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

Year 2024, Volume: 53 Issue: 1, 103 - 118, 30.04.2024

Çiğdem Karış Dilek Çil

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.

Keywords

Financial development, Income inequality, OECD countries, Panel data analysis

References

• Acemoglu, D., Johnson, S., & Robinson, J. (2005). Institutions as the fundamental cause of long-run growth. In: Aghion, Philippe, Durlauf, Stephen (Eds.), Handbook of Economic Growth (pp. 385-472). Amster-dam, Netherlands. google scholar
• Adams, S., & Klobodu, E. K. M. (2016). Financial development, control of corruption and income inequa-lity. International Review of Applied Economics, 30(6), 790-808. doi:10.1080/02692171.2016.1208740 google scholar
• Aghion, P., & Bolton, P. (1997). A theory of trickle-down growth and development. The Review of Economic Studies, 64(2), 151-172. doi:10.2307/2971707 google scholar
• Ahmed, A. R., & Masih, M. (2017). What is the link between financial development and income inequality? evidence from Malaysia. MPRA Paper No. 79416. google scholar
• Altunbaş, Y., & Thornton, J. (2019). The impact of financial development on income inequality: A quantile regression approach. Economics Letters, 175, 51-56. doi:10.1016/j.econlet.2018.12.030 google scholar
• Ang, J. (2009). Financial liberalization and income inequality. MPRA Paper No. 1449. google scholar
• Ang, J. B. (2010). Finance and inequality: the case of India. Southern economic journal, 76(3), 738-761. doi:10.4284/sej.2010.76.3.738 google scholar
• Argun, A. İ. (2016). Finansal Gelişme ve Gelir Eşitsizliği. Sosyal Bilimler Dergisi, (1), 61-74. google scholar
• Arora, R. U. (2012). Finance and inequality: a study of Indian states. Applied Economics, 44(34), 4527-4538. doi:10.1080/00036846.2011.597736 google scholar
• Banerjee, A. V., & Newman, A. F. (1993). Occupational choice and the process of development. Journal of Political Economy, 101(2), 274-298. doi:10.1086/261876 google scholar
• Barro, R. J. (2000). Inequality and Growth in a Panel of Countries. Journal of economic growth, 5(1), 5-32. google scholar
• Batuo, M. E., Guidi, F., & Mlambo, K. (2010). Financial development and income inequality: Evidence from African Countries. African Development Bank, 44, 1-27. google scholar
• Beck, T., Demirguc-Kunt, A., & Levine, R. (2004). Finance, inequality, and poverty: Cross-country eviden-ce (No. w10979). National Bureau of Economic Research. doi: 10.3386/w10979 google scholar
• Beck, T., Demirguc-Kunt, A., & Levine, R. (2007). Finance, inequality and the poor. Journal of economic growth, 12(1), 27-49. doi:10.3386/w10979 google scholar
• Behrman, J., Birdsall, N., & Szekely, M. (2001). Economic policy and wage differentials in Latin America. PIER Working Paper No. 01-048 google scholar
• Bittencourt, M. F. (2006). Financial Development and Inequality: Brazil 1985-99. Department of Economics, University of Bristol Discussion Paper, 06/582. google scholar
• Bittencourt, M. (2010). Financial development and inequality: Brazil 1985-1994. Economic Change and Restructuring, 43(2), 113-130. doi:10.1007/s10644-009-9080-x google scholar
• Bolarinwa, S. T., Vo, X. V., & Olufolahan, T. J. (2020). The effect of financial development on income ine-quality in Africa. Development Southern Africa, 1-19, 311-329. doi:10.1080/0376835X.2020.1838261 google scholar
• Bourguignon, F., & Verdier, T. (2000). Oligarchy, democracy, inequality and growth. Journal of development Economics, 62(2), 285-313. doi:10.1016/S0304-3878(00)00086-9 google scholar
• Breusch, T.S., & Pagan, A.R. (1980). The Lagrange multiplier test and its applications to model specification in econometrics. Rev. Econ. Stud. 47(1), 239-253. https://doi.org/10.2307/2297111 google scholar
• Bulir, A. (1998). Income Inequality; Does Inflation Matter? IMF Working Papers 98/7, International Mone-tary Fund. doi:10.5089/9781451928549.001 google scholar
• Calderon C., & Serven, L. (2003), Macroeconomic Dimensions of Infrastructure in Latin America, Mimeo, The World Bank, Washington, DC. google scholar
• Canavire-Bacarreza, G. J., & Rioja, F. K. (2008). Financial development and the distribution of income in Latin America and the Caribbean. IZA Discussion Paper No. 3796 google scholar
• Chiu, Y. B., & Lee, C. C. (2019). Financial development, income inequality, and country risk. Journal of International Money and Finance, 93, 1-18. doi:10.1016/j.jimonfin.2019.01.001 google scholar
• Clarke, G.; Xu, L.C. & Zou, H. (2003). Finance and Income Inequality: Test of Alternative Theories”, World Bank Policy Research Working Paper No. 2984. 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
• Claessens, S. (2006). Access to financial services: A review of the issues and public policy objectives. The World Bank Research Observer, 21(2), 207-240. doi:10.1093/wbro/lkl004 google scholar
• 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
• Kyriacou, A., Muinelo-Gallo, L., & Roca-Sagales, O. (2016). On the redistributive efficiency of fiscal policy. MPRA Paper No. 69045 google scholar
• Law, S. H., & Tan, H. B. (2009). The role of financial development on income inequality in Malaysia. Jour-nal of Economic Development, 34(2), 153-168. google scholar
• Li, H., Squire, L., & Zou, H. F. (1998). Explaining international and intertemporal variations in income ine-quality. The economic journal, 108(446), 26-43. doi:10.1111/1468-0297.00271 google scholar
• Li, J., & Yu, H. (2014). Income inequality and financial reform in Asia: the role of human capital. Applied Economics, 46(24), 2920-2935. doi:10.1080/00036846.2014.916390 google scholar
• Li, H., & Zou, H. F. (2002). Inflation, growth, and income distribution: A cross-country study. Annals of Economics and Finance, 3(1), 85-101. google scholar
• Liang, Z. (2006). Financial Development and Income Inequality in Rural China 1991-2000. World Institute for Development Economic Research Paper No. 2006/96. google scholar
• Liu, G., Liu, Y., & Zhang, C. (2017). Financial development, financial structure and income inequality in China. The World Economy, 40(9), 1890-1917. doi:10.1111/twec.12430 google scholar
• Lopez, H. (2004). Pro-poor-Pro-growth: Is there a Trade Off?. Policy Research Working Paper, 3378. google scholar
• Matsuyama, K. (2000). Endogenous inequality. The Review of Economic Studies, 67(4), 743-759. doi:10.1111/1467-937X.00152 google scholar
• Motonishi, T. (2006). Why has income inequality in Thailand increased?: An analysis using surveys from 1975 to 1998. Japan and the World Economy, 18(4), 464-487. google scholar
• Perotti, E., & Volpin, P. (2007). Investor protection and entry (No. 07-006/2). Tinbergen Institute discussion paper. google scholar
• Rajan, R. G., & Zingales, L. (2003). The great reversals: the politics of financial development in the twenti-eth century. Journal of financial economics, 69(1), 5-50. doi: 10.1016/S0304-405X(03)00125-9 google scholar
• Rashid, A., & Intartaglia, M. (2017). Financial development-does it lessen poverty?. Journal of Economic Studies. 44(1), 69-86. doi:10.1108/JES-06-2015-0111 google scholar
• Rehman, H. U., Khan, S., & Ahmed, I. (2008). Income distribution, growth and financial development: A cross countries analysis. Pakistan Economic and Social Review, 46(1), 1-16. google scholar
• Rodriguez-Pose, A., & Tselios, V (2009). Education and income inequality in the regions of the European Union. Journal of Regional Science, 49(3), 411-437. doi.org:10.1111/j.1467-9787.2008.00602.x google scholar
• Sebastian, J., & Sebastian, W. (2011). Financial development and income inequality. CESifo working paper: Fiscal Policy, Macroeconomics and Growth, No. 3687. google scholar
• Sehrawat, M., & Giri, A. K. (2015). Financial development and income inequality in India: an application of ARDL approach. International Journal of Social Economics, 42(1), 64-81. doi:10.1108/IJSE-09-2013-0208 google scholar
• Seven, U., & Coskun, Y. (2016). Does financial development reduce income inequality and poverty? Eviden-ce from emerging countries. Emerging Markets Review, 26, 34-63. doi:10.1016/j.ememar.2016.02.002 google scholar
• Shahbaz, M., Bhattacharya, M., & Mahalik, M. K. (2017). Finance and income inequality in Kazakhstan: evidence since transition with policy suggestions. Applied Economics, 49(52), 5337-5351. doi:10.1080/ 00036846.2017.1305095 google scholar
• Shahbaz, M., & Islam, F. (2011). Financial development and income inequality in Pakistan: an application of ARDL approach. google scholar
• Shahbaz, M., Loganathan, N., Tiwari, A. K., & Sherafatian-Jahromi, R. (2015). Financial development and income inequality: Is there any financial Kuznets curve in Iran?. Social Indicators Research, 124(2), 357382. doi: 10.1007/s11205-014-0801-9 google scholar
• Yerdelen Tatoğlu, F. (2016). Panel Veri Ekonometrisi. Üçüncü baskı. Beta Yayıncılık, İstanbul. google scholar
• Taylor, M. P., & Sarno, L. (1998). The behavior of real exchange rates during the post-Bretton Woods peri-od. Journal of international Economics, 46(2), 281-312. doi:10.1016/S0022-1996(97)00054-8 google scholar
• Thornton, J., & Di Tommaso, C. (2020). The long-run relationship between finance and income inequality: Evidence from panel data. Finance Research Letters, 32, 101180. 1-6. doi:10.1016/j.frl.2019.04.036 google scholar
• Topuz, S. G., & Dağdemir, Ö. (2016). Finansal gelişme ve gelir eşitsizliği: bir panel veri analizi. Anadolu Üniversitesi Sosyal Bilimler Dergisi, 16(3), 19-34. doi:10.18037/ausbd.390325 google scholar
• Wahid, A. N., Shahbaz, M., & Azim, P. (2011). Inflation and financial sector correlation: The case of Bang-ladesh. International journal of economics and financial issues, 1(4), 145. google scholar
• Westley, G. D. (2001). Can financial market policies reduce income inequality (No. 41498). Washington, DC: Inter-American Development Bank. google scholar
• Zhang, R., & Naceur, S. B. (2019). Financial development, inequality, and poverty: Some international evi-dence. International Review of Economics & Finance, 61, 1-16. doi:10.1016/j.iref.2018.12.015 google scholar