Growth in a time of external imbalances
Mariam Camarero (),
Jesús Peiró-Palomino () and
Economic Modelling, 2019, vol. 79, issue C, 262-275
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 non-linearities 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. Our results are in line with current theoretical contributions explaining the Lucas Paradox where financial frictions are present. Within this framework, the general outcome should be a positive sign and the “neoclassical” negative relationship between net foreign assets and growth would be just a particular case, with no universal explanatory mechanism. Accordingly, we find that the effect of the net foreign asset position on growth is heterogeneous, the impact depending on the characteristics of the countries such as institutional quality, openness and financial development.
Keywords: Economic growth; Net foreign assets; Parameter heterogeneity (search for similar items in EconPapers)
JEL-codes: C14 F34 O47 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:79:y:2019:i:c:p:262-275
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