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Financial sector policies and income inequality

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  • Johansson, Anders C.
  • Wang, Xun

Abstract

While finance has been shown to influence the distribution of income, little research has been devoted to the potential impact of financial policy on income inequality. This study analyzes the relationship between repressive financial policies and inequality across countries. We show that financial repression tends to increase income inequality. Robustness checks using GMM estimation and the modeling average method confirm the positive relationship between financial repression and income inequality. We also find that credit controls and entry barriers in banking sector are the two most important financial policies influencing inequality. Moreover, GDP per capita growth and urbanization serve as two important factors that might alleviate income inequality. These results have important policy implications, not the least so for quickly developing countries such as China, where rising inequality possesses a significant problem.

Suggested Citation

  • Johansson, Anders C. & Wang, Xun, 2014. "Financial sector policies and income inequality," China Economic Review, Elsevier, vol. 31(C), pages 367-378.
  • Handle: RePEc:eee:chieco:v:31:y:2014:i:c:p:367-378
    DOI: 10.1016/j.chieco.2014.06.002
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    More about this item

    Keywords

    Income distribution; Financial repression; Capital market; China;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • G00 - Financial Economics - - General - - - General
    • I30 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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