Political Booms, Financial Crises

Herrera, Helios; Ordoñez, Guillermo and Trebesch, Christoph (August 2014): Political Booms, Financial Crises. Discussion Papers in Economics 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.

• Item Type: Paper
• Keywords: Credit Booms, Reputation, Financial Crises, Political Popularity, Emerging Markets
• Faculties: Economics; Economics > Munich Discussion Papers in Economics
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: D82, E44, E51, E58, G01, H12, N10, N20
• Language: English

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