The Mexican crisis that took place in 1994 was followed by nearly a decade of frequent and severe financial crises in the emerging economies. These crises episodes that were characterized by dramatic reversals in capital flows and large losses in output are atypical to the more advanced economies. This dissertation explores the characteristics, and in particular the vulnerabilities, of the emerging markets that could explain this difference.

In the first part of my dissertation, I study the impact of the Asian financial crisis on firms in Southeast Asia using firm-level data. I then develop a model that shows how shocks to the expectations of agents and foreign investors could explain well the patterns observed during and following the crisis. The chapter emphasizes the credit-less recovery pattern that is left unexplained by the earlier sudden stop models. It also emphasizes the role of financial frictions in these economies as one of the important factors that makes them more vulnerable than the advanced economies to both expectations and productivity shocks. The model can account for both the patterns in the aggregate data as well as the heterogeneity of performance of firms of different leverage, size and growth opportunities.

The second part of my dissertation addresses another vulnerability of the emerging markets, which is their non-standard maturity structure of debt. It is a well-known fact that the excess reliance on foreign currency and short-term maturity debt in these economies tends to amplify the impact of negative shocks to these economies. One of the given explanations of this irregularity in the composition of debt points to the high and volatile inflation levels that characterized the emerging economies during the last two decades. In this chapter I show, in a general equilibrium model, a new mechanism through which high inflation levels can shorten the maturity of traded debt. In particular, the model suggests that the possibility of price stabilization by the central bank can significantly affect the ability of agents in the economy to borrow at long maturities.