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Financial Globalization in Emerging Economies: Much Ado About Nothing?

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  • Eduardo Levy Yeyati

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  • Tomas Williams

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Abstract

Financial globalization, defined as global linkages through cross-border financial flows, has become increasingly relevant for emerging markets as they integrate financially with the rest of the world. This paper argues that, because of the way it is often measured, it has also led to the misperception that financial globalization in emerging markets has been growing in recent years. We characterize the evolution of financial globalization in emerging markets using alternative measures, and find that, in the 2000s, financial globalization has grown only marginally and international portfolio diversification has been limited and declining over time. Next, we revisit the empirical literature on the implications of financial globalization for local market deepening and international risk diversification proposing new measures of the former that, in our view, are better suited to address these questions than those typically used in the literature. We find that, whereas financial globalization in emerging economies indeed fosters domestic market deepening, it falls short of providing the international portfolio diversification needed to yield visible gains in terms of consumption smoothing.

Suggested Citation

  • Eduardo Levy Yeyati & Tomas Williams, 2014. "Financial Globalization in Emerging Economies: Much Ado About Nothing?," ECONOMIA JOURNAL, THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION - LACEA, vol. 0(Spring 20), pages 91-131, January.
  • Handle: RePEc:col:000425:010922
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    1. Baltagi, Badi H. & Demetriades, Panicos O. & Law, Siong Hook, 2009. "Financial development and openness: Evidence from panel data," Journal of Development Economics, Elsevier, vol. 89(2), pages 285-296, July.
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    9. Stijn Claessens & Luc Laeven & Deniz O Igan & Giovanni Dell'Ariccia, 2010. "Lessons and Policy Implications from the Global Financial Crisis," IMF Working Papers 10/44, International Monetary Fund.
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    Cited by:

    1. Malik, Samreen, 2014. "Ex-ante implications of sovereign default," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 386-397.
    2. Ceballos, Francisco & Didier, Tatiana & Schmukler, Sergio L., 2012. "Financial Globalization in Emerging Countries: Diversification vs. Offshoring," ADBI Working Papers 389, Asian Development Bank Institute.
    3. Levy Yeyati, Eduardo & Williams, Tomas, 2012. "Emerging economies in the 2000s: Real decoupling and financial recoupling," Journal of International Money and Finance, Elsevier, vol. 31(8), pages 2102-2126.
    4. Bruno Bonizzi, 2015. "Capital Market Inflation in Emerging Markets: the Cases of Brazil and South Korea," PSL Quarterly Review, Economia civile, vol. 68(273), pages 115-150.
    5. repec:onb:oenbfi:y:2012:i:2:b:3 is not listed on IDEAS
    6. LUCHIAN, Ivan & FILIP, Angela, 2015. "Globalization As Financial Crises Premise," Journal of Financial and Monetary Economics, Centre of Financial and Monetary Research "Victor Slavescu", vol. 2(1), pages 127-134.
    7. Philip Lane, 2013. "International Capital Flows and Domestic Financial Conditions: Lessons for Emerging Asia," The Institute for International Integration Studies Discussion Paper Series iiisdp438, IIIS.
    8. Philip R. Lane, 2013. "Cross-Border Financial Integration in Asia and the Macro-Financial Policy Framework," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 14(2), pages 37-52, April.
    9. 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), issue 2, pages 46-64.
    10. Yilmaz Akyüz, 2014. "Internationalization of Finance and Changing Vulnerabilities in Emerging and Developing Economies," UNCTAD Discussion Papers 217, United Nations Conference on Trade and Development.
    11. Duygu Yolcu Karadam & Nadir Ocal, 2014. "Financial Integration and Growth: A Nonlinear Panel Data Analysis," ERC Working Papers 1415, ERC - Economic Research Center, Middle East Technical University, revised Nov 2014.
    12. Kyunghun Kim & Ju Hyun Pyun & Jiyoun An, 2017. "Does Credit Market Integration Amplify the Transmission of Real Business Cycle During Financial Crisis?," 2017 Meeting Papers 1236, Society for Economic Dynamics.

    More about this item

    Keywords

    financial globalization; international finance; emerging markets; financial development; portfolio risk sharing; financial stability; systemic currency mismatches;

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G01 - Financial Economics - - General - - - Financial Crises

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