Working Paper: NBER ID: w17831
Authors: Atif R. Mian; Amir Sufi; Francesco Trebbi
Abstract: Debtors bear the brunt of a decline in asset prices associated with financial crises and policies aimed at partial debt relief may be warranted to boost growth in the midst of crises. Drawing on the US experience during the Great Recession of 2008-09 and historical evidence in a large panel of countries, we explore why the political system may fail to deliver such policies. We find that during the Great Recession creditors were able to use the political system more effectively to protect their interests through bailouts. More generally we show that politically countries become more polarized and fractionalized following financial crises. This results in legislative stalemate, making it less likely that crises lead to meaningful macroeconomic reforms.
Keywords: No keywords provided
JEL Codes: G01; G33; G38; H1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial crises (G01) | political polarization (D72) |
| financial crises (G01) | legislative stalemate (D72) |
| political polarization (D72) | reduced likelihood of macroeconomic reforms (E69) |
| legislative stalemate (D72) | prolonged economic downturns (F44) |
| creditors lobbying (F34) | protection of creditor interests (G33) |
| financial crises (G01) | decline in asset prices (G19) |