Nonlinear dynamics of the finance-inequality nexus in developing countries

Hui-Boon Tan and Siong Hook Law

The Journal of Economic Inequality, 2012, vol. 10, issue 4, 563 pages

Abstract: This study examines the dynamics of the finance-inequality nexus in 35 developing countries during the past two decades, using two data sets of income inequality: the University of Texas Inequality Project (UTIP) and the Standardized World Income Inequality Database (SWIID). The empirical results of this study, based on the dynamic panel models, provide new evidence that highlights the nonlinear U-shaped relationship between financial deepening and income distribution. It implies the narrowing of the income-inequality gap at the early stage of financial development of the countries. This improvement, however, will only be sustainable dynamically below a certain threshold level. Further deepening above that level will lead to a reverse effect, which deteriorates income inequality. This reflects the inefficiency of financial markets in improving economic inequality when the threshold level is overshot. Copyright Springer Science+Business Media, LLC. 2012

Keywords: Financial deepening; Income inequality; Gini coefficient; Dynamic panel analysis; E0; G0; O15 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (41)

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DOI: 10.1007/s10888-011-9174-3

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