A Closer Look at Financial Development and Income Distribution

Céline Gimet, Thomas Lagoarde-Segot
2010 Social Science Research Network  
This paper analyzes the under-investigated relationship uniting financial development and income distribution. We use a novel approach taking into account for the first time the specific channels linking banks, capital markets and income inequality, the time-varying nature of the relationship, and reciprocal causality. We construct a set of annual indicators of banking and capital market size, robustness, efficiency and international integration. We then estimate the determinants of income
more » ... ants of income distribution using a panel Bayesian structural vector autoregressive (SVAR) model, for a set of 49 countries over the 1994-2002 period. We uncover a significant causality running from financial sector development to income distribution. In addition, the banking sector seems to exert a stronger impact on inequality. Finally, the relationship appears to depend on the characteristics of the financial sector, rather than on its size.
doi:10.2139/ssrn.1757876 fatcat:g6wcqciwf5f4pax6a5tv3hjgee