Description:
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.