Research Associate, National Bureau of Economic Research.
Financial Globalization, Financial Crises, and the External Portfolio Structure of Emerging Markets*
Article first published online: 30 DEC 2013
© The editors of The Scandinavian Journal of Economics 2013.
The Scandinavian Journal of Economics
Volume 116, Issue 1, pages 20–57, January 2014
How to Cite
Mendoza, E. G. and Smith, K. A. (2014), Financial Globalization, Financial Crises, and the External Portfolio Structure of Emerging Markets. The Scandinavian Journal of Economics, 116: 20–57. doi: 10.1111/sjoe.12039
*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.
- Issue published online: 30 DEC 2013
- Article first published online: 30 DEC 2013
- Capital controls;
- financial crisis;
- financial liberalization;
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.