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Income Distribution and Current Account Imbalances

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  • Theobald, Thomas
  • Belabed, Christian A.

Abstract

We develop a three-country, stock-fl ow consistent macroeconomic model to study the e ffects of changes in both personal and functional income distribution on national current account balances. Each country has a household sector and a non-household (corporate) sector. The household sector is divided into income deciles, and consumer demand is characterized by upward-looking status comparisons following the relative income hypothesis of consumption. The strength of consumption emulation depends on country-specifi c institutions. The model is calibrated for the United States, Germany and China. Simulations suggest that a substantial part of the increase in household debt and the decrease in the current account in the United States since the early 1980s can be explained by the interplay of rising (top-end) household income inequality and institutions. On the other hand, the weak domestic demand and increasing current account balances of Germany and China since the mid-1990s are strongly related to shifts in the functional income distribution at the expense of the household sector.

Suggested Citation

  • Theobald, Thomas & Belabed, Christian A., 2014. "Income Distribution and Current Account Imbalances," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100371, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc14:100371
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    More about this item

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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