Growth in a time of external imbalances

Abstract

Globalization and financial integration have increased in the last three decades giving rise to cumulated large external imbalances. The question we address in this paper is whether economic growth can be affected by these external imbalances. We estimate an augmented growth equation with the external stock position of the countries measured by the net foreign asset position. Unlike previous literature, we use non- parametric methods that capture nonlinearities and heterogeneity, and apply them to a sample that includes 106 developed and developing countries for the period 1983- 2011. Contrary to the neoclassical theory, we find that improvements in the external position foster growth. However, our results are in line with current theoretical contributions, suggesting that the effect of the net foreign asset position on growth is heterogeneous across countries and that there is no universal mechanism. In particular, we find that the impact depends on characteristics of the countries such as institutional quality, openness and financial development.