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A closer look at financial development and income distribution

  • Gimet, Céline
  • Lagoarde-Segot, Thomas

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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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 35 (2011)
Issue (Month): 7 (July)
Pages: 1698-1713

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Handle: RePEc:eee:jbfina:v:35:y:2011:i:7:p:1698-1713
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