Investigation of Parabolic Relationship Between Financial Development and Income Inequality using U Test: Analysis of Financial Curve in Türkiye

Nimet Melis Esenyel İçen ()
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Nimet Melis Esenyel İçen: İstanbul Üniversitesi, İktisat Fakültesi, Ekonometri Bölümü, İstanbul, Türkiye

Journal of Economic Policy Researches, 2024, vol. 11, issue 2, 355-369

Abstract: This study investigates the relationship between income inequality and financial development within the framework of the financial Kuznets hypothesis. The aim of this study is to determine the effects of financial development, inflation, and per capita income variables on income inequality using annual data from Turkiye for the period 1987-2021. The share of domestic credits to the private sector provided by banks in gross domestic product is considered as a measure of financial development. The Gini coefficient is used as an indicator of income inequality. To examine the long-term relationships between variables, the ARDL Bounds test developed by Pesaran, Shin, and Smith (2001) is conducted. According to the ARDL Bounds test, it is concluded that there is a long-run relationship exists among the variables. In the estimated long-run model, when examining the signs and statistical significance of the coefficients of the financial development variable and its square, it is found that there is initially a U-shaped relationship. However, this assessment is inadequate and may lead to misleading results. Therefore, a three-step model evaluation method is employed. First, attention should be paid to the signs and statistical significance of the coefficients of the financial development variable and its square. In the second step, it is checked whether the turning point of the parabola is within the data range. Finally, the slope at the smallest and largest values of the parabola should be sufficiently steep. According to the U test conducted to verify this condition, we conclude that the U-shaped model is valid.

Keywords: Financial kuznets hypothesis; Income inequality; ARDL bounds test; Cointegration JEL Classification : C12; C32; E10 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:ist:iujepr:v:11:y:2024:i:2:p:355-369

DOI: 10.26650/JEPR1490883

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