We examine the consequences of a sudden increase in household debt burdens by exploiting variation in exposure to household foreign currency debt during Hungary’s late-2008 currency crisis. The revaluation of debt burdens causes higher default rates and a collapse in spending. These responses lead to a worse local recession, driven by a decline in local demand, and negative spillover effects on nearby borrowers without foreign currency debt. The estimates translate into an output multiplier on higher debt service of 1.67. The impact of debt revaluation is particularly severe when foreign currency debt is concentrated on household, rather than firm, balance sheets. (JEL E21, E32, F34, G51)
We study the impact of debtor distress on support for a populist far-right political party during a financial crisis. Our empirical approach exploits variation in exposure to foreign currency household loans during a currency crisis in Hungary. Foreign currency debt exposure leads to a large, persistent increase in support for the populist far right. We document that the far right advocated for foreign currency debtors' interests by proposing aggressive debt relief and was rewarded with support from these voters. Our findings are consistent with theories emphasizing that conflict between creditors and debtors can shape political outcomes after financial crises.CAN A HOUSEHOLD DEBT CRISIS boost support for a populist political party? Financial crises, including the 2008 global financial crisis, are often followed by
This paper studies the effect of the 2008 financial crisis on the vote share of the populist far right. We use the foreign currency borrowing of households in Hungary as a natural experiment. During the crisis the unexpected and large depreciation of the domestic currency increased the debt burden of households borrowing in foreign currencies but not of households borrowing in the local currency. We use zip code level variation in the prevalence of foreign currency borrowing of households, and show that the exposure to the depreciation significantly affected political preferences. A 10 percent unanticipated rise in indebtedness increased the vote share of the far right by 2.2 percentage points. This effect explains one third of the increase of their popularity by the 2010 election. Foreign currency debtors' naïveté, persistent extremist attitudes, local labor market shocks, and immigration do not account for this increase. We present evidence that the conflict between creditors and debtors about the resolution of the crisis is an important mechanism in the electoral success of the far right. The far right sided with debtors against creditors by advocating policies to help households with foreign currency loans.
1. Introduc on 2. The Hungarian Foreign Currency Debt Crisis 3. Data and Summary Sta s cs 3.1. Household Credit Registry 3.2. Se lement and Firm-level Data 3.3. Summary Sta s cs 4. Theory and Empirical Framework 4.1. Theore cal Predic ons 4.2. Empirical Specifica on 4.3. Iden fica on and Varia on in Household FC Debt 5. Main Results 5.1. Household Default 5.2. Durable Spending 5.3. Local Unemployment 5.4. Interpreta on of the Es mates: The Debt Revalua on Mul plier 5.5. Robustness 6. Mechanisms 6.1. Local Demand MNB WORKING PAPERS 2 • 3 MAGYAR NEMZETI BANK 6.2. Limited Labor Market Adjustment 6.3. House Prices and Housing Market Distress 7. Financial Spillovers 8. Household and Firm Foreign Currency Debt 9. Conclusion References 10. Appendix Tables and Figures 11. Data Appendix 11.1.Household Credit Registry and Other Credit Market Data 11.2.Wage Es mates from the Structure of Earnings Survey 12.Consump on Response to Debt Revalua on 12.1. Permanent Income Consumer 12.2. Hand-to-Mouth Consumer 13. Debt Revalua on in an Open Economy Model 13.1.Model Set-Up 13.2.Consequences of a Household Debt Revalua on 14. Financial Spillovers and Unobserved Selec on 14.1.Set-up 14.2.Short and Intermediate Regressions 14.3.Evalua on of FC FC
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