Financial Globalization and Emerging Markets: With or Without Crash?

No 9288, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We analyze the impact of financial globalization on asset prices, investment and the possibility of crashes driven by self-fulfilling expectations in emerging markets. In a two-country model with one emerging market (intermediate income level) and one industrialized country (high income level), we show that liberalization of capital flows increases asset prices, investment and income in the emerging market. However, for intermediate levels of international financial transaction costs, we find that pessimistic expectations can be self-fulfilling, leading to a financial crash. The crash is accompanied by capital flight, a drop in income and investment below the financial autarky level and more market incompleteness. We show that emerging markets are more prone to financial crashes simply because they have a lower income level and not because of the existence of market failures (moral hazard or credit constraints), bad monetary policies or exchange rate regimes.

JEL-codes: F3 F4 (search for similar items in EconPapers)
Date: 2002-10
New Economics Papers: this item is included in nep-fin, nep-ifn, nep-mfd and nep-rmg
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (40)

Downloads: (external link)
http://www.nber.org/papers/w9288.pdf (application/pdf)

Related works:
Working Paper: Financial Globalization and Emerging Markets: With or Without Crash? (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:9288

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w9288

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().