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Financial Sector Policies, Poverty and Inequality

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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File URL: http://swopec.hhs.se/hacerc/papers/hacerc2012-024.pdf
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Paper provided by China Economic Research Center, Stockholm School of Economics in its series Working Paper Series with number 2012-24.

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Length: 36 pages
Date of creation: 20 Sep 2012
Date of revision:
Handle: RePEc:hhs:hacerc:2012-024
Contact details of provider: Postal: China Economic Research Center, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
Phone: +46-8-736 90 00
Fax: +46-8-31 81 86
Web page: http://www.hhs.se/en/Research/Institutes/SCERI/

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  1. Nouriel Roubini & Xavier Sala-i-Martin, 1991. "Financial Repression and Economic Growth," NBER Working Papers 3876, National Bureau of Economic Research, Inc.
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  7. James B. Ang & Warwick J. McKibbin, 2005. "Financial Liberalization, Financial Sector Development And Growth: Evidence From Malaysia," CAMA Working Papers 2005-05, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  8. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
  9. Anders C. Johansson & Xun Wang, 2012. "Financial Repression and Structural Imbalances," DEGIT Conference Papers c017_034, DEGIT, Dynamics, Economic Growth, and International Trade.
  10. Dennis Tao Yang, 1999. "Urban-Biased Policies and Rising Income Inequality in China," American Economic Review, American Economic Association, vol. 89(2), pages 306-310, May.
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  12. Kui-Wai Li & Lihong Yun & Gilbert C. S. Lui, 2009. "Economic Performance of Human Capital in Post-Reform China," Chinese Economy, M.E. Sharpe, Inc., vol. 42(1), pages 40-61, January.
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  15. Kiminori Matsuyama, 2002. "Financial Market Globalization, Symmetry-Breaking, and Endogenous Inequality of Nations," CIRJE F-Series CIRJE-F-186, CIRJE, Faculty of Economics, University of Tokyo.
  16. Nora Lustig, 2012. "Taxes, Transfers, and Income Redistribution in Latin America," World Bank - Inequality in Focus, The World Bank, vol. 1(2), pages 1-5, July.
  17. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  18. Georg R. G. Clarke & Lixin Colin Xu & Heng-fu Zou, 2006. "Finance and Income Inequality: What Do the Data Tell Us?," Southern Economic Journal, Southern Economic Association, vol. 72(3), pages 578-596, January.
  19. Yiping Huang & Xun Wang, 2011. "Does Financial Repression Inhibit or Facilitate Economic Growth? A Case Study of Chinese Reform Experience," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 73, pages 833-855, December.
  20. Johansson, Anders C. & Wang, Xun, 2012. "Financial Repression and External Imbalances," Working Paper Series 2012-20, China Economic Research Center, Stockholm School of Economics.
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  22. Johansson, Anders C., 2012. "Financial Repression and China’s Economic Imbalances," Working Paper Series 2012-22, China Economic Research Center, Stockholm School of Economics.
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