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Resolving Debt Overhang: Political Constraints in the Aftermath of Financial Crises

  • Atif Mian
  • Amir Sufi
  • Francesco Trebbi

Countries become more politically polarized and fractionalized following financial crises, reducing the likelihood of major financial reforms precisely when they might have especially large benefits. The evidence from a large sample of countries provides strong support for the hypotheses that following a financial crisis, voters become more ideologically extreme and ruling coalitions become weaker, independently of whether they were initially in power. The evidence that increased polarization and weaker governments reduce the chances of financial reform and that financial crises lead to legislative gridlock and anemic reform is less clear-cut. The US debt overhang resolution is discussed as an illustration.

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Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 6 (2014)
Issue (Month): 2 (April)
Pages: 1-28

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Handle: RePEc:aea:aejmac:v:6:y:2014:i:2:p:1-28
Note: DOI: 10.1257/mac.6.2.1
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  1. Alberto Alesina & Silvia Ardagna & Francesco Trebbi, 2006. "Who Adjusts and When?The Political Economy of Reforms," IMF Staff Papers, Palgrave Macmillan, vol. 53(si), pages 1.
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