NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

NBER Working Papers by Katherine Smith

Contact and additional information for this authorAll publicationsWorking Papers only

Working Papers

May 2013Financial Globalization, Financial Crises, and the External Portfolio Structure of Emerging Markets
with Enrique G. Mendoza: w19072
We 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 ...
December 2004Quantitative Implication of A Debt-Deflation Theory of Sudden Stops and Asset Prices
with Enrique G. Mendoza: w10940
This paper shows that the quantitative predictions of an equilibrium asset pricing model with financial frictions are consistent with the large consumption and current-account reversals and asset-price collapses observed in the "Sudden Stops" of emerging markets crises. Margin requirements set a collateral constraint on foreign borrowing by domestic agents. Foreign traders incur costs in trading assets with domestic agents. Margin constraints bind occasionally depending on equilibrium portfolios and asset prices. When the constraints do not bind, productivity shocks cause standard real-business-cycle effects. When the constraints bind, shocks of the same magnitude cause strikingly different effects that vary with the leverage ratio and the liquidity of asset markets. With high leverage and...
October 2002Margin Calls, Trading Costs, and Asset Prices in Emerging Markets: The Finanical Mechanics of the 'Sudden Stop' Phenomenon
with Enrique G. Mendoza: w9286
A central feature of emerging markets crises is the Sudden Stop' phenomenon characterized by large reversals of capital inflows and current accounts, deep recessions, and collapses in asset prices. This paper proposes an open-economy asset-pricing model with financial frictions that yields predictions in line with these observations. Margin requirements and information costs distort asset trading between a small open economy and foreign securities firms. If the economy's debt-equity ratio is low, standard productivity shocks cause normal recessions with smooth current-account adjustments. If the ratio is high, the same productivity shocks trigger margin calls forcing domestic agents to firesell equity to foreign traders who are slow to adjust their portfolios. This sets off a Fisherian a...

Contact and additional information for this authorAll publicationsWorking Papers only

 
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