosltein 24105
Germany

Emil Verner (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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