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Financial Inequality, group entitlements and populism

Federico Faveretto and Donato Masciandaro ()

No 1892, BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy

Abstract: This paper offers a theoretical framework that explains how financial inequality and misbeliefs about group entitlements among voters foster voting in favour of populist parties. When a banking shock occurs in an economy with heterogeneous agents, the central bank independently chooses the optimal degree of monetization to balance financial and monetary instability, while agents choose between a populist party and a classical party to select the degree of bank bailout, which is paid through a proportional tax. Agents vote according to a behavioural mechanism that we call “democratic rioting”: “aggrieved” agents benefit psychologically from voting for the populist party. The banking shock triggers a higher probability of voting for a populist party in the presence of financial inequality and misbeliefs about group entitlements.

Keywords: Financial inequality; monetary policy; populism; banking policy; fiscal policy; central bank independence; political economics (search for similar items in EconPapers)
JEL-codes: D72 D78 E31 E52 E58 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cdm, nep-mac, nep-mon and nep-pol
Date: 2018
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