Populism, Political Risk and the Economy: Lessons from Italy

60 Pages Posted: 10 Feb 2020

See all articles by Pierluigi Balduzzi

Pierluigi Balduzzi

Boston College - Carroll School of Management

Emanuele Brancati

Sapienza University of Rome

Marco Brianti

Boston College

Fabio Schiantarelli

Boston College - Department of Economics; IZA Institute of Labor Economics

Abstract

We study the effects on financial markets and real economic activity of changes in risk related to political events and policy announcements in Italy during the 2013-2019 period that saw the rise to power of populist parties. We focus on events that have implications for budgetary policy, debt sustainability and for Euro membership. We use changes in the Credit Default Swaps (CDS) spread on governments bonds around those dates as an instrument for shocks to policy and institutional risk – political risk for short – in the context of Local Projections – IV. We show that shocks associated with the rise of populist forces or their policies have adverse and sizable effects on financial markets. These negative effects were moderated by European institutions and domestic constitutional constraints. In addition, Italian political developments generate international spillover effects on the spreads of some other euro-zone countries. Finally, political risk shocks have a negative impact on the real economy, although the accommodating stance of monetary policy helped in cushioning their effect.

Keywords: populism, political risk, policy uncertainty, sovereign debt, fiscal policy, CDS spread

JEL Classification: E44, G10, H62, H63

Suggested Citation

Balduzzi, Pierluigi and Brancati, Emanuele and Brianti, Marco and Schiantarelli, Fabio, Populism, Political Risk and the Economy: Lessons from Italy. IZA Discussion Paper No. 12929, Available at SSRN: https://ssrn.com/abstract=3534477

Pierluigi Balduzzi (Contact Author)

Boston College - Carroll School of Management ( email )

Department of Finance
140 Commonwealth Avenue - Fulton Hall 438
Chestnut Hill, MA 02467
United States
617-552-3976 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://www.bc.edu/bc_org/avp/csom/faculty/

Emanuele Brancati

Sapienza University of Rome ( email )

via Castro del Laurenziano 9
Roma, 00191
Italy

Marco Brianti

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Fabio Schiantarelli

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617-552-4512 (Phone)
617-552-2308 (Fax)

HOME PAGE: http://https://sites.google.com/a/bc.edu/fabio-schiantarelli/

IZA Institute of Labor Economics

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Bonn, D-53072
Germany

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