This study investigates the non-linear relationship between financial globalization and inflation in a sample of 20 developing economies over the period 2000–2023. Utilizing a dynamic panel threshold regression model, the research distinguishes between the de facto (actual capital flows) and de jure (institutional openness) dimensions of financial globalization using the KOF Globalization Index.
The empirical findings reveal significant structural breaks, identifying specific thresholds that govern the globalization-inflation nexus. For de facto flows, a threshold of 31.858 was identified; below this level, capital flows exert severe inflationary pressure (β=29.012), which significantly diminishes to (β=13.459) once the threshold is surpassed, validating the "Absorptive Capacity" argument. Conversely, de jure openness exhibits a consistent disinflationary "discipline effect" (β=−7.406 below the 51.288 threshold, and β=−4.805 above it), acting as a commitment device for price stability. Interestingly, the aggregate KOF Financial Globalization Index showed statistical neutrality due to the "Offsetting Effects Phenomenon," where the inflationary impact of flows is neutralized by institutional gains.
The study concludes that the nature of integration matters more than its volume; policy-makers in developing markets, such as Egypt, should prioritize institutional de jure reforms and target the 31.8% de facto maturity level to mitigate external shocks and anchor long-term price stability.