Capital account flows, consumption ratios and the middle-income trap

Using a sample of 31 OECD countries and 17 middle-income countries over the period 1950-2013, we carry out an empirical investigation of the relationship amongst domestic consumption, capital account flows and the growth rate of GDP. The main findings are that there is an inverted U-shaped relationship between the consumption ratio and economic growth, while capital outflow is positively associated with economic growth but capital inflow is associated with slower growth. These results hold in the full sample of countries, in the high-income group, the middle-income group and in a group that we define as middle-income trapped. An extreme bounds analysis indicates that the results are, for the most part, robust to the inclusion of a range of variables that have been found to be associated with growth in the literature