Political booms, financial crises

There is a new paper by Helios Herrera, Guillermo Ordoñez, and Christoph Trebesch and it has a striking result:

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.

The NBER version is here, there are ungated versions here.


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