When Credit Turns Political: Evidence from the Spanish Financial Crisis

Pia Hüttl and Simon Baumgartner

No 2042, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: This paper provides causal evidence on the effect of credit crunches on political polarization. We combine data on bank-firm connections and electoral outcomes at the city-level during the 2008-2014 Spanish Financial Crisis. First, we show that firms in a relationship with weak banks experience a reduction in their loan supply and employment growth. Next, we estimate the effects of unemployment on voting behaviour. We construct an instrument for unemployment based on the city-level exposure to foreign weak banks. We find that a one standard deviation increase in instrumented unemployment translates into a 7 percentage increase in the polarisation of voters.

Keywords: Polarization; financial crisis; instrumental variable strategy; Spanish elections; credit supply shock; real effects; unemployment risk (search for similar items in EconPapers)
JEL-codes: D43 D72 G01 P16 (search for similar items in EconPapers)
Pages: 44 p.
Date: 2023
New Economics Papers: this item is included in nep-ban, nep-cdm and nep-pol
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