Reforms, Finance, and Current Accounts

ABSTRACT: We interpret empirical relationships between current accounts, changes of labor market institutions, and financial developments in terms of interactions between deregulation, which may speed up income growth but also amplifies idiosyncratic income risk, and borrowing constraints, that reduce the relevance of future income for current consumption. We document that deregulation and current accounts are positively related in a standard OECD country panel, indicating that precautionary and liquidity-constrained choices are relevant alongside the investment and consumption-smoothing reactions that would predict a negative association. Consistently with the proposed theoretical perspective, the empirical relationship between deregulation reforms and current accounts surpluses is more positive where financial markets are less developed, robust to a variety of specification details, and associated with faster production growth and higher wage dispersion. JEL Classification: E44, F32, J0