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Financial Development and Income Inequality: A U-shaped Relationship

Author

Listed:
  • Mustafa Rajput, Sheraz

    (Department of Business Administration, Karachi School of Business and Leadership, Pakistan)

  • Nadeem Javaid, Muhammad

    (Department of Business Administration, Karachi School of Business and Leadership, Pakistan)

  • Junaid, Ahmad

    (Department of Business Administration, Karachi School of Business and Leadership, Pakistan)

Abstract

This paper investigates how changes in financial development may affect income inequality. We apply the ordinary least squares method, controlling for time and country fixed effects, to an international panel dataset consisting of 195 countries and covering the period from 1990 to 2021. The findings reveal a U-shaped relationship between financial development and income inequality. The development of financial institutions initially lowers income inequality. However, any further advancement, once societies attain a certain threshold of fair distribution, leads to a worsening of income distribution. This is an interesting result as previous literature discusses positive, negative, or inverted U-shaped relationships between financial development and income inequality. For a decomposed sample of strong versus weak democracies and high- versus low-income countries, the finding of a U-shaped relationship firmly holds for strongly democratic and high-income countries.

Suggested Citation

  • Mustafa Rajput, Sheraz & Nadeem Javaid, Muhammad & Junaid, Ahmad, 2023. "Financial Development and Income Inequality: A U-shaped Relationship," Asian Journal of Applied Economics/ Applied Economics Journal, Kasetsart University, Faculty of Economics, Center for Applied Economic Research, vol. 30(2), pages 38-53, Jul-Dec.
    • Handle: RePEc:ris:apecjn:0087
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    More about this item

    Keywords

    financial development; income inequality; democracy level; income level; international panel data;
    All these keywords.

    JEL classification:

    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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