Global current account imbalances and the link between income and consumption inequality

Abstract

AbstractResearch attention to current account imbalances increases because this problem is now manifested as intensified trade wars between countries. Our paper revisits this global issue from a new perspective complementary to previous studies. We propose a simple economics model and find that the current account balance is related inversely to the ratio of income to consumption inequality. This ratio synthesizes all schemes of consumption smoothing, which hinge on political interventions that temporarily attenuate the problem of rising income inequality. Yet shortsighted policy would have a consequential effect on current accounts in the long run. These theoretical findings accord well with our empirical observation that consumption inequality tracks income inequality loosely in deficit countries but closely in surplus economies, with global imbalances affected by financial liberalization and smoothing opportunities.