Zusammenfassung:
This paper provides causal evidence on the effect of credit crunches on political polarisation. Combining data on bank-firm connections and electoral outcomes at the city-level during the 2008-2014 Spanish financial crisis, I construct an instrument for unemployment based on the city-level exposure to (foreign) weak banks. I find that a 10% increase in (instrumented) local unemployment rates leads to radical parties gaining approximately one percentage point more in vote share relative to centrist parties. This suggests that credit contractions do not only impact firm performance and economic output, but also shape political polarisation through the channel of economic uncertainty.