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The Impact of Financial Development on Income Inequality: Evidence from OECD Countries

Year 2024, Volume: 53 Issue: 1, 103 - 118, 30.04.2024
https://doi.org/10.26650/ibr.2024.53.1094981

Abstract

The financial system has an important component which adds to social welfare. Investment and consumption expenditures contribute to the increase in production by meeting the capital requirement. The study examines the impact of financial development on income inequality for 13 member nations of the OECD between 1993 and 2017 in light of the panel data method. In the study, income inequality is used as a proxy for the GINI coefficient, while the banks’ domestic credit to the private sector is utilized to represent financial development. In addition, the model utilizes control variables, including per capita income, trade openness, inflation, and public spending. The panel data regression results reveal that financial development has a positive effect on income inequality. The results of the paper support the Income Inequality Widening Hypothesis, which suggests that the situation which favours individuals with high income levels who have access to financial resources continues when financial development increases, which in turn increases income inequality.

References

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Year 2024, Volume: 53 Issue: 1, 103 - 118, 30.04.2024
https://doi.org/10.26650/ibr.2024.53.1094981

Abstract

References

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  • Claessens, S., & Perotti, E. (2007). Finance and inequality: Channels and evidence. Journal of comparative Economics, 35(4), 748-773. doi:10.1016/j.jce.2007.07.002 google scholar
  • Clarke, G. R., Xu, L. C., & Zou, H. F. (2006). Finance and income inequality: what do the data tell us?. So-uthern economic journal, 578-596. doi:10.2307/20111834 google scholar
  • Dabla-Norris, M. E., Kochhar, M. K., Suphaphiphat, M. N., Ricka, M. F., & Tsounta, M. E. (2015). Causes and consequences of income inequality: A global perspective. International Monetary Fund. google scholar
  • De Haan, J., & Sturm, J. E. (2017). Finance and income inequality: A review and new evidence. European Journal of Political Economy, 50, 171-195. doi:10.1016/j.ejpoleco.2017.04.007 google scholar
  • Demirgüç-Kunt, A., & Levine, R. (2009). Finance and inequality: Theory and evidence. Annual Review Fi-nancial Economics, 1(1), 287-318. doi.org:10.1146/annurev.financial.050808.114334 google scholar
  • Denk, O., & Cournede, B. (2015). Finance and income inequality in OECD countries. Available at SSRN 2649944. doi:10.2139/ssrn.2649944 google scholar
  • Dollar, D., & Kraay, A. (2002). Growth is Good for the Poor. Journal of economic growth, 7(3), 195-225. google scholar
  • Emek, Ö. F., & Tatoğlu, F. Y. (2020). Gelir eşitsizliği ile enflasyon ilişkisinin gelişmişlik düzeyine göre heterojen panel veri modelleri ile analizi. SGD-Sosyal Güvenlik Dergisi, 10(2), 301-312. doi: 10.32331/ sgd.840693 google scholar
  • Galor, O., & Moav, O. (2004). From physical to human capital accumulation: Inequality and the process of development. The Review of Economic Studies, 71(4), 1001-1026. doi:10.1111/0034-6527.00312 google scholar
  • Galor, O., & Zeira, J. (1993). Income distribution and macroeconomics. The Review of Economic Studi-es, 60(1), 35-52. doi:10.2307/2297811 google scholar
  • Gimet, C., & Lagoarde-Segot, T. (2011). A closer look at financial development and income distribution. Jo-urnal of Banking & Finance, 35(7), 1698-1713. doi:10.1016/j.jbankfin.2010.11.011 google scholar
  • Goni, E., Lopez, J. H., & Serven, L. (2011). Fiscal redistribution and income inequality in Latin America. World Development, 39(9), 1558-1569. doi:10.1596/1813-9450-4487 google scholar
  • Greenwood, J., & Jovanovic, B. (1990). Financial development, growth, and the distribution of income. Jo-urnal of political Economy, 98(5, Part 1), 1076-1107. doi:10.1086/261720 google scholar
  • Hamori, S., & Hashiguchi, Y. (2012). The effect of financial deepening on inequality: Some international evidence. Journal of Asian Economics, 23(4), 353-359. doi:10.1016/j.asieco.2011.12.001 google scholar
  • Jalil, A., & Feridun, M. (2011). Long-run relationship between income inequality and financial development in China. Journal of the Asia Pacific Economy, 16(2), 202-214. doi:10.1080/13547860.2011.564745 google scholar
  • Jalilian, H., & Kirkpatrick, C. (2005). Does financial development contribute to poverty reduction?. Journal of development studies, 41(4), 636-656. doi:10.1080/00220380500092754 google scholar
  • Jauch, S., & Watzka, S. (2012). Financial development and income inequality. Cesifo Working Papers 3687 google scholar
  • Jauch, S., & Watzka, S. (2016). Financial development and income inequality: a panel data approach. Empi-rical Economics, 51(1), 291-314. doi: 10.1007/s00181-015-1008-x google scholar
  • Jaumotte, F., Lall, S., & Papageorgiou, C. (2013). Rising income inequality: technology, or trade and finan-cial globalization?. IMF Economic Review, 61(2), 271-309. google scholar
  • Kanberoğlu, Z., & Arvas, M. (2014). Finansal kalkınma ve gelir eşitsizliği: Türkiye örneği, 1980-2012. Sos-yoekonomi, 21(21), 105-122. doi:10.17233/se.59218 google scholar
  • Kappel, V. (2010). The effects of financial development on income inequality and poverty. CER-ETH-Center of Economic Research at ETH Zurich, Working Paper, (10/127). doi:10.2139/ssrn.1585148 google scholar
  • Kar, B. B., & Mikail, K. A. R. (2019). Finansal gelişme ve gelir eşitsizliği: BRICS ekonomileri için dinamik heterojen bir yaklaşım. Anadolu Üniversitesi Sosyal Bilimler Dergisi, 19(1), 27-46. doi:10.18037/ ausbd.550242 google scholar
  • Koçak, E., & Uzay, N. (2019). The effect of financial development on income inequality in Turkey: An es-timate of the Greenwood-Jovanovic hypothesis. Review of Economic Perspectives, 19(4), 319-344. doi: 10.2478/revecp-2019-0017 google scholar
  • Kunieda, T., Okada, K., & Shibata, A. (2014). Finance and inequality: How does globalization change their relationship?. Macroeconomic Dynamics, 18(5), 1091-1128. doi:10.1017/S1365100512000843 google scholar
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Details

Primary Language English
Subjects Business Administration
Journal Section Articles
Authors

Çiğdem Karış 0000-0002-7534-0494

Dilek Çil 0000-0002-8242-1970

Publication Date April 30, 2024
Submission Date March 30, 2022
Published in Issue Year 2024 Volume: 53 Issue: 1

Cite

APA Karış, Ç., & Çil, D. (2024). The Impact of Financial Development on Income Inequality: Evidence from OECD Countries. Istanbul Business Research, 53(1), 103-118. https://doi.org/10.26650/ibr.2024.53.1094981

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