Income Inequality and Current Account Imbalances

By Romain Ranciere, Nathaniel A. Throckmorton, Michael Kumhof, Claire Lebarz, Alexander W. Richter

January 1, 2012

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Romain Ranciere, Nathaniel A. Throckmorton, Michael Kumhof, Claire Lebarz, and Alexander W. Richter Income Inequality and Current Account Imbalances, (USA: International Monetary Fund, 2012) accessed September 20, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper studies the empirical and theoretical link between increases in income inequality and increases in current account deficits. Cross-sectional econometric evidence shows that higher top income shares, and also financial liberalization, which is a common policy response to increases in income inequality, are associated with substantially larger external deficits. To study this mechanism we develop a DSGE model that features workers whose income share declines at the expense of investors. Loans to workers from domestic and foreign investors support aggregate demand and result in current account deficits. Financial liberalization helps workers smooth consumption, but at the cost of higher household debt and larger current account deficits. In emerging markets, workers cannot borrow from investors, who instead deploy their surplus funds abroad, leading to current account surpluses instead of deficits.

Subject: Balance of payments, Consumption, Current account, Current account balance, Income inequality, National accounts, Personal income

Keywords: Consumption, Current account, Current account balance, Current account deterioration, Current account equation, Current account imbalances, Financia sector, Financial liberalization., Global, Income inequality, Income inequality, Income share, Per capita income, Personal income, Physical capital, Share decrease, Share increase, Utility function, WP

Publication Details

Pages:

44
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/008
Stock No:

WPIEA2012008
ISBN:

9781463930578
ISSN:

1018-5941

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