Manipulating Credit: Government Popularity as Driver of Credit Cycles

Etienne Lepers

No 2022/0239, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: This paper analyses the interaction between credit and political cycles, arguing that short-termist governments will seek to ride and amplify credit cycles for political gains. Specifically, it tests for the existence of political credit cycles not only before elections but throughout the term when executives seek to bolster support in periods of popularity drops. Compiling a unique database on government approval from opinion polls in 57 countries starting in 1980, it provides evidence that drops in popularity are systematically associated with larger future credit cycles, robust to a number of checks for confounding factors. Such credit manipulation appears to target credit to households specifically, is more prevalent in advanced, financialized, and indebted economies, and increases the likelihood of bad credit booms. Overall, this research points to the crucial importance of political cycles as drivers and sources of financial cycles and vulnerabilities.

Keywords: credit booms; financial stability; political business cycle; government popularity; electoral cycles; credit subsidies; homeownership (search for similar items in EconPapers)
JEL-codes: D72 E51 E58 G01 G18 I38 N20 (search for similar items in EconPapers)
Date: 2022-07
New Economics Papers: this item is included in nep-ban, nep-fdg and nep-pol
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Persistent link: https://EconPapers.repec.org/RePEc:ise:remwps:wp02392022

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