Financial Globalization, Financial Crises, and the External Portfolio Structure of Emerging Markets
AbstractWe study the short- and long-run effects of financial integration in emerging economies using a two-sector model with a collateral constraint on external debt and trading costs incurred by foreign investors. The probability of a financial crisis displays overshooting: It rises sharply initially and then falls sharply but remains positive in the long run. While equity holdings fall permanently, bond holdings initially fall but rise after the crisis probability peaks. Conversely, asset returns and asset prices first rise and then fall. These results are in line with the post-globalization dynamics observed in emerging markets, and the higher frequency of crises they displayed. Without financial frictions, the model yields a negligible fall in equity and a large increase in debt. The results also depend critically on supply-side effects of financial frictions affecting the price of nontradables and dividends from nontradables producers, and on strong precautionary savings incentives induced by the risk of financial crises.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19072.
Date of creation: May 2013
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Publication status: published as Enrique G. Mendoza & Katherine A. Smith, 2014. "Financial Globalization, Financial Crises, and the External Portfolio Structure of Emerging Markets," Scandinavian Journal of Economics, Wiley Blackwell, vol. 116(1), pages 20-57, 01.
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- Enrique G. Mendoza & Katherine A. Smith, 2014. "Financial Globalization, Financial Crises, and the External Portfolio Structure of Emerging Markets," Scandinavian Journal of Economics, Wiley Blackwell, vol. 116(1), pages 20-57, 01.
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-06-04 (All new papers)
- NEP-DGE-2013-06-04 (Dynamic General Equilibrium)
- NEP-OPM-2013-06-04 (Open Economy Macroeconomics)
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