Sovereign Risk, Anonymous Markets, and the Effects of Globalization

UPF Economics and Business Working Paper No. 837

32 Pages Posted: 29 Nov 2005

See all articles by Fernando Broner

Fernando Broner

CREI; Barcelona GSE; Universitat Pompeu Fabra; CEPR

Jaume Ventura

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: June 2005

Abstract

The goal of this paper is to study the effects of globalization on the workings of asset markets and welfare. To do this, we adopt a technological view of the globalization process. That is, we model this process as consisting of a gradual (and exogenous) reduction in the costs of shipping goods across different regions of the world. In the absence of market frictions, globalization creates foreign trade opportunities without affecting domestic ones and, as a result, unambiguously raises welfare. In the presence of sovereign risk, however, globalization can either create or destroy both domestic and foreign trade opportunities. The net effect on welfare of this process of creation and destruction of trade opportunities might be either positive or negative. We also find that asset bubbles moderate this welfare effect. When globalization is welfare reducing, asset bubbles grow creating a positive wealth effect, and vice versa. This might come at a cost though. Asset bubbles reduce the incentives to implement reforms aimed at reducing sovereign risk.

Keywords: Financial integration, anonymous markets, sovereign risk, domestic markets, international markets

JEL Classification: F34, F36, G15

Suggested Citation

Broner, Fernando and Ventura, Jaume, Sovereign Risk, Anonymous Markets, and the Effects of Globalization (June 2005). UPF Economics and Business Working Paper No. 837, Available at SSRN: https://ssrn.com/abstract=859584 or http://dx.doi.org/10.2139/ssrn.859584

Fernando Broner (Contact Author)

CREI ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain
+34 93 542 2601 (Phone)

HOME PAGE: http://www.crei.cat/people/broner

Barcelona GSE

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
+34 93 542 2601 (Phone)

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain
+34 93 542 2601 (Phone)

HOME PAGE: http://www.crei.cat/people/broner

CEPR ( email )

London
United Kingdom
+34 93 542 2601 (Phone)

Jaume Ventura

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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