Do Financial Markets Respond to Populist Rhetoric?

Abstract

With the global rise in populism over the last decade, there has been an increase in political commentaries (PC) by leaders that criticize their central banks and argue for lower interest rates. We analyse the effects of PCs on exchange rates, bond yields, and the risk premium for six countries that are subject to political pressures. Utilizing a specification with time-varying parameters, we show that PCs affect the level and the volatility of exchange rates, bond yields and the risk premium in Turkey. The response increases over time. In other countries, there is a significant impact on exchange rate volatility.