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A closer look at financial development and income distribution

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  • Gimet, Céline
  • Lagoarde-Segot, Thomas

Abstract

This paper analyzes the under-investigated relationship uniting financial development and income distribution. We use a novel approach taking into account for the first time the specific channels linking banks, capital markets and income inequality, the time-varying nature of the relationship, and reciprocal causality. We construct a set of annual indicators of banking and capital market size, robustness, efficiency and international integration. We then estimate the determinants of income distribution using a panel Bayesian structural vector autoregressive (SVAR) model, for a set of 49 countries over the 1994-2002 period. We uncover a significant causality running from financial sector development to income distribution. In addition, the banking sector seems to exert a stronger impact on inequality. Finally, the relationship appears to depend on the characteristics of the financial sector, rather than on its size.

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  • Gimet, Céline & Lagoarde-Segot, Thomas, 2011. "A closer look at financial development and income distribution," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1698-1713, July.
    • Handle: RePEc:eee:jbfina:v:35:y:2011:i:7:p:1698-1713
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    More about this item

    Keywords

    Finance Income distribution SVAR;

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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