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Political Booms, Financial Crises

Listed author(s):
  • Helios Herrera
  • Guillermo Ordonez
  • Christoph Trebesch

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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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4935.

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Date of creation: 2014
Handle: RePEc:ces:ceswps:_4935
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