Crisis Politics:Uncertainty, Relative Prices, and Political

Change

Jeffry A. FriedenDavid A. Lake

Michael NicholsonAditya Ranganath

What is a Crisis?Why and how do crises affect national politics?

Crises increase uncertainty and change relative prices so as to alter the expected gains from political activity relative to alternatives

We posit theoretically grounded, ex ante measures of crisis, independent of (and possibly predictive of) observed political change

Politics in Normal Times Individuals pursue their interests in

economic and political arenasRelative price changes create winners and

losers Winners exploit market opportunities; losers

pursue political remediesCollective action central in coalition

formation Time horizon – “shadow of the future” – affects

ability to resolve collective action problemsLonger time horizon, more stable coalitions

Institutions induce equilibrium Fixed asset holders “vested” in policy regime

Politics in Hard TimesUncertainty shortens time horizons, reducing present value of expected future gains. Large increase in uncertainty can lead actors to abandon existing coalitions

Change in relative prices alters incentives facing individuals. Large change in relative prices leads to new coalitions Actors shift from less to more rewarding

economic activities Actors with fixed assets turn to politics

Both “shocks” disrupt existing politics

UncertaintyCertainty is the degree of predictability of future exogenous events

Measured by stock market volatility

Asymmetric GARCH (w/o autoregressive term)

S&P 500, 1900-2011

Volatility: Reinhart and Rogoff Banking Crises

Dummy Variable for period

Coefficients

1907 Crisis 3.843***

World War I 2.334***

Great Depression 2.186***

S&L Crisis 0.429***

Great Recession 0.830***

Monthly Volatility

Relative Price DispersionMonthly Average Producer Price Indices 1900-1950: seven sectors1950-2011: nine sectors

Greater variance across price changes leads to greater relative price dispersion

Relative Price Dispersion: Reinhart and Rogoff Banking CrisesDummy Variable for period

Coefficients

1907 Crisis -0.182

World War I 0.745***

Great Depression 0.097***

S&L Crisis -0.015

Great Recession 0.090***

Relative Price Dispersion, 1900-1950

Relative Price Dispersion, 1950-2011

Political CrisesStock Market Volatility

Relative Price Disper-sion

Normal Greater than one s.d. above the mean

Normal Normal TimesAll other years

Potential Crises1907, 1929-30, 1933-34, 1937-40, 1987-88, 2001-02

Greater than one s.d. above the mean

Potential Crises1914-20, 1972-73, 1979-80, 1985-86, 1999, 2003-05, 2010-11

Hard Times1931-32, 1974-75, 1986-87, 2000, 2008-09

ConclusionThe Great Recession: “The times they are a-changin”Stock market volatility second highest since 1900

Relative price dispersion fourth highest in any crisis period

Next step: identify winners and losers and map onto post-crisis coalition formation