Financial Globalization in Emerging Economies : Much Ado about Nothing?

Abstract

Financial globalization, defined as
 global linkages through cross-border financial flows, has
 become increasingly relevant for emerging markets as they
 integrate financially with the rest of the world. This paper
 argues that, because of the way it is often measured, it has
 also led to the misperception that financial globalization
 in emerging markets has been growing in recent years. The
 authors characterize the evolution of financial
 globalization in emerging markets using alternative
 measures, and find that, in the 2000s, financial
 globalization has grown only marginally and international
 portfolio diversification has been limited and declining
 over time. The paper revisits the empirical literature on
 the implications of financial globalization for local market
 deepening, international risk diversification, financial
 contagion, and financial dollarization, and finds them to be
 rather limited. Whereas financial globalization has indeed
 fostered domestic market deepening in good times, it has
 yielded neither the dividends of consumption smoothing (in
 line with limited portfolio diversification) nor the costs
 of amplifying global financial shocks. In turn, financial
 de-dollarization has largely reflected the undoing of
 financial offshoring and the valuation effects of real appreciation.