Inequality, Financial Deepening and Current Account Impact

In this paper, we analyze the relationship between inequality and the current account, discussing the role of the financial system in the interaction between these variables. Using panel data of 29 advanced and developing countries for the 1970-2011 period, our results confirm that a higher wage share is associated with a decrease in the current account. This result is robust to different specifications and econometric methodologies. On the other hand, while we found evidence that deterioration in personal income distribution is associated with a lower current account balance, our results shows that the relationship is stronger in emerging economies than in advanced ones, the opposite of what had been suggested by the recent literature, focused on the US. The existence of differences between groups of countries confirms that the relationship between income distribution and external sector is mediated by various structural and idiosyncratic factors. Therefore, we warn about the danger of generalizing results based only on the study of advanced economies.