It is often argued that financial globalization involves threshold effects: countries should have a minimum level of preconditions in place before they can reap the benefits of financial integration. This paper investigates what this means for the dynamics of de facto financial globalization, using recently developed threshold and sample splitting methods. We find that there are indeed signs of multiple equilibria in the dynamics of financial integration. We confirm that the main cause for these non-linearities is the quality of the institutional context, as measured by corruption, investment profile, capital account balance and aggregate growth prospects.
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