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Financial Sector Policies, Poverty and Inequality

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Abstract

While finance has been shown to influence the distribution of income, little research has been devoted to the potential impact of financial sector policies on inequality. This study analyzes the relationship between financial repression and inequality across countries and across China's provinces. Using several alternative estimation procedures including fixed effect, dynamic panel and instrumental variable regressions, we find that financial repression is positively associated with inequality across countries. Moreover, we find that this relationship is stronger in less developed economies and that interest rate controls, capital account controls, poor banking supervision and a concentrated banking sector are the most important financial policies influencing inequality. Furthermore, financial repression is associated with a higher fraction of the population living in poverty. Focusing on China, financial repression again acts as a driver for inequality and its effect is stronger in less developed provinces. These results have important policy implications, not the least so for China, where rising inequality poses a significant problem for the government.

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  • Johansson, Anders C. & Wang, Xun, 2012. "Financial Sector Policies, Poverty and Inequality," Working Paper Series 2012-24, Stockholm School of Economics, China Economic Research Center.
  • Handle: RePEc:hhs:hacerc:2012-024
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    Keywords

    Income distribution; Poverty; Financial repression; Capital markets; China;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • G00 - Financial Economics - - General - - - General
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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