Abstract
Three decades before the Great Recession (the 2008 financial and economic crisis) were marked by the continuous growth of current account imbalances and income inequality. This period of high globalization is accompanied by financial liberalization and an increase in trade openness. The empirical investigations of the causes of global imbalances show that growing income inequalities are worsening the current account. After the fall of the Berlin Wall, new EU member states experienced an increase in trade openness accompanied by current account deficits and financial liberalization, but also an increase in income inequality. The Great Recession led to a decrease in imports in these countries and an improvement in the current account. The goal of our research is primarily to examine the relationship between income inequality, current account, and economic openness in the new EU member states. We show that rising income inequality linked with financial liberalization is connected with the deterioration of the current account in new EU member states. Financial liberalization relates to an increase in household domestic debt, contributing to a deterioration of the current account.
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Notes
Domestic consumption is no longer bound by national income restrictions since foreign savings have become more affordable. Greater credit opportunities based on domestic and foreign savings permit individuals to retain a high quality of living, thus enabling low-income individuals to engage in deficit spending to reach the 'lifestyle gap' that separates them from wealthier groups (Levine et al. 2010). The practice of 'keeping up with the Joneses' increased poor households' debt relative to their income (Van Treeck 2014).
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Cota, B., Erjavec, N. & Jakšić, S. Income inequality, economic openness and current account imbalances in new EU member states. Empirica 51, 403–423 (2024). https://doi.org/10.1007/s10663-024-09606-2
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DOI: https://doi.org/10.1007/s10663-024-09606-2
Keywords
- Current account
- Income inequality
- Economic openness
- Financial liberalization
- Panel data
- Feasible generalized least squares