Current Account Imbalances and Income Inequality: Theory and Evidence
AbstractIn this paper we analyze theoretically and empirically the impact of an increase in income inequality on the current account balance. We develop a model with consumption externalities and heterogeneous agents which explains how an increase in income inequality can affect negatively or positively the current account balance. The relationship is exacerbated by the level of financial liberalization represented by changes in the borrowing constraints. Panel data regressions for a sample of developed and developing economies confirm that an increase in income inequality is mostly linked to a decrease in the current account balance. Moreover, we also and that relatively higher levels of financial liberalization interact with the level of income inequality so that the previous effect is amplifed. These results are robust to different specifications
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Bibliographic InfoPaper provided by Kiel Institute for the World Economy in its series Kiel Advanced Studies Working Papers with number 459.
Length: 38 pages
Date of creation: Jul 2012
Date of revision:
Current account; income inequality; global imbalances; financial liberalization; consumption externalities; heterogeneity;
Find related papers by JEL classification:
- C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-23 (All new papers)
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