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Income inequality and Germany’s current account surplus

Patrick Grüning, Thomas Theobald () and Till van Treeck

No 147-2015, IMK Working Paper from IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute

Abstract: Germany entered the euro with a current account deficit but over the entire past decade has run large and persistent current account surpluses. Besides joining the common currency, the increase of Germany’s current account since the late 1990s has been accompanied by strong shifts in the personal and, in particular, the functional income distribution. In this paper, we argue that income inequality should always be analyzed with respect to both the personal and the functional distribution of income. We present a dynamic stochastic general equilibrium (DSGE) model in which a current account surplus arises as an endogenous result of a decrease in the share of household income in national income. On the one hand, this result complements existing literature where current account deficits result from rising personal income inequality. On the other hand, we find that current account imbalances will be more pronounced when accompanied by changes in the financial system. Accordingly, if we link Germany’s accession to the European monetary union to lower exchange rate costs for German bank lending, the current account surplus becomes larger.

Keywords: income inequality; functional income distribution; household debt; financial system; current account (search for similar items in EconPapers)
JEL-codes: D31 E17 F32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-eec, nep-mac and nep-opm
Date: 2015
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