Globalization and Emerging Markets: With or Without Crash?

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.

Globalization and Emerging Markets: With or Without Crash?.

We analyze the effects of financial and trade globalization on the likelihood of financial crashes in emerging markets. While trade globalization always makes crashes less likely, financial globalization may make them more likely, especially when trade costs are high. Pessimistic expectations can be self-fulfilling and lead to a collapse in demand for goods and assets. Such a crash comes with a current account reversal and drops in income and investment. Lower-income countries are more prone to such demand-based financial crises. A quantitative evaluation shows our model is consistent with the main stylized facts of financial crashes in emerging markets.

International financial adjustment

The paper proposes a unified framework to study the dynamics of net foreign assets and exchange rate movements. We show that deteriorations in a country's net exports or net foreign asset position have to be matched either by future net export growth (trade adjustment channel) or by future increases in the returns of the net foreign asset portfolio (hitherto unexplored financial adjustment channel). Using a newly constructed data set on US gross foreign positions, we find that stabilizing valuation effects contribute as much as 31% of the external adjustment. Our theory also has asset pricing implications. Deviations from trend of the ratio of net exports to net foreign assets predict net foreign asset portfolio returns one quarter to two years ahead and net exports at longer horizons. The exchange rate affects the trade balance and the valuation of net foreign assets. It is forecastable in and out of sample at one quarter and beyond. A one standard deviation decrease of the ratio of net exports to net foreign assets predicts an annualized 4% depreciation of the exchange rate over the next quarter.

International Financial Adjustment

The paper proposes a unified framework to study the dynamics of net foreign assets and exchange rate movements. We show that deteriorations in a country's net exports or net foreign asset position have to be matched either by future net export growth (trade adjustment channel) or by future increases in the returns of the net foreign asset portfolio (hitherto unexplored financial adjustment channel). Using a newly constructed data set on US gross foreign positions, we find that stabilizing valuation effects contribute as much as 31% of the external adjustment. Our theory also has asset pricing implications. Deviations from trend of the ratio of net exports to net foreign assets predict net foreign asset portfolio returns one quarter to two years ahead and net exports at longer horizons. The exchange rate affects the trade balance and the valuation of net foreign assets. It is forecastable in and out of sample at one quarter and beyond. A one standard deviation decrease of the ratio of net exports to net foreign assets predicts an annualized 4% depreciation of the exchange rate over the next quarter.Meese-Rogoff, external adjustment, net foreign assets, valuation effects, exchange rates

From World Banker to World Venture Capitalist: US External Adjustment and the Exorbitant Privilege

Does the center country of the International Monetary System enjoy an "exorbitant privilege" that significantly weakens its external constraint as has been asserted in some European quarters? Using a newly constructed dataset, we perform a detailed analysis of the historical evolution of US external assets and liabilities at market value since 1952. We find strong evidence of a sizeable excess return of gross assets over gross liabilities. Interestingly, this excess return increased after the collapse of the BrettonWoods fixed exchange rate system. It is mainly due to a "return discount": within each class of assets, the total return (yields and capital gains) that the US has to pay to foreigners is smaller than the total return the US gets on its foreign assets. We also find evidence of a "composition effect": the US tends to borrow short and lend long. As financial globalization accelerated its pace, the US transformed itself from a World Banker into a World Venture Capitalist, investing greater amounts in high yield assets such as equity and FDI. We use these findings to cast some light on the sustainability of the current global imbalances.

Home bias in open economy financial macroeconomics

Home bias is a perennial feature of international capital markets. We review various explanations of this puzzling phenomenon highlighting recent developments in macroeconomic modelling that incorporate international portfolio choices in standard two-country general equilibrium models. We refer to this new literature as Open Economy Financial Macroeconomics. We focus on three broad classes of explanations: (i) hedging motives in frictionless financial markets (real exchange rate and non-tradable income risk), (ii) asset trade costs in international financial markets (such as transaction costs or differences in tax treatments between national and foreign assets), (iii) informational frictions and behavioural biases. Recent theories call for new portfolio facts beyond equity home bias. We present new evidence on crossborder asset holdings across different types of assets: equities, bonds and bank lending and new micro data on institutional holdings of equity at the fund level. These data should inform macroeconomic modelling of the open economy and a growing literature of models of delegated investment

Elaboration de stratégies de veille pour les structures offrant un accompagnement aux start-up: les exemples de Genilem et de la Fongit

Le principal avantage d’une start-up est son agilité et sa capacité d’adaptation à l’environnement, notamment à travers des solutions innovantes. L’information et la veille constituent donc pour elles des enjeux vitaux. Les structures qui les soutiennent ont donc elles-mêmes besoin d’un dispositif de veille particulièrement efficace pour apporter une réponse pertinente à leurs attentes. Cette étude poursuit deux objectifs. Le premier consiste à déterminer les besoins en matière de veille de deux organisations qui proposent un accompagnement à des start-up : Genilem Vaud-Genève avec son programme de trois ans de coaching destiné à des entreprises de tout secteur, et la Fongit, un incubateur spécialisé dans les sociétés high-tech localisé à Plan-les-Ouates. Ce travail s’intéresse non seulement aux besoins liés à l’activité de conseil, mais aussi à ceux qui concernent la gestion et l’élaboration de la stratégie de l’organisation. Le second objectif vise à repérer des besoins similaires dans les deux structures et à définir une réponse commune à ces derniers. Les données ont été récoltées à travers une vingtaine d’entretiens avec trois catégories de participants : des dirigeants de start-up coachés, des collaborateurs des structures d’accompagnement et des représentants de deux autres organisations qui offrent un soutien aux entrepreneurs : l’OPI et le GCC. Afin de récolter davantage d’informations auprès des entreprises suivies, un questionnaire a été adressé à une majorité d’entre elles. Ce dernier n’a, toutefois, reçu que 7 réponses sur une cinquantaine d’envois. Les résultats nous ont permis de dresser deux listes d’une quinzaine de recommandations adressées à chacune des deux organisations. Elles portent sur des thématiques de veille dont une partie se recoupe, comme les sources de financement des entreprises ou les méthodes d’accompagnement, mais aussi sur l’instauration d’outils de partage comme l’introduction d’un groupe Facebook pour Genilem. Plusieurs besoins se recoupent, mais les informations elles-mêmes utiles à l’une des organisations le sont rarement à l’autre. Nous avons, toutefois, dégagé quelques propositions de dispositifs communs, par exemple, pour la veille sur les techniques de management ou les sources de financement. Dans le cas de la veille sur les secteurs économiques, ni la Fongit, ni Genilem n’ont les moyens de l’effectuer. Ce rôle ne peut donc être dévolu qu’à d’autres partenaires comme l’OPI ou des clusters tels qu’Alp ICT. Au final, ce travail devrait aider à la fois la Fongit et Genilem à améliorer leurs pratiques de veille, mais également apporter une contribution à une réflexion politique sur le dispositif de soutien à l’entrepreneuriat des cantons de Vaud et Genève