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Investigating the Relationship Between Financial Development and Income Inequality in Developed and Developing Countries: An Application of Canonical Correlation Analysis

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  • ÇiÄŸdem Yılmaz Özsoy

    (İstanbul Topkapı Üniversitesi, İktisadi ve İdari Bilimler Fakültesi, Ekonomi Bölümü, İstanbul, Türkiye)

Abstract

This paper investigates the relationship between the variables of financial development and income inequality using a canonical correlation analysis for 41 developed and developing countries in 2017. Financial develop consists of the four subdimensions of access to finance, efficiency, stability, and external liberalization, which are respectively explained by the number of ATMs per 100,000 adults, net interest margin, ratio of regulatory capital to risk-weighted assets, and ratio of consolidated foreign claims of BIS (Bank for International Settlements) Reporting Banks to GDP. Meanwhile, income inequality consists of the variables of Gini coefficient and poverty gap index. As a result of the canonical correlation analysis, a highly correlated relationship was found between financial development and income inequality, with the common variance shared among the data being 45%. To test the reliability of this result, Mardia’s multivariate normal distribution test was applied, and the dataset of the variables was determined to not be normally distributed. Therefore, the study only considered structural correlations. As a result of the structural correlations, the Gini coefficient’s contributions to the income inequality dataset can be said to be more significant than what the poverty gap index contributes. Net interest margin explains the subdimension of financial efficiency, and its contribution was observed to be more important than the other proxy measurements that express access to the subdimensions of finance, stability, and external liberalization. Therefore, positive developments in the net interest margin will be able to positively affect financial development thus increasing the income of the poor and the use of economic opportunities, as well as narrowing income inequality in both developed and developing countries.

Suggested Citation

  • ÇiÄŸdem Yılmaz Özsoy, 2023. "Investigating the Relationship Between Financial Development and Income Inequality in Developed and Developing Countries: An Application of Canonical Correlation Analysis," EKOIST Journal of Econometrics and Statistics, Istanbul University, Faculty of Economics, vol. 0(38), pages 35-52, June.
    • Handle: RePEc:ist:ekoist:v:0:y:2023:i:38:p:35-52
    DOI: 10.26650/ekoist.2022.36.1055477
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