TY  - JOUR
AU  - Martin,Philippe
AU  - Rey,Hélène
TI  - Globalization and Emerging Markets: With or Without Crash?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11550
PY  - 2005
Y2  - August 2005
UR  - http://www.nber.org/papers/w11550
L1  - http://www.nber.org/papers/w11550.pdf
N1  - Author contact info:
Philippe Martin
Sciences Po
27, rue Saint-Guillaume
75007 Paris
France
E-Mail: philippe.martin@sciences-po.fr

Helene Rey
London Business School
Regents Park
London NW1 4SA
UNITED KINGDOM
Tel: 44 2070008412
E-Mail: hrey@london.edu
M2  - featured in NBER digest on 2005-08-15
AB  - 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. In a two-country model, we show that 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. Such a crash in asset prices is accompanied by a current account reversal, a drop in income and investment and more market incompleteness. We show that countries with lower income are more prone to such demand-based financial crashes. Our model can replicate the main stylized facts of financial crashes in emerging markets. Our results strongly suggest that emerging markets should liberalize trade in goods before trade in assets.
ER  -