Net foreign asset (com)position: Does financial development matter?

•We relate domestic financial development to the (composition of) net foreign asset positions.•We use a pooled mean group estimator and data for 50 countries during the period 1970–2007.•Results show that financial development reduces a country's long-run net foreign asset position.•Financial development leads to higher net equity and lower net debt positions.•The results are robust to using different indicators of financial development.

We investigate the relationship between a country's domestic financial development and the (composition of its) net foreign asset position using a pooled mean group estimator and data for 50 countries for the 1970–2007 period. The results show that financial development reduces a country's long-run net foreign asset position. In addition, financial development leads to higher net equity and lower net debt positions. These findings confirm the theoretical predictions of Mendoza et al. (2009). The results are robust to using different indicators of financial development and inclusion of the level of development of a country in the cointegrating relationship.