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

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  • Van Campenhout, Bjorn
  • Cassimon, Danny

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.

Suggested Citation

  • Van Campenhout, Bjorn & Cassimon, Danny, 2012. "Multiple equilibria in the dynamics of financial globalization: The role of institutions," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(2), pages 329-342.
  • Handle: RePEc:eee:intfin:v:22:y:2012:i:2:p:329-342
    DOI: 10.1016/j.intfin.2011.10.002
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    References listed on IDEAS

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    Keywords

    Financial globalization; Institutions; Conditional convergence;

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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