Out of balance? Revisiting the nexus of income inequality, household debt and current account imbalances after the Great Recession

Abstract

Abstract Rising current account imbalances around the globe preceded the Great Recession in the late 2000s. These imbalances narrowed significantly during the crisis mainly due to a negative demand shock and plummeting imports in deficit countries. While income inequality and household debt played a pivotal role in current account imbalances prior to the crisis, it is unclear whether these relations still hold when including the post-crisis era. We estimate current account determinants using a panel of 31 OECD countries over 45 years and include measures for functional and personal income distribution as well as household debt. We find a sustained relation between income inequality and current accounts when including the post-crisis period, while the link to household debt diminishes, indicating a change in the debt regime in a number of countries.