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Financial development and income inequality in Pakistan: An application of ARDL approach

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  • Shahbaz, Muhammad
  • Islam, Faridul

Abstract

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; and the error correction model (ECM) for the short run relationships. Stationarity properties of the series are checked by the ADF method. 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.

Suggested Citation

  • Shahbaz, Muhammad & Islam, Faridul, 2011. "Financial development and income inequality in Pakistan: An application of ARDL approach," MPRA Paper 28222, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:28222
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    More about this item

    Keywords

    Financial Development; Income Inequality;

    JEL classification:

    • D30 - Microeconomics - - Distribution - - - General
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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