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Income inequality and current account imbalances
Kumhoff, Michael Rancière, Romain Richter, Alexander W. Throckmorton, Nathaniel Winant, Pablo
Kumhoff, Michael
Rancière, Romain
Richter, Alexander W.
Throckmorton, Nathaniel
Winant, Pablo
Abstract
Current account regressions show that when top income shares are added to the comprehensive set of conventional explanatory variables used by the IMF, they predict significantly larger current account deficits in a cross-section of advanced economies, but with important outliers among countries that have pursued export-led rather than finance-led growth strategies. To study this mechanism, we develop a DSGE model where the income share of top earners increases at the expense of bottom earners. Due to preferences for wealth, top earners have a much higher marginal propensity to save than bottom earners, as they do in the data. We find that, when the redistributive shock has a large positive effect on asset values, and if domestic financial markets are large, the result will be a sizeable current account deficit. On the other hand, when the redistributive shock mostly affects relative labor incomes, and if domestic financial markets are small, the result will be a current account surplus.
Description
Date
2015-11-15
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Publisher
International Monetary Fund