Functional Income Distribution,Financial Development And Current Account Inbalances

Since the21st century, global current account imbalances are increasingly becoming a prominent issue. The current account of developed countries, represented by the United States of America is in deficit all the year round; while, the developing countries which is represented by China keep current account surplus. The deep imbalances of current account pose threats to global steady growth. And some scholars believed that global imbalances is an important factor of2008global financial crisis(Obstfeld and Rogoff,2009, Blanchard and Milesi-Ferretti,2009, Portes,2009). Therefore, to probe into the current account imbalances has certain significance of revealing the global economic crisis and its causes. Current account imbalances reflect the imbalance of savings and investment to some extent. And the imbalance between savings and investment mainly results from the imbalance of income distribution structure which is related to the structure of initial distribution of income directly. The changes in the pattern of the initial distribution have a direct effect on the income redistribution, affecting the whole society’s proportion of investment and consumption the ultimately (Liu wei and Cai Zhizhou,2008). This article attempts to explain current account imbalances from the perspective of functional imbalance in the distribution of income, and conduct the research on the impacts from both theoretical and empirical aspects.Based on the related literature collected and summarized from home and abroad, this paper attempts to illustrate the relationship between functional income distribution and current account imbalances from four major parts. Firstly, this paper makes a cross-board comparative analysis of current account imbalances and finds that the current account imbalances are global and persistent. The comparative analysis about the labor income share shows that the share of labor income in the developed countries is much higher than that in the developing countries and the share of labor income of all countries takes on the decreasing trend.Secondly, by means of constructing external agent heterogeneity and consumption model, this paper explains the relationship among the labor income share, financial development and current account imbalances from the perspective of the consumer channel. The model assumes that capital accumulation and government spending does not exist, and the relationship among the labor share,the degree of financial development and the current account has close links with consumption externalizations and the size of the subjective discount rate. In developed countries,the subjective discount rate is low, residents tend to the current consumption and the workers’ consumption externalities will be bigger which will lead to the deficit of current account. and the the bigger share of labor income and the higher level of financial development will enlarge the deficit of current account. In developing countries, the subjective discount rate is larger, residents will be more inclined to the savings. The more attention from workers paid to the relative consumption, the more chance it will lead to current account surplus, when the proportion of a country’s labor income is larger and the degree of financial development is higher, it will promote the current account surplus.Furthermore, the paper selects panel data from42countries which consists of22developed countries and20developing countries, and conduct the panel data regressive analysis from1995to2011year which is consistent with the above mentioned theoretical conclusion. The result shows that, Labor income share and financial development have a significant impact on the current account, when the labor income share in developed countries, increases by one unit, the current account deficit will increase by0.128%accordingly. While in developing countries, the labor income share increase by1%, the current account surplus will increase by0.143%. Financial development has a negative impact on the two samples of the current account, and is more significant in developed countries. Finally, the paper comes to the conclusion that the fundamental cause of current account imbalances lies in the differences of imbalance of functional income distribution and the degree of financial development around the countries. For the countries which has imbalance of current account should emphasize functional income distribution in the process and the developing countries should focus on the development of domestic financial markets.