Does political polarization affect economic expectations?: Evidence from three decades of cabinet shifts in Europe

Polarization can have economic effects if the hostility between political camps (i.e., affective polarization) shapes economic expectations. This paper shows that, in polarized contexts, agents disagree more over their expectations, and that partisan hostility – rather than differences in individual economic circumstances or beliefs about government policies – drives this disagreement. The causal impact of partisanship is identied from the discontinuity created by shifts in Prime Ministers’ cabinet. The study of 134 shifts between 1993 and 2019 in 27 European countries reveals that left and right supporters with identical circumstances and information sets update their expectations in opposite directions, evidencing a partisan bias. Its size ranges from 1.5 to 0 standard deviations across these cabinet shifts. The polarization of parties – measured by their left-right positions or their cooperation within coalitions – explains half this variation, and adverse economic conditions amplify it. The analysis points to affective polarization (rather than disagreements over the likely effects of government policy) as the driver of partisan bias. Partisan bias extends to variables unaffected by future policy and, even when parties have similar economic positions, bias increases withpolarization on non-economic dimensions. Overall, these findings suggest that political conflicts originally unrelated to economic matters could affect household behavior and policy debates and extend to the economic sphere.