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


  • *We would like to thank two anonymous referees and the guest editors for their helpful comments and suggestions. We also thank Gian Maria Milesi-Ferretti and Philip Lane for their dataset on foreign asset positions.


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.