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Income Inequality and Current Account Imbalances
Author: Mr. Romain Ranciere, Mr. Nathaniel A. Throckmorton, Mr. Michael Kumhof, Ms. Claire Lebarz, and Mr. Alexander W. Richter
Series:
IMF Working Papers
Volume/Issue:
Volume 2012: Issue 008
Language:
English
Publication Date:
01 Jan 2012
DOI:
https://doi.org/10.5089/9781463930578.001
ISBN:
9781463930578
ISSN:
1018-5941
Pages:
44
Keywords:
WP; current account deterioration; current account equation; utility function; Current account imbalances; income inequality; financial liberalization.; income share; physical capital; share decrease; per capita income; share increase; financia sector; Personal income; Income inequality; Current account; Consumption; Current account balance; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund