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Income distribution and the current account: a sectoral perspective

Jan Behringer () and Till van Treeck

No 379, Working Papers from ECINEQ, Society for the Study of Economic Inequality

Abstract: We investigate whether changes in income distribution can explain current account developments in a sample of 20 countries for the period 1972-2007. We analyze the relationship between the personal and the functional income distribution in our sample, before disentangling their effects on the household and corporate financial balances and the current account. We find that rising (top-end) personal inequality leads to a decrease of the private household financial balance and the current account, controlling for standard current account determinants. Moreover, an increase in corporate net lending or, alternatively, a fall in the wage share leads to an increase in the current account, ceteris paribus. While we remain agnostic as to the underlying theoretical explanations of our findings, they are consistent with consumption externalities on the one hand and with incomplete piercing of the corporate veil or the underconsumptionist view on the other hand. We show that changes in personal and functional income distribution have contributed considerably to the widening of current account balances, and hence to the instability of the international economic system, prior to the global financial crisis starting in 2007.

Keywords: Income distribution; current account determinants; sectoral financial balances; global financial crisis. (search for similar items in EconPapers)
JEL-codes: D31 D33 E21 F41 G3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-mac and nep-opm
Date: 2015-10
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Related works:
Working Paper: Income Distribution and Current Account: A Sectoral Perspective (2014) Downloads
Working Paper: Income distribution and current account: A sectoral perspective (2013) Downloads
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