Populists at the Helm: ideology, policy tools, and bank liquidity creation

This paper provides the first empirical investigation of the association between populist regimes and bank liquidity creation, a core function of financial intermediation. Drawing on monetary populism theory and redistribution economics, we examine how ideology, monetary policy, protectionism, and institutional conditions relate to bank liquidity creation. Using a panel of 10,255 commercial banks across 60 countries from 1990 to 2020, we find that right-wing populist regimes, particularly those employing monetary policy tools, are associated with significantly higher bank liquidity creation, whereas left-wing and protectionist populism are associated with lower liquidity creation. These relationships are strongest in countries with poorer institutional quality, more fragile banking systems, and lower central bank independence, suggesting that institutional context conditions the association between populist policy tools and bank liquidity creation. Importantly, our results show that bank liquidity creation is associated not only with ideological orientation but also with the interaction between ideology and policy instruments. Robustness checks using alternative specifications and measures support these findings. Temporal-ordering tests show that changes in bank liquidity creation are concentrated during populists’ time in office and dissipate after they leave. Moreover, political orientation without populist characteristics yields markedly different associations, underscoring the distinct nature of populism.