Favaretto and Masciandaro study the connection between the emergence of populism and public policy decisions

In light of the Great Depression, the Great Crisis and their aftermaths, the emergence of populism in the wake of financial crises has taken the stage in academic and public debates. Some explain populism from trade shocks that foster inequality, others with increase in salience of immigration and increase in economic inequality as drivers of the long-term dynamics of populism. There is also empirical evidence supporting that financial crises are a strong and significant predictor of a subsequent increase in support for populist and far-right parties. In the paper “Populistic Surfing: Consensus, Monetary and Banking Policies”, Federico Favaretto and Donato Masciandaro (Baffi Centre of Bocconi University) study how the emergence of populism is related to decisive public policy decisions such as monetary and banking policies.

The findings

The paper applies two political economics models with a common approach to understand the nexus between populism on one side and monetary and banking policies on the other side. The first model studies populism and central bank independence (CBI) when a macroeconomic-wide banking shock induces two distinct, but subsequent decisions on bailout and fiscal monetization. In this setting, populist attracts consensus because they propose policies that pressure status-quo institutional settings based on individual financial heterogeneities. Voter preferences are consistent with the socially optimal policies if and only if financial portfolios are homogeneous. In the case they are not, median voter support for populist policies would depend on the composition of his/her financial portfolios respect to the average voter with respect to deposits and public bond holding.

The second model studies monetary and banking policies and populist vote under psychological group dynamics. Citizens vote for populists when psychological benefits exceed economic costs, hence being influenced by political features that are far from the policy choice at hand. The economic costs of voting for the populists come from choosing a suboptimal policy that the populists propose after evaluating the political opportunity space. This framework explains why different policy choices championed by different populists are still compatible with citizens diminished support for traditional parties.