NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Political Booms, Financial Crises

Helios Herrera, Guillermo Ordoñez, Christoph Trebesch

NBER Working Paper No. 20346
Issued in July 2014
NBER Program(s):   EFG   IFM   PE   POL

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.

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Document Object Identifier (DOI): 10.3386/w20346

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