Income Distribution and the Current Account: A Sectoral Perspective

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We analyse the link between income distribution and the current account for the period 1972-2007. We find that rising (top-end) personal inequality leads to a decrease of the current account, ceteris paribus.

This result is consistent with consumption externalities resulting from upward-looking comparisons. Moreover, an increase in the corporate financial balance or a decrease in the labour income share leads to an increase in the current account. This finding is consistent with the view that consumers do not fully ‘pierce the corporate veil’. Changes in personal and functional income distribution have contributed considerably to the widening of current account balances.