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Financial Development and Income Inequality: Evidence from Advanced, Emerging and Developing Economies

Carolyn Chisadza and Mduduzi Biyase

No 202221, Working Papers from University of Pretoria, Department of Economics

Abstract: Using a broad-based index of financial development, this paper investigates the effects of financial development on income inequality for 148 countries between 1980 and 2019. The findings indicate that in general, financial development reduces inequality across emerging and least developed countries, but is not statistically significant for advanced countries. However, when we disaggregate the financial development index into its sub-components (financial institutions and financial markets), we find different effects on inequality, based on the levels of development. Further investigation on the dimensions under financial institutions and financial markets (depth, access and efficiency) reveals that banking sector development under financial institutions has income inequality-reducing effects in emerging and least developed countries, while stock market development under financial markets widens inequality in least developed countries. The findings in our paper firstly highlight the nuances in financial development depending on the level of development in countries, and secondly that policies focussed on financial inclusion of the poor can mitigate inequality.

Keywords: financial development; financial markets; inequality; financial institutions (search for similar items in EconPapers)
JEL-codes: C22 D63 G20 O55 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2022-04
New Economics Papers: this item is included in nep-ban, nep-fdg, nep-fle and nep-isf
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