Political Booms, Financial Crises
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.
We thank Bennet Berger, Gary Gorton, Stephen Harber, Enrique Mendoza, Moritz Schularick, Aaron Tornell, Francesco Trebbi and seminar participants at the SED Meetings in Seoul, PUC-Rio de Janeiro, FGV-São Paulo, EIEF Rome, University of Ottawa, Wharton and the PRIN Workshop at Bologna for comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Helios Herrera & Guillermo Ordoñez & Christoph Trebesch, 2020. "Political Booms, Financial Crises," Journal of Political Economy, vol 128(2), pages 507-543.