Financial deepening indicators and income inequality of OECD and ASIAN countries

The present study examined the effects of financial deepening on income inequality using gross domestic product (GDP) and money supply proxies. A sample of 32 Organisation Economic Co-operation and Development (OECD) and ASIAN countries was examined during the period of 2002–2018. Using a robust methodology, many tests were applied to control the issues of heterogeneity and endogeneity. The findings of the pooled OLS, the pooled OLS group and GMM estimators showed that the financial depth proxies of the importance of the semi-formal and informal financial sectors had a positive and significant impact on income inequality in the OECD and ASIAN countries. Furthermore, the ASIAN countries had a positive and significant financial depth as a money supply proxy for the formal sector. In other words, the excessive expansion of the formal financial sector in the ASIAN countries compared to other financial sectors led to an unequal impact on income inequality. The effect was even greater when redistributing income in the semi-formal financial sector than in the informal sector for all major indicators. We concluded that the two main proxies worked in parallel by strengthening the informal and semi-formal financial sectors. It also indicates that regulatory institutions are gradually reduce the high level of inequality in the OECD and ASIAN countries.