Income Inequality and Current Account Imbalances

By Romain Rancière, Nathaniel A. Throckmorton, Michael Kumhof, Claire Lebarz, A. W. Richter. Social Science Research Network, 2012

186 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/77f369094a4a4dd0761a0d003bce9b102cb57262

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Citations in the corpus

Inequality, the Great Recession, and Slow Recovery (2014, unknown): “13 Lavoie (1994) interprets a long literature, going back to Veblen (2001 [1899]), that proposes a model of household decision making under ‘procedural rationality’, which he describes as an inherently social phenomenon in which consumer choices are made ‘in conformity with social norms’ (p 545).”
The Chicago Plan Revisited (2012, background): “As shown in Kumhof and Rancière (2010) and Kumhof et al. (2012), such inequalities can make economies more vulnerable to financial crises, and they can contribute to current account imbalances.”