Financial Integration and Emerging Market Crises
How Does Financial Integration Cause Severe Sudden Stops
DOI:
https://doi.org/10.51094/jxiv.514Keywords:
Financial Integration, Overborrowing, Sudden Stops, Emerging Market Economies, Occasionally Binding Borrowing Constraint, World Real Interest RateAbstract
This paper theoretically investigates the relationship between financial integration and sudden stops by introducing an Interest Coverage Ratio-based borrowing constraint (Yamada, 2023) into an small open economy with tradables and nontradables model. Calibration exercises show that a deeper financial integration makes sudden stops less likely, but worsens the impact of the crises. A deeper financial integration, represented by a looser borrowing constraint, increases average foreign debt and reduces crises probability. Meanwhile, the amount of overborrowing increases, especially during the low world real interest rate periods. Once the borrowing constraint binds, consumption must decrease a lot for the repayment of accumulated borrowing.
Conflicts of Interest Disclosure
The author declares no conflicts of interest associated with this study.Downloads *Displays the aggregated results up to the previous day.
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Submitted: 2023-09-27 20:11:30 UTC
Published: 2023-09-29 00:23:44 UTC
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Copyright (c) 2023
Haruna Yamada
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