Michael Kumhof, Claire Lebarz, Romain Rancière, Alexander W. Richter and Nathaniel A. Throckmorton (2012) Research This paper studies the empirical and theoretical link between increases in income inequality and increases in current account deficits. Cross-sectional econometric evidence shows that higher top income shares, and also financial liberalization, which is a common policy response to increases in income inequality, are associated with substantially larger external deficits. To study this mechanism we develop a DSGE model that features workers whose income share declines at the expense of investors