Popular governments may be a sign of future financial crises

In emerging countries, politicians have more to gain from riding the popularity benefits of unsustainable booms, write Helios Herrera, Guillermo Ordoñez, and Christoph Trebesch

 
One well-documented predictor of financial crises are credit booms and capital flow bonanzas. Indeed, many banking and current account crises (sudden stops) have been preceded by unusual expansion of domestic and/or external credit (see for example Reinhart and Reinhart 2008, Forbes and Warncock 2012, Schularick and Taylor 2012, Mendoza and Terrones 2012). To the best of our knowledge, however, not much research has focused on early warning indicators outside the realm of economic variables.

In this post, which is based on our research in Herrera et al. (2020), we discuss the role of political bonanzas (large increases of government popularity) in the run-up to financial crises, showing that this political variable can be helpful to predict crises. We propose new cross-country measures of government popularity, which covers more than 100 countries as far back as 1984. Specifically, we propose the use of the “International Country Risk Guide” (ICRG) sub-indicator of “government stability”, which measures “the government’s ability to carry out its declared program(s), and its ability to stay in office” and which we show is closely related to actual public opinion data for those countries and episodes for which actual government approval data is available (e.g. from Gallup).

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Πηγή: blogs.lse.ac.uk