Political Booms, Financial Crises

Herrera, Helios; Ordoñez, Guillermo und Trebesch, Christoph (August 2014): Political Booms, Financial Crises. Münchener Wirtschaftswissenschaftliche Beiträge (VWL) 2014-39

Abstract

We show that political booms, measured by the rise in governments’ popularity, predict financial crises above and beyond other better-known early warning indicators, such as credit booms. This predictive power, however, only holds in emerging economies. We show that governments in emerging economies are more concerned about their reputation and tend to ride the short-term popularity benefits of weak credit booms rather than implementing politically costly corrective policies that would help prevent potential crises. We provide evidence of the relevance of this reputation mechanism.

• Dokumententyp: Paper
• Keywords: Credit Booms, Reputation, Financial Crises, Political Popularity, Emerging Markets
• Fakultät: Volkswirtschaft ; Volkswirtschaft > Munich Discussion Papers in Economics
• Themengebiete: 300 Sozialwissenschaften > 330 Wirtschaft
• JEL Classification: D82, E44, E51, E58, G01, H12, N10, N20
• Sprache: Englisch

Literaturliste

[1] Abiad, Abdul, Enrica Detragiache and Thierry Tressel, 2010. "A New Database of Financial Reforms," IMF Staff Papers. 57(2): 281-302.

[2] Acemoglu, Daron, Simon Johnson, and James A. Robinson, 2001. "The Colonial Origins of Comparative Development: An Empirical Investigation", American Economic Review. 91: 1369-1401.

[3] Acemoglu, Daron, Simon Johnson, James A. Robinson and Yunyong Thaicharoen, 2003. "Institutional Causes, Macroeconomic Symptoms: Volatility, Crises and Growth," Journal of Monetary Economics, 50(1): 49-123.

[4] Aguiar, Mark and Manuel Amador, 2011. "Growth in the Shadow of Expropriation," Quarterly Journal of Economics, 126(2): 651-697.

[5] Ales, Laurence, Pricila Maziero and Pierre Yared, 2012. "A Theory of Political and Economic Cycles," mimeo, Columbia University.

[6] Alfaro, Laura, Sebnem Kalemli-Ozcan and Vadym Volosovych, 2008. "Why Doesn’t Capital Flow from Rich to Poor Countries? An Empirical Investigation," Review of Economics and Statistics, 90(2): 347-368.

[7] Azzimonti, Marina, 2011. "Barriers to Investment in Polarized Societies," American Economic Review, 101(5): 2182-2204.

[8] Bianchi, Javier and Enrique Mendoza, 2012. "Overborrowing, Financial Crises and ‘Macro-prudential’ Policy," NBER Working Paper 16091.

[9] Brender, Adi and Allan Drazen, 2008. "How Do Budget Deficits and Economic Growth Affect Reelection Prospects? Evidence from a Large Panel of Countries," American Economic Review, 98(5): 2203-20.

[10] Calvo, Guillermo, Alejandro Izquierdo and Luis-Fernando Mejía, 2008. “Systemic Sudden Stops: The Relevance Of Balance-Sheet Effects And Financial Integration,” NBER Working Paper 14026.

[11] Chang, Roberto, 2001. "Commitment, Coordination Failures, and Delayed Reforms," Journal of Monetary Economics, 47(1), 123-144.

[12] Chang, Roberto, 2007. "Financial Crises and Political Crises," Journal of Monetary Economics, 54, 2409 -2420.

[13] Chong, Alberto and Mark Gradstein, 2007. "Inequality and Institutions," Review of Economics and Statistics:89(3), 454-465.

[14] Claessens, Stijn, M Ayhan Kose and Marco Terrones, 2011. "Financial Cycles: What? How? When?" IMF Working Paper N0. WP/11/76.

[15] Corsetti, Giancarlo, Paolo Pesenti and Nouriel Roubini, 1999. "What Caused the Asian Currency and Financial Crisis?" Japan and the World Economy, 11(3): 305-373.

[16] Drazen, Allan, 2000. "The Political Business Cycle after 25 Years," NBER Macroeconomics Annual. MIT Press.

[17] Duch, Raymond and Randolph Stevenson, 2008. "The Economic Vote: How Political and Economic Institutions Condition Election Results," Cambridge University Press.

[18] Fernandez-Villaverde, Jesus, Luis Garicano and Tano Santos, 2013. "Political Credit Cycles: The Case of the Eurozone," Journal of Economic Perspectives, 27(3): 145-66.

[19] Forbes, Kristin and FrancisWarnock, 2012. "Capital FlowWaves: Surges, Stops, Flight, and Retrenchment," Journal of International Economics, 88(2): 235-251.

[20] Fudenberg, Drew and David Levine, 1989. "Reputation and Equilibrium Selection in Games with a Patient Player," Econometrica, 57: 759-778

[21] Fudenberg, Drew and David Levine, 1998. "The Theory of Learning in Games." MIT Press. [22] Gelos, Gaston and Shang-Jin Wei, 2005. "Transparency and International Portfolio Holdings," Journal of Finance, 60(6): 2987-3020.

[23] Gorton, Gary and Guillermo Ordoñez, 2014a. "Collateral Crises," American Economic Review, 104(2): 343-378.

[24] Gorton, Gary and Guillermo Ordoñez, 2014b. "Crises and Productivity in Good Booms and in Bad Booms," mimeo, University of Pennsylvania.

[25] Gourinchas, Pierre-Olivier and Maurice Obstfeld, 2012. "Stories of the Twentieth Century for the Twenty First," American Economic Journal: Macroeconomics, 4(1): 226-265.

[26] Gourinchas, Pierre-Olivier, Rodrigo Valdes and Oscar Landerretche, 2001. "Lending Booms: Latin America and theWorld," Economia, 1(2): 47-99.

[27] International Monetary Fund, 2000. "Financial Sector Crisis and Restructuring: Lessons from Asia," IMF Occasional Paper No 188.

[28] Kesternich, Iris and Monika Schnitzer. 2010. "Who is afraid of political risk? Multinational firms and their choice of capital structure," Journal of International Economics, 82(2): 208-218.

[29] Knack, Stephen and Philip Keefer. 1997. "Does Social Capital Have an Economic Payoff? A Cross-Country Investigation," Quarterly Journal of Economics, 112(4):1251-88.

[30] Laeven, Luc and Fabian Valencia. 2010. "Resolution of Banking Crises," IMF Working Paper 10/146d.

[31] Mailath, George and Larry Samuelson, 2001. "Who Wants a Good Reputation?" Review of Economic Studies, 68: 415-41.

[32] Mailath, George and Larry Samuelson, 2006. "Repeated Games and Reputations," Oxford University Press, New York.

[33] McCarty, Nolan, Keith Poole and Howard Rosenthal. 2013. Political Bubbles: Financial Crises and the Failure of American Democracy, Princeton University Press.

[34] Mendoza, Enrique and Marco Terrones, 2012. "An Anatomy of Credit Booms and their Demise," NBER Working Paper 18379. [35] PRS, 2004. International Country Risk Guide Methodology. Available at: http://www.prsgroup.comPDFS/icrgmethodology.pdf.

[36] Radelet, Steven and Jeffrey Sachs, 1998. "The Onset of the East Asian Financial Crisis," NBER Working Paper 6680.

[37] Reinhart, Carmen and Vincent Reinhart, 2008. "Capital Flow Bonanzas: An Encompassing View of the Past and Present," NBER Working Paper 14321.

[38] Reinhart, Carmen and Vincent Reinhart, 2010. "After the Fall," NBER Working Paper 16334.

[39] Reinhart, Carmen and Kenneth Rogoff, 2009. "The Aftermath of Financial Crises," American Economic Review,99(2): 466-72.

[40] Schularick, Moritz and Alan Taylor. 2012. "Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870-2008," American Economic Review, 102(2):1029-61.