Income Inequality and Current Account Imbalances

Rancière, Romain; Throckmorton, Nathaniel A.; Kumhof, Michael; Lebarz, Claire; Richter, Alexander W.

doi:10.5089/9781463930578.001

Cited by 56 publications

(10 citation statements)

References 52 publications

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“…Moreover, the variables of current account balance, primary balance, and interest rate were included in Equation (7) to control for foreign demand, fiscal policy, and monetary factors (Martin & Philippon, 2014;Ranciere, Throckmorton, Kumhof, Lebarz, & Richter, 2012). However, the results were insignificant, and also, the significance of the remaining variables was affected.…”

Section: Resultsmentioning

confidence: 99%

An investigation of the effects of income inequality on financial fragility: Evidence from Organization for Economic Co‐operation and Development countries

Amountzias

2018

Int. J Fin Econ

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The main scope of the paper is to investigate the proposition that rising income inequality results in systemic financial instability in developed countries. In particular, 33 OECD (Organization for Economic Co‐operation and Development) countries are studied in a panel Vector Autoregression (VAR) framework analysis over 1995–2015. There is a growing literature on the effects of income inequality on financial crises. This study provides significant evidence in favour of a positive relationship between income inequality and financial fragility, when particular factors are controlled for. Complementary findings also suggest that (a) debt accumulation in the private sector significantly depends on credit expansion, (b) the debt levels of the private sector and households co‐move over time, and (c) financial deregulation significantly contributes to financial instability. Therefore, policymakers should take into account regulatory reforms that will promote institutional and financial innovations to restrict debt accumulation and render the financial system more robust to destabilising shocks.

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Section: Resultsmentioning

confidence: 99%

An investigation of the effects of income inequality on financial fragility: Evidence from Organization for Economic Co‐operation and Development countries

Amountzias

2018

Int. J Fin Econ

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“…The existing literature on this subject is vast and has yielded numerous conflicting results, as some authors discovered the Fisher hypothesis, which argues that the main drivers of fragility are the private sector's explosive degree of indebtedness, resulting in the destabilization of financial markets, thus causing harm to the economy overall (Bazillier and Hericourt, 2017;Destek and Koksel, 2019), while others found the Minsky hypothesis, which posits that a period of extreme euphoria and growth was followed by financial downfalls as a result of inefficient investment decisions and speculative activities (Kumhof and Ranci ere, 2010;Fasianos et al, 2017;Bodea et al, 2021). Others discovered the Rajan hypothesis, which posits that a significant increase in inequality was the major driver of the crisis (Kumhof et al, 2012;Stiglitz, 2012;Perugini et al, 2013Perugini et al, , 2016El-Shagi et al, 2019). Among these studies, others find the relationship to be inconclusive (Tridico, 2012).…”

Section: Background Of the Studymentioning

confidence: 99%

Investigating the asymmetric effect of income inequality on financial fragility in South Africa and selected emerging markets: a Bayesian approach with hierarchical priors

Zungu,

Greyling

2023

IJOEM

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PurposeThis study aims to test the validity of the Rajan theory in South Africa and other selected emerging markets (Chile, Peru and Brazil) during the period 1975–2019.Design/methodology/approachIn this study, the researchers used time-series data to estimate a Bayesian Vector Autoregression (BVAR) model with hierarchical priors. The BVAR technique has the advantage of being able to accommodate a wide cross-section of variables without running out of degrees of freedom. It is also able to deal with dense parameterization by imposing structure on model coefficients via prior information and optimal choice of the degree of formativeness.FindingsThe results for all countries except Peru confirmed the Rajan hypotheses, indicating that inequality contributes to high indebtedness, resulting in financial fragility. However, for Peru, this study finds it contradicts the theory. This study controlled for monetary policy shock and found the results differing country-specific.Originality/valueThe findings suggest that an escalating level of inequality leads to financial fragility, which implies that policymakers ought to be cautious of excessive inequality when endeavouring to contain the risk of financial fragility, by implementing sound structural reform policies that aim to attract investments consistent with job creation, development and growth in these countries. Policymakers should also be cautious when implementing policy tools (redistributive policies, a sound monetary policy), as they seem to increase the risk of excessive credit growth and financial fragility, and they need to treat income inequality as an important factor relevant to macroeconomic aggregates and financial fragility.

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“…The role of government intervention, especially in equitable distribution, efficient production and economic stabilization for achieving well-being, is essential and cannot be overemphasized. In recent years, there has been discussion in the literature to examine the potential role of government in the equitable distribution, production and stabilization essentially in an environment characterized by macroeconomic imbalance (Rajan, 2010;Ranciere et al, 2012;Pettis, 2013;Frank et al, 2014;Bertrand and Morse, 2016;Piketty et al, 2018). Also, studies have examined the importance of institution of government in achieving any of the welfare objectives with findings suggesting that the performance of government institution determines the development of an economy (Kim et al, 2018;Hall and Ahmad, 2012;Slesman et al, 2015;Acemoglu and Robinson, 2008).…”

Section: Drivers Of Unemployment Intensity In Ssamentioning

confidence: 99%

Drivers of unemployment intensity in sub-Saharan Africa: do government intervention and natural resources matter?

Akinyele

Oloba²,

Mah

2022

REPS

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PurposeAfrican countries are endowed with both human and natural resources. These resources constitute integral components for any economic development due to the long-lasting relationship with all sectors in an economy, yet there is an obvious disagreement between growing economy and employment generation in Africa. Though there has been a growing pattern of economic size, particularly the gross domestic product (GDP) among African countries, most of these economies are low in human development. The disagreement between economic growth and employment generation in Africa despite abundant natural resources located on the continent calls for public discourse among scholars. Therefore, the purpose of the study is to examine the peculiar drivers of unemployment intensity in a region characterized by endowed resources.Design/methodology/approachThe paper adopts two approaches; the authors employed the pooled mean group (PMG) estimator and utilised stochastic frontier analysis (SFA) to generate a government efficiency index between the period 1991 and 2017 among sub-Saharan Africa (SSA) countries.FindingsThe empirical results through the single output-multiple inputs framework indicate that on average, there is a low level of government efficiency towards increasing the objective of human development in Africa. However, in the long run, natural resource endowment has a positive and significant relationship with employment generation for SSA. Hence, the study established that a low level of government efficiency has a long-lasting effect on low human development experienced in Africa.Social implicationsThe need to improve the level of government efficiency towards economic development by making both human and physical capital more effective will spur the exploration of natural resources.Originality/valueThe paper provides an empirical study of the effectiveness and efficiency of government through PMG and SFA in establishing the relationship between government approaches and employment level in selected SSA countries.

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Income Inequality and Current Account Imbalances

Abstract: This Working Paper should not be reported as representing the views of the IMF.

Cited by 56 publications

References 52 publications

An investigation of the effects of income inequality on financial fragility: Evidence from Organization for Economic Co‐operation and Development countries

An investigation of the effects of income inequality on financial fragility: Evidence from Organization for Economic Co‐operation and Development countries

Investigating the asymmetric effect of income inequality on financial fragility in South Africa and selected emerging markets: a Bayesian approach with hierarchical priors

Drivers of unemployment intensity in sub-Saharan Africa: do government intervention and natural resources matter?

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