Theorizing global imbalances: a perspective on savings and inequality

The recent global financial crisis has generated substantial research interest in the relationships among savings, inequality and global imbalances. Our study examines the causes of global imbalances by analysing the relationship between income inequality and economic performance and the relationship between savings imbalances and economic instability. We identify a positive link between savings and inequality whenever savings are allocated through the financial market to investment firms for production. However, this relationship becomes negative when non-saving households borrow savers' funds for consumption. Our findings suggest that income inequality should be reduced in both China and the US to mitigate global imbalances.