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Financial Development and Income Inequality: Evidence from Advanced, Emerging and Developing Economies

Author

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  • Carolyn Chisadza

    (Department of Economics, University of Pretoria, Pretoria, South Africa)

  • Mduduzi Biyase

    (Director of the Economic Development and Well-being Research Group (EDWRG); Senior lecturer at the School of Economics, University of Johannesburg)

Abstract

Using a broad-based index of financial development, this paper investigates the effects of financial development on income inequality for 148 countries between 1980 and 2019. The findings indicate that in general, financial development reduces inequality across emerging and least developed countries, but is not statistically significant for advanced countries. However, when we disaggregate the financial development index into its sub-components (financial institutions and financial markets), we find different effects on inequality, based on the levels of development. Further investigation on the dimensions under financial institutions and financial markets (depth, access and efficiency) reveals that banking sector development under financial institutions has income inequality-reducing effects in emerging and least developed countries, while stock market development under financial markets widens inequality in least developed countries. The findings in our paper firstly highlight the nuances in financial development depending on the level of development in countries, and secondly that policies focussed on financial inclusion of the poor can mitigate inequality.

Suggested Citation

  • Carolyn Chisadza & Mduduzi Biyase, 2022. "Financial Development and Income Inequality: Evidence from Advanced, Emerging and Developing Economies," Working Papers 202221, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:202221
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    More about this item

    Keywords

    financial development; financial markets; inequality; financial institutions;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa

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