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Financial Development and Income Inequality: A Panel Data Approach

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  • Sebastian Jauch
  • Sebastian Watzka

Abstract

We analyze the link between financial development and income inequality for a broad unbalanced dataset of up to 138 developed and developing countries over the years 1960 to 2008. Using credit-to-GDP as a measure of financial development, our results reject theoretical models predicting a negative impact of financial development on income inequality measured by the Gini coefficient. Controlling for country fixed effects and GDP per capita, we find that financial development has a positive effect on income inequality. These results are robust to different measures of financial development, econometric specifications, and control variables.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3687.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3687

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Related research

Keywords: financial development; income inequality; global; panel analysis;

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  1. Daron Acemoglu & Simon Johnson & James Robinson & Pierre Yared, 2005. "Income and Democracy," NBER Working Papers 11205, National Bureau of Economic Research, Inc.
  2. Deininger, Klaus & Squire, Lyn, 1996. "A New Data Set Measuring Income Inequality," World Bank Economic Review, World Bank Group, vol. 10(3), pages 565-91, September.
  3. Galor, Oded & Zeira, Joseph, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 35-52, January.
  4. Asli Demirguc-Kunt & Ross Levine, 2009. "Finance and Inequality: Theory and Evidence," NBER Working Papers 15275, National Bureau of Economic Research, Inc.
  5. Clarke, George & Xu, Lixin Colin & Zou, Heng-fu, 2003. "Finance and income inequality : test of alternative theories," Policy Research Working Paper Series 2984, The World Bank.
  6. Thorsten Beck & Asli Demirgüç-Kunt & Ross Levine, 2010. "Financial Institutions and Markets across Countries and over Time: The Updated Financial Development and Structure Database," World Bank Economic Review, World Bank Group, vol. 24(1), pages 77-92, January.
  7. Demirgüç-Kunt, A. & Beck, T.H.L. & Honohan, P., 2008. "Finance for all?: Policies and pitfalls in expanding access," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3508393, Tilburg University.
  8. Isabel Ortiz & Matthew Cummins, 2011. "Global Inequality: Beyond the Bottom Billion – A Rapid Review of Income Distribution in 141 Countries," Working papers 1102, UNICEF,Division of Policy and Strategy.
  9. Frederick Solt, 2009. "Standardizing the World Income Inequality Database," Social Science Quarterly, Southwestern Social Science Association, vol. 90(2), pages 231-242.
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Cited by:
  1. Muhammad, Shahbaz & Tiwari, Aviral & Reza, Sherafatian-Jahromi, 2012. "Financial Development and Income Inequality: Is there any Financial Kuznets curve in Iran?," MPRA Paper 40899, University Library of Munich, Germany, revised 26 Aug 2012.

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