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Globalization and Emerging Markets: With or Without Crash?

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  • Philippe Martin

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

  • Hélène Rey

    (Department of Economics, Harvard University)

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.

Suggested Citation

  • Philippe Martin & Hélène Rey, 2006. "Globalization and Emerging Markets: With or Without Crash?," Post-Print hal-01021349, HAL.
    • Handle: RePEc:hal:journl:hal-01021349
    DOI: 10.1257/aer.96.5.1631
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-01021349
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    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F15 - International Economics - - Trade - - - Economic Integration

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