TY  - JOUR
AU  - Martin,Philippe
AU  - Rey,Helene
TI  - Financial Globalization and Emerging Markets: With or Without Crash?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9288
PY  - 2002
Y2  - October 2002
UR  - http://www.nber.org/papers/w9288
L1  - http://www.nber.org/papers/w9288.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
AB  - We analyze the impact of financial globalization on asset prices, investment and the possibility of crashes driven by self-fulfilling expectations in emerging markets. In a two-country model with one emerging market (intermediate income level) and one industrialized country (high income level), we show that liberalization of capital flows increases asset prices, investment and income in the emerging market. However, for intermediate levels of international financial transaction costs, we find that pessimistic expectations can be self-fulfilling, leading to a financial crash. The crash is accompanied by capital flight, a drop in income and investment below the financial autarky level and more market incompleteness. We show that emerging markets are more prone to financial crashes simply because they have a lower income level and not because of the existence of market failures (moral hazard or credit constraints), bad monetary policies or exchange rate regimes.
ER  -