Domestic Inequality and Global Imbalances
Overview
Paper Summary
This paper finds a positive relationship between income inequality, particularly the share of income held by the top 1%, and current account balances in advanced economies. This link is driven by higher savings among the wealthy, which flow abroad in search of higher returns. The study uses a combination of empirical analysis and a quantitative model to support these claims.
Explain Like I'm Five
Countries with bigger gaps between rich and poor tend to have more money flowing out to other countries. This happens because richer people save more and this extra savings goes abroad when there aren't enough investment opportunities at home.
Possible Conflicts of Interest
None identified
Identified Limitations
Rating Explanation
This paper presents a comprehensive and well-structured analysis of the relationship between income inequality and current account balances. The combination of empirical analysis, a stylized theoretical framework, and a quantitative model provides a compelling case for the proposed mechanism. While the lack of causal identification and model simplifications are limitations, the paper's overall contribution to the literature is valuable.
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