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Globalization and Emerging Markets: With or Without Crash?

Martin, P., Rey, H.
Date Published: December 2006
Martin, Philippe, and Hélène Rey. "Globalization and Emerging Markets: With or Without Crash?." The American Economic Review 96.5 (2006): 1631-1651.

Abstract:
This paper develops a theory of financial crisis based on the demand side of the economy. We analyze the impact of financial and trade globalizations on asset prices, investment and the possibility of self-fulfilling financial crashes. Financial and trade globalizations have different effects on asset prices, investment and income in the emerging market and in the industrialized country. Whereas trade globalization always has a positive effect on the emerging market, financial globalization may not, especially when trade costs are high. For intermediate levels of financial transaction costs and high levels of trade costs, pessimistic expectations can be self-fulfilling and may lead to a collapse in demand for goods and assets of the emerging market.



Citation:
Martin, Philippe, and Hélène Rey. "Globalization and Emerging Markets: With or Without Crash?." The American Economic Review 96.5 (2006): 1631-1651.
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CEPR DP 3378 and NBER WP 9288 . [Media coverage: Wall Street Journal].


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