So Right It’s Wrong? Right Governments, Far Right Populism, and Investment Risk

Abstract

Political economy literature documents how financial investors are more partial to right executives than left ones. Right cabinets face lower interest rates, less volatile stock prices and exchange rates, and higher credit ratings than left cabinets, even after accounting for fiscal differences. But does this advantage persist if right governments accommodate far right parties or ideas? I hypothesize that because far right populism can introduce political instability, markets’ evaluation of right executives might deteriorate if they enter coalition with far right parties or adopt their positions. Employing a panel analysis of bond spread data, and a comparative case study of the Netherlands and Sweden, I find that right executives enjoy significantly lower spreads than their left-wing counter-parts, but this advantage disappears if they rule in coalition with the far right or produce overly right-wing manifestos. These findings highlight that right parties may encounter tangible borrowing costs and market rebuke if they accommodate far right populism.