Multiple equilibria in the dynamics of financial globalization: The role of institutions

Bjorn Van Campenhout and Danny Cassimon

Journal of International Financial Markets, Institutions and Money, 2012, vol. 22, issue 2, 329-342

Abstract: Recent research underscores the dual role played by institutions for deciphering the financial globalization – growth nexus. On the one hand, for capital account liberalization to be growth enhancing, a critical level of local institutional quality is needed. On the other hand, increased integration in the global financial system strengthens these countries’ institutions. We argue that this complex relationship may give rise to multiple equilibria in the dynamics of financial global integration: haphazard capital account liberalization may lead to situations where well integrated nations become increasingly better integrated, while poorly integrated nations are left at the margin. To test this hypothesis, we check whether controlling for the quality of institutions eliminates conditional convergence of global financial integration. Our results confirm that growth in financial integration is non-linear, and that this non-linearity disappears once we control for the quality of institutions.

Keywords: Financial globalization; Institutions; Conditional convergence (search for similar items in EconPapers)
JEL-codes: F36 G28 O43 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:22:y:2012:i:2:p:329-342

DOI: 10.1016/j.intfin.2011.10.002

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