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Financial Development and Top Income Shares in OECD Countries

Anjan Saha (), Vinod Mishra () and Russell Smyth ()

No 03-19, Monash Economics Working Papers from Monash University, Department of Economics

Abstract: We use instrumental variable regression to isolate the causal impact of financial development on top income shares a panel of 14 OECD countries - five Anglo-Saxon countries, eight continental European countries and Japan - over a 110-year period. Our main finding is that financial development has a significant positive effect on top income shares, and that the most affluent are the biggest beneficiaries of financial development. In distribution terms, a onestandard-deviation increase in the private credit-GDP ratio corresponds to around a onestandard-deviation increase in the top 1% income share, with the top 1% income group deriving more benefits from financial development than the top 5%, and the top 5% deriving more benefit than the top 10%. The effects are robust to various measures of top income shares and financial development and alternative estimation techniques, including nonparametric modelling. Financial development is typically viewed in positive terms in that it makes it easier to access credit and facilitates economic growth. Our results are important because they contribute to understanding of the potential negative effects of financial development.

Keywords: Financial development; top income shares. (search for similar items in EconPapers)
JEL-codes: E62 G00 O15 O50 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2019-06
New Economics Papers: this item is included in nep-cwa, nep-fdg and nep-mac
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