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.