Description

An implication of the "globalization hazard" hypothesis is that sudden stops could be prevented by offering foreign investors price guarantees on emerging markets assets. These guarantees create a tradeoff, however, because they weaken globalization hazard by creating international moral hazard. We study this tradeoff using an equilibrium asset-pricing model. Without guarantees, margin calls and trading costs cause Sudden Stops driven by Fisher's debt-deflation process. Price guarantees prevent this deflation by propping up foreign asset demand, but their effectiveness and welfare implications depend critically on the price elasticity of foreign demand and on making the guarantees contingent on debt levels.

Taxonomy

Asset prices , Capital markets , Deflation , Economic cooperation , Economic policy , Financial institutions and markets , Globalization , Monetary policy

More publications in this series: Working Papers

More publications by: Enrique G Mendoza ; Ceyhun Bora Durdu