Income Inequality and Current Account Imbalances

44 Pages Posted: 2 Feb 2012  

Michael Kumhof

International Monetary Fund (IMF)

Claire Lebarz

International Monetary Fund (IMF)

Romain G. Rancière

Paris School of Economics (PSE); International Monetary Fund (IMF)

Alexander W. Richter

Federal Reserve Bank of Dallas

Nathaniel A. Throckmorton

College of William and Mary

Multiple version iconThere are 2 versions of this paper

Date Written: Janurary 2012

Abstract

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.

Keywords: Credit demand, Cross country analysis, Current account deficits, Domestic debt, Economic models, Income distribution

Suggested Citation

Kumhof, Michael and Lebarz, Claire and Rancière, Romain G. and Richter, Alexander W. and Throckmorton, Nathaniel A., Income Inequality and Current Account Imbalances (Janurary 2012). IMF Working Paper No. 12/8. Available at SSRN: https://ssrn.com/abstract=1997721

Michael Kumhof (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Claire Lebarz

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Romain G. Rancière

Paris School of Economics (PSE) ( email )

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Alexander W. Richter

Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States
214-922-5360 (Phone)

HOME PAGE: http://alexrichterecon.com

Nathaniel A. Throckmorton

College of William and Mary ( email )

P.O. Box 8795
Williamsburg, VA 23187
United States

HOME PAGE: http://nathrockmorton.people.wm.edu/

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