Inequality, Saving and Global Imbalances: A New Theory with Evidence from OECD and Asian Countries

Global imbalances are attributable to savings deficiency in some economies and savings glut in others. The recent global crisis has triggered widespread social conflict over income inequality. The inequality-saving link has again become a pressing issue needing serious attention. We present a new theory to explain why the link between inequality and saving is negative in OECD countries but positive in emerging Asia. We also offer an econometric analysis of differences in inequality-saving links between those economies. We find that aggressive financial services lead to a negative link by creating income illusion for overconsumption, but imperfect financial markets contribute to a positive link by interacting with industrial policies as part of growth strategies while ignoring liquidity constraints on consumption.