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Financial globalization in emerging economies:Much ado about nothing?

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  • Eduardo Levy-Yeyati
  • Tomas Williams

Abstract

Financial globalization (FG), defined as global linkages through cross-border financial flows, has become increasingly relevant for emerging markets (EM) as they integrate financially to the rest of the world. In this paper, we argue that, because of the way it is often measured, it has also led to the misperception that FG in EM has been growing in recent years. We characterize the evolution of FG in EM using alternative measures, and find that, in the 2000s, FG have grown only marginally and international portfolio diversification has been very limited, and declining over time. Next, we revisit the empirical literature on the implications of FG for local market deepening, international risk diversification, financial contagion, and financial dollarization, and we find them to be rather limited. Whereas FG has indeed fostered domestic market deepening in good times, it has yielded neither the dividends of consumption smoothing (in line with the limited portfolio diversification) nor the costs of amplifying global financial shocks. In turn, financial de-dollarization has largely reflected the undoing of financial offshoring and the valuation effects of real appreciation.

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Bibliographic Info

Paper provided by Universidad Torcuato Di Tella in its series Business School Working Papers with number 2011-01.

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Length: 47 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:udt:wpbsdt:2011-01

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  1. Kaminsky, Graciela L. & Schmukler, Sergio L., 1999. "What triggers market jitters?: A chronicle of the Asian crisis," Journal of International Money and Finance, Elsevier, Elsevier, vol. 18(4), pages 537-560, August.
  2. Rose, Andrew K. & Spiegel, Mark M., 2011. "Cross-country causes and consequences of the crisis: An update," European Economic Review, Elsevier, vol. 55(3), pages 309-324, April.
  3. Stijn Claessens & Luc Laeven & Deniz Igan & Giovanni Dell'Ariccia, 2010. "Lessons and Policy Implications From the Global Financial Crisis," IMF Working Papers 10/44, International Monetary Fund.
  4. Levy Yeyati, Eduardo & Schmukler, Sergio L. & Van Horen, Neeltje, 2006. "International financial integration through the law of one price," Policy Research Working Paper Series 3897, The World Bank.
  5. Kose, M. Ayhan & Prasad, Eswar & Rogoff, Kenneth & Wei, Shang-Jin, 2009. "Financial Globalization and Economic Policies," IZA Discussion Papers 4037, Institute for the Study of Labor (IZA).
  6. Yan Bai & Jing Zhang, 2006. "Financial Integration and International Risk Sharing," 2006 Meeting Papers, Society for Economic Dynamics 371, Society for Economic Dynamics.
  7. Aart Kraay & Norman Loayza & Luis Servén & Jaume Ventura, 2000. "Country portfolios," Economics Working Papers 913, Department of Economics and Business, Universitat Pompeu Fabra.
  8. Martin Schindler, 2009. "Measuring Financial Integration: A New Data Set," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 222-238, April.
  9. Badi H. Baltagi & Panicos O. Demetriades & Siong Hook Law, 2008. "Financial Development and Openness: Evidence from Panel Data," Center for Policy Research Working Papers, Center for Policy Research, Maxwell School, Syracuse University 107, Center for Policy Research, Maxwell School, Syracuse University.
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Cited by:
  1. Philip R. Lane, 2013. "Cross-Border Financial Integration in Asia and the Macro-Financial Policy Framework," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 14(2), pages 37-52, April.
  2. Bonizzi, Bruno, 2013. "Capital market inflation in emerging markets: The case of Brazil and South Korea," MPRA Paper 51255, University Library of Munich, Germany.
  3. Yeyati, Eduardo Levy & Williams, Tomas, 2012. "Emerging economies in the 2000s : real decoupling and financial recoupling," Policy Research Working Paper Series 5961, The World Bank.
  4. Jesús Crespo Cuaresma & Martin Feldkircher, 2012. "Drivers of Output Loss during the 2008–09 Crisis: A Focus on Emerging Europe," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 46-64.
  5. Ceballos, Francisco & Didier, Tatiana & Schmukler, Sergio L., 2012. "Financial globalization in emerging countries : diversification vs. offshoring," Policy Research Working Paper Series 6105, The World Bank.
  6. Josef Schreiner, 2012. "Developments in Selected CESEE Countries: Heterogeneous Growth Performance, Improving Fiscal and External Accounts," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 8-37.

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