Income Inequality and Current Account Imbalances

46 Pages Posted: 2 Jun 2015

See all articles by Michael Kumhof

Michael Kumhof


Claire Lebarz

International Monetary Fund (IMF)

Romain G. Rancière

University of Southern California

Alexander W. Richter

Federal Reserve Bank of Dallas

Nathaniel A. Throckmorton

William & Mary

Multiple version iconThere are 2 versions of this paper

Date Written: January 2012


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, Domestic debt, Economic models, Income distribution, current account, current account deficit, private credit, current account balance, current account imbalances, current account deficits, current accounts, current account surpluses, current account balances, global current account, global current account imbalances

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 (January 2012). IMF Working Paper No. 12/8, Available at SSRN:

Michael Kumhof

CEPR ( email )

United Kingdom

Claire Lebarz

International Monetary Fund (IMF) ( email )

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

Romain G. Rancière (Contact Author)

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
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)


Nathaniel A. Throckmorton

William & Mary ( email )

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


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