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A closer look at financial development and income distribution

  • Céline Gimet

    (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure de Lyon)

  • Thomas Lagoarde-Segot

    (CEDERS - Centre de Recherche en Développement Economique et Finance Internationale - Université de la Méditerranée - Aix-Marseille II, Euromed Management - Euromed Management)

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 characteristics of the financial sector, rather than on its size.

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Paper provided by HAL in its series Post-Print with number halshs-00564641.

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Date of creation: 2011
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Publication status: Published, Journal of Banking and Finance, 2011, 35, 7, pp. 1698-1713
Handle: RePEc:hal:journl:halshs-00564641
Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00564641/en/
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