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

► Multiple equilibria explain why some countries remain trapped at the margins of the global financial system. ► The complex relationship between financial globilization and institutions may result in multiple equilibria. ► Panel data on foreign assets and liabilities confirms the existence of multiple equilibria in a dynamic setting. ► Controlling for institutional quality generally reduces the number of equilibria. ► Capital account liberalization is risky when the institutional setup is poor, but has a large potential payoff.