Financial Globalization, Financial Crises, and the External Portfolio Structure of Emerging Markets

38 Pages Posted: 31 Dec 2013

See all articles by Enrique G. Mendoza

Enrique G. Mendoza

National Bureau of Economic Research (NBER); University of Pennsylvania

Katherine A. Smith

U.S. Naval Academy

Multiple version iconThere are 2 versions of this paper

Date Written: January 2014

Abstract

We study the transitional dynamics 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 non‐zero in the long run. While equity holdings fall permanently, bond holdings initially fall, but rise after the probability of a crisis 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 that they display.

Keywords: Capital controls, financial crisis, financial liberalization

JEL Classification: D52, E44, F32, F41

Suggested Citation

Mendoza, Enrique G. and Smith, Katherine A., Financial Globalization, Financial Crises, and the External Portfolio Structure of Emerging Markets (January 2014). The Scandinavian Journal of Economics, Vol. 116, Issue 1, pp. 20-57, 2014, Available at SSRN: https://ssrn.com/abstract=2373312 or http://dx.doi.org/10.1111/sjoe.12039

Enrique G. Mendoza (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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University of Pennsylvania ( email )

Philadelphia, PA 19104
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HOME PAGE: http://www.sas.upenn.edu/~egme/index.html

Katherine A. Smith

U.S. Naval Academy ( email )

121 Blake Road
Annapolis, MD 21402-5000
United States

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