Income inequality and Germany's current account surplus

Thomas Theobald, Patrick Grüning and Till van Treeck

VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy from Verein für Socialpolitik / German Economic Association

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 then 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.

JEL-codes: D31 E17 F32 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-eec, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: Income inequality and Germany’s current account surplus (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc15:112846

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