Political Booms, Financial Crises

Political booms, measured by the rise in governments’ popularity, predict financial crises above and beyond better known early warning indicators, such as credit booms. This predictive power, however, only holds in emerging economies. We argue that governments in developing countries have stronger incentives to “ride” unsound credit booms in order to boost their popularity, rather than implementing corrective policies that could prevent crises but are politically costly. We provide evidence of the relevance of this mechanism, partly by constructing a new cross-country data set on government popularity based on opinion polls.