Working Paper: NBER ID: w20346
Authors: Helios Herrera; Guillermo Ordoñez; Christoph Trebesch
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.
Keywords: Political Economy; Financial Crises; Government Popularity; Emerging Markets
JEL Codes: D82; E44; E51; E58; G01; H12; N10; N20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| political booms (D72) | financial crises (G01) |
| increases in government popularity (H11) | financial crises (G01) |
| lack of regulation during rising popularity (G18) | increased likelihood of crises (H12) |
| political incentives (D72) | regulatory inaction (L51) |
| government popularity changes (D72) | onset of crises (G01) |