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Current Account Imbalances and Income Inequality: Theory and Evidence

  • Fares Al-Hussami
  • Álvaro Martín Remesal
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    In 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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    Paper provided by Kiel Institute for the World Economy in its series Kiel Advanced Studies Working Papers with number 459.

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    Length: 38 pages
    Date of creation: Jul 2012
    Date of revision:
    Handle: RePEc:kie:kieasw:459
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