Crisis Politics: Uncertainty, Relative Prices, and Political Change Jeffry A. Frieden David A. Lake Michael Nicholson Aditya 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 arenas Relative price changes create winners and losers Winners exploit market opportunities; losers pursue political remedies Collective action central in coalition formation Time horizon – “shadow of the future” – affects ability to resolve collective action problems Longer time horizon, more stable coalitions Institutions induce equilibrium Fixed asset holders “vested” in policy regime

Politics in Hard Times Uncertainty 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

Uncertainty Certainty is the degree of predictability of future exogenous events Measured by stock market volatility Asymmetric GARCH (w/o autoregressive term) S&P 500,

Volatility: Reinhart and Rogoff Banking Crises Dummy Variable for period Coefficients 1907 Crisis3.843*** World War I2.334*** Great Depression2.186*** S&L Crisis0.429*** Great Recession0.830***

Monthly Volatility

Relative Price Dispersion Monthly Average Producer Price Indices : seven sectors : nine sectors Greater variance across price changes leads to greater relative price dispersion

Relative Price Dispersion: Reinhart and Rogoff Banking Crises Dummy Variable for period Coefficients 1907 Crisis World War I0.745*** Great Depression0.097*** S&L Crisis Great Recession0.090***

Relative Price Dispersion,

Relative Price Dispersion,

Political Crises Stock Market Volatility Relative Price Disper- sion NormalGreater than one s.d. above the mean Normal Normal Times All other years Potential Crises 1907, , , , , Greater than one s.d. above the mean Potential Crises , , , , 1999, , Hard Times , , , 2000,

Conclusion The 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