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American Economic Review Vol. 96 No. 5 2006

Globalization and Emerging Markets: With or Without Crash?

Philippe Martin1; Hélène Rey2

1 University of Paris 1 Panthéon Sorbonne Economie, Paris School of Economics, 106-112 bd de l'Hôpital, 75647 Paris Cedex 13, France, and Centre for Economic Policy Research (CEPR). · 2 Department of Economics and Woodrow Wilson School, 307 Fisher Hall, Princeton University, Princeton, NJ 08544, CEPR, and National Bureau of Economic Research.

Abstract

We analyze the effects of financial and trade globalization on the likelihood of financial crashes in emerging markets. While trade globalization always makes crashes less likely, financial globalization may make them more likely, especially when trade costs are high. Pessimistic expectations can be self-fulfilling and lead to a collapse in demand for goods and assets. Such a crash comes with a current account reversal and drops in income and investment. Lower-income countries are more prone to such demand-based financial crises. A quantitative evaluation shows our model is consistent with the main stylized facts of financial crashes in emerging markets.

DOI
10.1257/aer.96.5.1631
Volume
96
Issue
5
Pages
1631-1651
Language
en
Sources
crossref openalex bibtex:phds-export.bib

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