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The Matthew effect and modern finance: on the nexus between wealth inequality, financial development and financial technology

Author

Listed:
  • Jon Frost

    (Bank for International Settlements and Cambridge Centre for Alternative Finance)

  • Leonardo Gambacorta

    (Bank for International Settlements and CEPR)

  • Romina Gambacorta

    (Bank of Italy)

Abstract

This paper analyses the role of financial development and financial technology in inequality in (returns to) wealth. Using micro data from the Survey on Household Income and Wealth (SHIW) conducted by the Bank of Italy over the period 1991-2016, we find that financial development (number of bank branches) and financial technology (use of remote banking) both have a positive association with households’ financial wealth and financial returns. By applying an instrumental variable approach to control for endogeneity, we find that the two variables are, by and large, substitutes. The economic significance of both decreased in the last part of the sample period, as remote banking became more widespread. Finally, other things equal, the effects of financial development and financial technology increase when moving toward the top of the wealth distribution. This is in line with the so-called “Matthew effect” (Merton, 1968), or the capacity of wealthy households to achieve higher returns than other households.

Suggested Citation

  • Jon Frost & Leonardo Gambacorta & Romina Gambacorta, 2020. "The Matthew effect and modern finance: on the nexus between wealth inequality, financial development and financial technology," Questioni di Economia e Finanza (Occasional Papers) 565, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_565_20
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    References listed on IDEAS

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    2. Brei, Michael & Ferri, Giovanni & Gambacorta, Leonardo, 2023. "Financial structure and income inequality," Journal of International Money and Finance, Elsevier, vol. 131(C).
    3. Tut, Daniel, 2023. "FinTech and the COVID-19 pandemic: Evidence from electronic payment systems," Emerging Markets Review, Elsevier, vol. 54(C).

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    More about this item

    Keywords

    inequality; financial development; banks; financial technology; fintech;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

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