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When Credit Turns Political: Evidence from the Spanish Financial Crisis

Discussion Papers 2042, 44 S.

Pia Hüttl, Simon Baumgartner


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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.

Pia Hüttl

Research Associate in the Macroeconomics Department

JEL-Classification: G01;P16;D72;D43
Keywords: Polarization, financial crisis, instrumental variable strategy, Spanish elections, credit supply shock, real effects, unemployment risk
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