Reforms, Finance, and Current Accounts

ABSTRACT: We study theoretical and empirical relationships between countries ’ current accounts and reforms of institutions that shape labor’s productivity and labor income risk. In theory, both consumption smoothing and precautionary motives shape saving behavior when deregulation speeds up income growth and amplify idiosyncratic income risk, and the relative importance of these two channels depends on workers ’ access to credit. Empirically, nonlinear regressions on a standard sample of OECD countries indicate that the association between deregulation trends and current accounts surpluses is statistically significant, robust to a variety of specification details, and stronger where financial markets are less developed. The relevant labor market regulation and financial indicators are empirically associated not only with lower consumption, faster production growth, and more investment, but also with higher wage dispersion. JEL Classification: E44, F32, J0