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Globalization and Emerging Markets: With or without Crash?

Author

Listed:
  • Philippe Martin

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

  • Helene Rey

    (Department of economics - Princeton 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 & Helene Rey, 2006. "Globalization and Emerging Markets: With or without Crash?," Post-Print halshs-00176903, HAL.
    • Handle: RePEc:hal:journl:halshs-00176903
    DOI: 10.1257/aer.96.5.1631
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    Keywords

    JEL F12; F32; F37; F41; O16;
    All these keywords.

    JEL classification:

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

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