Resolving Debt Overhang: Political Constraints in the Aftermath of Financial Crises
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Abstract
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.Citation
Mian, Atif, Amir Sufi, and Francesco Trebbi. 2014. "Resolving Debt Overhang: Political Constraints in the Aftermath of Financial Crises." American Economic Journal: Macroeconomics, 6 (2): 1-28. DOI: 10.1257/mac.6.2.1Additional Materials
JEL Classification
- D72 Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
- E32 Business Fluctuations; Cycles
- E44 Financial Markets and the Macroeconomy
- G01 Financial Crises
- H63 National Debt; Debt Management; Sovereign Debt
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