American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Globalization and Emerging Markets: With or Without Crash?
American Economic Review
vol. 96,
no. 5, December 2006
(pp. 1631–1651)
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. (JEL F12, F32, F37, F41, O16)Citation
Martin, Philippe, and Hélène Rey. 2006. "Globalization and Emerging Markets: With or Without Crash?" American Economic Review, 96 (5): 1631–1651. DOI: 10.1257/aer.96.5.1631Additional Materials
JEL Classification
- F12 Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
- F32 Current Account Adjustment; Short-term Capital Movements
- F37 International Finance Forecasting and Simulation: Models and Applications
- F41 Open Economy Macroeconomics
- O16 Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
- P34 Socialist Institutions and Their Transitions: Financial Economics