Herrera, Helios Ordoñez, Guillermo Trebesch, Christoph
Year of Publication:
Munich Discussion Paper 2014-39
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.
Credit Booms Reputation Financial Crises Political Popularity Emerging Markets