Multiple equilibria in the dynamics of financial globalization: The role of institutions |
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| Authors: | Bjorn Van Campenhout Danny Cassimon |
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| Institution: | 1. International Food Policy Research Institute (IFPRI), Plot 15, East Naguru Road, PO Box 28565, Kampala, Uganda;2. Institute of Development Policy and Management (IOB) – University of Antwerp, Lange Sint-Annastraat 7, 2000 Antwerpen, Belgium;1. Department of Public Policy and Public Affairs, McCormack Graduate School of Policy and Global Studies, University of Massachusetts Boston, Boston, MA 02125-3393, USA;2. Department of Operations & Information Management, Isenberg School of Management, University of Massachusetts Amherst, Amherst, MA 01003-9310, USA;3. Department of Management Science and Information Systems, College of Management, University of Massachusetts Boston, Boston, MA 02125-3393, USA;1. Institute of Information Science, Beijing Jiaotong University, Beijing 100044, China;2. Computer & Information Science, University of Pennsylvania, Philadelphia, PA 19104, USA |
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| 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. |
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