Non-linearity Between Finance and Income Inequality: A Panel Data Analysis for EAGLE Countries

Shahzad Mushtaq (), Moheddine Younsi () and Zoofshan Sagheer ()
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Shahzad Mushtaq: University of Sargodha
Moheddine Younsi: Shaqra University
Zoofshan Sagheer: University of Sargodha

Journal of the Knowledge Economy, 2025, vol. 16, issue 2, No 152, 10136-10163

Abstract: Abstract A major issue for socioeconomic development, especially in developing countries, is income inequality. In terms of the financial sector and income inequality, the Kuznets curve is expanded upon by the financial Kuznets curve (FKC). Using a panel dataset of eight EAGLE nations from 1991 to 2019, the current study aims to empirically investigate the existence of non-linearity between financial systems (financial development, financial institutions, and financial markets) and income inequality. The financial development index, the financial institutions index, and the financial markets index are the three additional components that make up finance. The feasible generalized least squares (FGLS) and panel-corrected standard errors (PCSE) estimators have been used for robustness assessments because of the cross-sectional dependency in the panel dataset. The empirical findings confirmed that there is an inverted U-shaped relationship in EAGLE nations between financial development, financial institutions, financial markets, and income inequality. This suggests that after a certain level is achieved, income inequality may decline. It may rise in the early stages of financial development, financial institutions, and financial markets. Moreover, our empirical results showed that while GDP growth, school enrollment, and trade openness reduce income inequality, factors like unemployment, inflation, population growth, and age dependency increase it. According to the study, income inequality can be reduced by the current government's prudent socioeconomic policies and advanced financial systems.

Keywords: Income inequality; Financial development; Financial institutions; Financial markets; Panel data; Financial Kuznets curve (search for similar items in EconPapers)
JEL-codes: D33 D53 G15 G20 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s13132-024-02302-3

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