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When Credit Turns Political: Evidence from the Spanish Financial Crisis

Author

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  • Pia Hüttl

Abstract

This paper provides causal evidence on the effect of credit crunches on political polarisation. Combining data on bank-firm connections and electoral outcomes at the city-level during the 2008-2014 Spanish financial crisis, I construct an instrument for unemployment based on the city-level exposure to (foreign) weak banks. I find that a 10% increase in (instrumented) local unemployment rates leads to radical parties gaining approximately one percentage point more in vote share relative to centrist parties. This suggests that credit contractions do not only impact firm performance and economic output, but also shape political polarisation through the channel of economic uncertainty.

Suggested Citation

  • Pia Hüttl, 2025. "When Credit Turns Political: Evidence from the Spanish Financial Crisis," Discussion Papers of DIW Berlin 2120, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp2120
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    File URL: https://www.diw.de/documents/publikationen/73/diw_01.c.954622.de/dp2120.pdf
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    More about this item

    Keywords

    polarisation; Financial Crisis; Instrumental Variable Strategy; Spanish Elections; Credit Supply Shock; Real Effects;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • P43 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Finance; Public Finance

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