Globalization and Emerging Markets: With or Without Crash? | Zendy

Philippe Martin | Zendy; Hélène Rey | Zendy

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Globalization and Emerging Markets: With or Without Crash?

Author(s) -

Philippe Martin,

Hélène Rey

Publication year - 2006

Publication title -

american economic review

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 16.936

H-Index - 297

eISSN - 1944-7981

pISSN - 0002-8282

DOI - 10.1257/aer.96.5.1631

Subject(s) - stylized fact , globalization , crash , emerging markets , financial market , economics , investment (military) , financial integration , pessimism , international economics , monetary economics , finance , macroeconomics , market economy , politics , computer science , political science , law , programming language , philosophy , epistemology

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)

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