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Financial Development And Income Inequality In Pakistan: An Application Of Ardl Approach

  • Muhammad Shahbaz

    ()

    (COMSATS Institute of Information Technology)

  • Faridul Islam

    ()

    (Department of Finance and Economics, Utah Valley University)

The paper examines the relationship between financial development and income inequality; and also explores if the Greenwood and Jovianvich (GJ) hypothesis applies to Pakistan. Using data from 1971 to 2005, the paper implements the Auto Regressive Distributed Lag (ARDL) bounds testing approach to cointegration to examine the existence of long run relation ships; and the error correction model (ECM) for the short run relationships. Stationarity properties of the series are tested by the ADF unit root test. The findings indicate that financial development reduces income inequality while financial instability aggravates it. Contrary to the conventional wisdom, we find economic growth worsens income distribution and that the latter is deteriorated further by trade openness. The paper does not find support for the GJ relation. Appropriate reforms aimed at developing a well-organized financial sector in Pakistan can help reduce income inequality.

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Article provided by Chung-Ang Unviersity, Department of Economics in its journal Journal Of Economic Development.

Volume (Year): 36 (2011)
Issue (Month): 1 (March)
Pages: 35-58

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Handle: RePEc:jed:journl:v:36:y:2011:i:1:p:35-58
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