Financialization and Income Inequality

Abdullah Gulcu (), Erdal Ozmen and Fatma Tasdemir
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Abdullah Gulcu: Ankara University
Erdal Ozmen: Middle East Technical University
Fatma Tasdemir: Sinop University

No 1821, Working Papers from Economic Research Forum

Abstract: This study aims to explore the nonlinear impact of financial integration on income inequality in advanced (AE) and emerging market and developing economies (EMDE). Our panel fixed effect threshold estimation results suggest that international financial integration (IFI) provides a data-driven estimated threshold for the effect of IFI on income inequality. IFI is positively associated with inequality in EMDE, albeit this positive relation diminishes in more financially integrated episodes. In AE, inequality decreases with IFI in less financially integrated episodes. Our empirical findings reveal that the relationship between IFI and inequality is driven by both capital inflows and outflows in AE while it is determined by capital inflows in EMDE. Finally, we investigate whether the impact of IFI on inequality changes with the level of financial development. Our results also suggest that the inequality-increasing effect of IFI is much lower in financially more developed episodes in EMDE. All these findings imply that policies fostering financial development and equitable financial access are crucially important to mitigate the adverse effects of IFI on inequality, especially in EMDE.

Pages: 22
Date: 2025-12-20, Revised 2025-12-20
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